RIA Compliance and Practice Management Blog

The cost of noncompliance for investment advisory firms

Posted by RIA in a Box

Dec 5, 2022 12:23:53 PM

RIA noncompliance cost (1)

There is no doubt, complying with the myriad rules and regulations of the Securities and Exchange Commission (SEC) or state regulatory bodies requires significant investment in both time and money. For registered investment adviser (RIA) firms, the cost can be quite high, depending in part, on factors like what types of products and services they offer.

Because of this steep cost, some compliance teams, particularly those who serve firms which have not experienced significant regulatory concerns, may see reluctance or even resistance to funding the compliance program from senior leaders who see the chief compliance officer’s (CCO) efforts as a drain on firm profits.

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However, this kind of attitude is extremely short-sighted. As experienced compliance professionals know, a lack of regulatory violations does not always mean the firm and its personnel are managing regulatory compliance risk as effectively as possible. In fact, there can be significant issues which have simply not yet been detected. Issues, which when left unaddressed, could cost the firm much more than it would have cost to prevent them or detect them in their earliest stages.

How the cost of noncompliance impacts your investment firm’s operations and compliance program

Just this past fiscal year, the SEC issued $6.4 billion in fees for violating SEC regulations, reflecting just how much a single act of noncompliance can cost. It is important to note however, noncompliance impacts much more than your investment firm’s financial accounts. It can cause:

• Business disruption.
• Low productivity.
• Low revenue.
• Low customer trust.
• Operational expenses related to “clean-up” efforts.

These costs can exceed regulatory fines and penalties.

When compared, the average total cost of noncompliance is $14.82 million, while the cost of compliance is a much lower $5.47 million.

How to lower the cost of compliance at your investment advisory firm

Several factors can influence, and reduce, your compliance costs. To help cut the budget where possible, financial advisory firms should consider:

  1. Investing in your compliance staff.
    As the rules become more complex, experienced compliance staffers are increasingly in demand. While some investment advisory firms are apprehensive about investing so much into their compliance team, it’s much better to invest proactively in the front end, than have to cover the costs of compliance violations on the back end.
  2. Performing regulatory audits multiple times a year.
    Similarly, making your regulatory audits more of an ongoing affair rather than a once-a-year drill can reduce risks and costs. When firms have the tools they need to conduct effective internal audits, they can identify potential compliance risks before those issues become significant and costly.
  3. Offering compliance training to employees.
    Effective compliance training can also result in cost-savings for firms. This can help create a culture of compliance at your firm and avoid risks of noncompliance which could cost the company.

The ever-changing regulatory landscape means investment firms cannot afford to become complacent about their compliance efforts. Although a firm may have approved a one-time resource expenditure years ago to update its compliance program, risks are rapidly evolving and your compliance program should be too. Firms which simply adhere to the status quo because the status quo was once sufficient may regret their decision when problems ultimately arise.

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RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

Topics: RIA Operations, RIA Compliance

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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