Compliance: The Worst Job In The Advisory Business

by: John Lohr


To simplify the compliance process, do not settle for an "off the shelf" product.

Independent advisors often overlook compliance specifics which could prove fatal to their business.

Here are some steps to take to make compliance more workable for advisors.

It has been variously described as a "necessary evil", the "sales prevention department", and a host of unmentionable names. It is required, could cost you your business license or big time money. It is the bane of the independent advisors business.

What Is It?

Surprise! It's advisory compliance. For the moment, let's forgo the brokerage side and skip the wirehouses and other big firms. They have their own problems, so leave them aside for now. But, what about the growing number of independent advisors?

Independent advisors don't generally like compliance. It's too hard to keep up with. It is fraught with vendor-driven interpretations and hastily concluded advice and interpretations. If there is one area of the independent's advisory business that will get the short shrift, it will be compliance. Advisors are not aware of this vulnerability, and they often get inadequate guidance. In short, compliance is a pain. A chore. It interferes with the important work of the advisor-managing portfolios, building business, and closing the sale.

Vendors provide "education", interpretations and conferences. The perceived advantage of a conference is that the Advisor will pay money and interact with their colleagues. The thing about conferences is that no two vendors have the same interpretation. Sure, the regulators claim to establish compliance standards, but they have set no definitive policy for the industry to practice from a business perspective.

There are vendor-sponsored conferences that have value because you should know what the regulators are doing. The thing is you have two types of speakers at compliance conferences:

1. Lawyers ("let's look at the Cash Solicitation Rule, 206-4(3) and it says: " a bunch of legalese that many lawyers don't know about, or understand what it means in practice"). Some help. From lawyers you get Black letter law, statute, and administrative opinion. They know the words, but keep this in mind-they never actually DID any of this work. They just told the doers what they think it means.

2. Compliance officers-Chief Compliance Officers ("CCOs) from Big Firms USA who have staffs and probably couldn't navigate the IARD anymore. 3. Accountant types calling themselves Compliance consultants who break down the process into the smallest nit-picking components possible. They may know what to do, but have no idea how to apply business practices to the what, and why they do it. 4. Regulators who are boring speakers who know what the rules say, do not know what your business is like and have no idea how the courts interpret or rule on the regulations in practice.

So often the independent/small firm fail on process. They do know they need compliance and that somebody has to be the CCO (often it's the one person Advisor who is also President, Chief Investment Officer, and CCO). What a combination! They use template Compliance Policies and Procedures, "Off the shelf" contracts and registration (ADV) answers, and do not practice the policies and procedures in their daily business.

The baseline fact is that regardless of your compliance education level, it is too time consuming to actually DO the compliance work.

What do you do?

You can hire a "consultant for $5-$10,000 to tell you what to do. (but you still have to do it)

You can outsource your CCO, but the Regulators don't like it.

You can pay a consultant $50,000-$80,000 to do some of the work for you (price depends on how many advisors. ) What price is failure?

What you can not do is ignore the problem, which is often what happens. Inadequate compliance procedures that fit exactly what you do, and that actually gets done is crucial to surviving in the regulated investment business.

Fundamental failures in the compliance process include:

  • Thinking: "Compliance is too difficult and expensive"
  • Letting things slip through the cracks in a flawed process (or no process).
  • Inadequate recordkeeping documenting the process; records misplaced, or not done at all.

In fact, an independent may be completely compliant, but not be able to prove or document it. If that's the case, it could be fatal.

  • Relying on the advice of other CCOs may not exactly apply to your business
  • Going to a compliance conference does not make you instantly compliant.

The biggest problem: Remedial action. You could wind up:

  • Fined
  • Censured
  • Suspended
  • Out of the business entirely
  • Jailed

These are issues involving personal liability (especially if you are the CCO). It's worse if you wear the sales, marketing, portfolio management and Chief Administrator hats.

My best advice is you have to keep the CCO hat, but have the work actually done by somebody else that understands your business. You do not have to pay thousands of dollars for this kind of help, and you do not have to pay a compliance employee $65,000 a year to do it either (Wyoming rates — New York, eat your heart out.)

Stay tuned.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.