In this crowded regulatory environment, RIA firms need to have a detailed, well-thought-out, and calculated view of compliance, and not just see it as an exercise to prevent SEC or FINRA fines, but also as a way to build trust and protect investors.
At the core of every successful RIA compliance program lie essential compliance fundamentals for advisory firms, those critical pillars that empower firms to manage risks efficiently and meet regulatory obligations consistently.
The Importance of Compliance Fundamentals for Advisory Firms
Fundamental principles of compliance are the foundation for a sound and effective compliance program.
Building upon these principles helps ensure an RIA firm’s program can adapt to regulatory changes.
If these principles exist early on, someone can plan for compliance.
Someone does not just address it when the regulator knocks.
If firms embed these compliance fundamentals within their culture, they can reduce the chance that regulations are breached and impart client confidence, acting as a predicate to sustainable growth.
Firms that embed these compliance fundamentals tend to have shorter gaps in compliance, easier regulatory exams, and staff accountability.
Key Components of Compliance Fundamentals
Tailored Risk Management and Assessment
As RIAs are highly heterogeneous, compliance requirements differ from firm to firm.
A risk assessment analyzes the firm’s operational, financial, and cybersecurity risks in order to inform compliance efforts.
The risk management approach reveals that more resources must be allocated to the areas with the greatest exposure.
Risk should be reviewed regularly, at least annually, and more often if the business environment or regulatory regime changes.
Technology can improve the efficiency and speed of the risk process for most advisory firms, but human judgment is required to interpret the results and identify control improvements.
Documentation, Policies, and Procedures
A good compliance program has well-defined policies and procedures, like a company-wide code of ethics, a trading policy, supervisory procedures, privacy policies, and others.
A compliance manual, applying to the whole organization, should document these policies and procedures.
Policies should meet required regulations and remain current with firm practices.
Staff should be able to easily access them.
They should be supplemented with staff training regarding their contents and rationale.
Cybersecurity Preparedness
Cybersecurity has emerged as an important topic of compliance, as advisory firms are increasingly responsible for sensitive data, and thus attractive targets for cyber attacks.
Cybersecurity policies, vulnerability assessments, and incident response policies compose cybersecurity.
Companies must maintain monitoring and safeguards appropriate for the company’s size and complexity.
Adopting best practices in cybersecurity from existing industry standards can help firms be good stewards of client data.
Marketing and Advertising Controls
Marketing compliance is an area of regulatory oversight that requires marketing materials communicate honestly and fairly with clients, including advertising, testimonials, and performance and investment return claims.
Formal processes and training for handling marketing reviews can help avoid unintentional breaches, and this also includes handling digital marketing and social media, where informal communications can implicitly breach advertising compliance.
Leadership and Accountability
A Chief Compliance Officer (CCO) must be designated by the firm.
A designated CCO is responsible for administering the firm’s compliance program, providing training to employees, monitoring the firm’s compliance with applicable regulations, and responding to regulatory inquiries during a firm examination or inspection.
Whether in-house or outsourced, the CCO is responsible for ensuring the firm and its employees are compliant, revising policies and controls, and advising staff.
Steps to Strengthen Your Compliance Program
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Conduct Comprehensive Compliance Reviews
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Perform in-depth audits of existing procedures, policies, filings, and risk assessments to uncover gaps. These reviews establish a baseline for necessary improvements.
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Develop and Update Customized Policies
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Use insights from reviews to tailor policies that reflect your firm’s unique structure and business model. Policies should be living documents revisited regularly.
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Invest in Compliance Technology Solutions
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Leverage software for document management, tracking regulatory changes, conducting training, and reporting. Technology reduces errors and improves program efficiency.
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Embed Continuous Training
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Educate all employees on compliance policies and standards through regular sessions. Practical training elevates awareness and nurtures a culture where compliance is prioritized.
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Prepare for Regulatory Examinations
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Implement mock exams and develop comprehensive documentation to demonstrate compliance efforts. Transparency and readiness reduce regulatory stress.
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Incorporating Innovation
However, technology-based compliance tools such as Luthor.ai are forcing advisory firms to rethink compliance programs.
From document reviews and policy updates to compliance checks, tools utilizing artificial intelligence may help compliance officers keep pace with regulatory change while ensuring compliance processes are mobile and operationally efficient.
One example is Luthor.ai, which enables advisory firms to strike a balance between improving controls and reducing their administrative burden.
Such tools support a proactive and adaptive compliance culture.
Why Strong Compliance Fundamentals Matter
Compliance is not a box-ticking exercise; it is a process that protects the firm and its clients from future legal liabilities and associated financial costs.
When advisors follow compliance basics, they create an infrastructure that can undergo review and accommodate future regulation.
When advisory firms comply solidly, clients gain confidence, firms compete advantageously, and growth occurs in the future.
Because regulators scrutinize the advisory industry more, investing in compliance creates success when managing risk and fulfilling fiduciary obligations to clients.
