5 Compliance Mistakes You're Probably Making

Compliance is a “have to” in the financial services industry. Advisory firms are required to have a compliance officer or a designated third-party compliance administrator. While your business might technically meet internal compliance requirements, there’s much more to consider in order to keep your business protected from regulatory scrutiny.

 

We recently teamed up with Bates Group to film a series of special Roundtable Talks centered on the importance of staying on top of compliance. One of Bates Group’s Managing Directors, David Birnbaum, JD, joined us to talk about the ways to achieve good compliance management, as well as how it can impact the value and growth of your firm. From these conversations we’ve found the following five compliance mistakes to be the most common to many financial services businesses.

1. Neglecting Internal Compliance Audits

If you wait until you’re faced with a regulatory audit to look at your policies and operating procedures, you’ve waited too long. By reviewing the business periodically, you’ll not only be able to head off potential issues before they arise, but you’ll be prepared for any observations a regulator could make during a compliance audit. In addition to the security in knowing everything is running smoothly and within regulation, you’ll also be able to confidently answer any questions a regulator or outside party might have about your business.

2. Not Connecting the Dots

Detecting and preventing regulatory issues is often a matter of drawing connections between seemingly small occurrences, that in reality could indicate a larger issue. In the roundtable discussion, David relates this process of observations and detection to looking for smoke in order to find and prevent the fire. A layoff here, a complaint there, or a missing document way back there may all seem benign, but depending on the details of each one, they could add up to a regulatory misstep, or worse. If you don’t devote the time to properly analyze the events of your business, you could end up blindsided and unprepared to face a regulatory officer or a prospective buyer.

3. Using "Off-the-Shelf" Policy and Procedure Templates

As a full-time advisor and a part-time compliance officer, the limited time spent on compliance is likely not sufficient. All the customized compliance policies may not be high on your list of priorities now, but as your business grows, you’re apt to simply run out of time to sit and develop policies and procedures that will fit your ever changing business, staff, and operations; let alone the ever changing regulations. Imagine how much smoother things would be if your procedures were constantly updated in your ever changing practice. Spending time keeping up with non-applicable steps or antiquated methods laid out by a generic template lead to wasted time and energy – time that could otherwise be devoted to client service, growth strategies, or fewer hours in the office.

4. Ignoring the Connection Between Compliance and Business Value

If you’re preparing to sell your business (either externally to a third party or internally to key staff members), having strong compliance and appropriate operating procedures will secure your value and asking price. Compliance is one of those often overlooked value factors that can reduce value if red flags arise during due diligence. Buyers or investors are less likely to make an investment that will require extra work to straighten out, or that presents a high risk of litigation or regulatory concerns.

 

By the same token, if you’re looking to acquire or invest in a business, you are responsible for doing thorough due diligence on a practice to avoid surprises. It is also a good idea, as a buyer or investor, to perform a compliance audit on your own business. Sellers often perform due diligence to ensure their buyer will serve their clients well post-transition. A seller will be wary of a buyer who puts the clients at risk of service decline or regulatory issues.

5. Doing it Yourself

As a business owner, you likely don’t have the time or the in-depth knowledge of regulations to fully handle compliance effectively. This makes it impossible to provide maximum protection for your business. In fact,  you shouldn’t spend that time – you’re an advisor, and your focus SHOULD be on your clients. There are a couple of ways to solve this problem: you could hire a full-time compliance officer or team; or you can enlist a third-party firm that specializes in compliance management.

 

It might seem a simpler and less expensive task to simply designate a Chief Compliance Officer from amongst your staff, use policies and procedures from a base template, and only think about issues as they arise. Compliance is required, and effective compliance takes more than the bare minimum. Be realistic about the risks you could be taking with your business and its value.

 View all three compliance Roundtable Talks here.