Breakaway Advisors Launching RIAs Anxious About Compliance

 Julius Buchanan, Managing Editor, Wealth Solutions Report

Wirehouse Advisors Exploring Independence Increasingly Worried About Potential Compliance Needs, Seeking Cost-Flexible Solutions

It’s officially the middle of the year, when summer barbeque parties are getting into full swing, kids with too much free time on their hands are driving parents crazy and big family vacation trips are happening.

This also tends to be the point of the year when employee financial advisors, especially those working at wirehouses, tend to get much more serious about either pulling the trigger on a move towards independence, versus waiting for the rest of the year to go by.  Those who opt for the latter generally do so in the hopes of receiving a healthy annual bonus in the first quarter of the following year.

Stress doesn’t really go well with this summer outfit.

And for potential breakaway advisors thinking of forming their own RIA, this can be an especially delicate calculus, as the economics of moving later in the year may not justify walking away from one’s year-end bonus.

It’s About More Than Just Time

But these days, it is much more than just about how much time has elapsed in the year.

At WSR, we recently surveyed a broad cross-section of W-2 channel financial advisors who have recently considered or are in the process of considering going independent via forming their own RIA. 

The results indicate that taking on ownership of one’s own compliance function – the costs, complexities and time involved – are increasingly a cause for anxiety among recent or prospective wirehouse breakaways who are forming their own RIA.

Consider the following key summary details:

  • 83% of respondents stated that the Chief Compliance Officer role currently is assigned to (or in the case of prospective breakaways, will be assigned to) a leader of the firm whose primary responsibilities are client-facing in nature
  • 64% of respondents agree or strongly agree that “the costs and complexities of being responsible for one’s own compliance function are more worrisome now than two years ago”

Out of this latter group of respondents:

  • 77% attribute their heightened compliance anxiety to “general concern about heightened regulatory complexity”
  • 85% referenced concern about “being more directly responsible for compliance costs or liabilities”
  • 66% attributed increased concerns about compliance to “the increased time that needs to be spent” on compliance-related workflows
  • 29% referenced “concern about future enforcement of Reg BI for RIA firms”; 

Why the Concern?

Mitch Avnet, Founder & Managing Partner, Compliance Risk Concepts

Driving the heightened concern is a belief that remains largely fixed among the overwhelming majority of prospective and recent breakaway advisors with their own RIA firms:  Compliance costs protect a firm from negative events that damage the bottom line or worse, but the compliance function is ultimately a cost center, not a revenue-generative function.

According to Mitch Avnet, Founder and Managing Partner of Compliance Risk Concepts (CRC), the mandatory role of Chief Compliance Officer of a newly launched RIA often falls to one of the founders or the CEO as a “double-duty,” a role that distracts from the necessary push towards retaining clients, transitioning accounts and building the new firm in the early months.

Distractions are inevitable

Avnet emphasizes, “Every minute spent by client-facing professionals across the breakaway team on non-client facing and non-revenue generative activities – including compliance – is time spent away from activities that are crucial to getting the RIA off to the strongest possible start.”

Building a Successful Compliance Function

If an independent RIA firm must have someone in-house executing the role of compliance officer, how can a firm ensure that the person wearing the compliance hat among many others can build a compliance function that minimizes the time dedicated to compliance while mitigating the risks?

Avnet says that firms should align “with seasoned third-party providers that can deliver ongoing and hands-on expertise, versus trying to do it on the cheap with less proven partners, or trying to do it all internally.”

Sander Ressler, Managing Director, Essential Edge

Sander Ressler, Founder and Managing Partner of Essential Edge (who also serves as WSR’s Expert Columnist on Compliance & Regulatory Affairs recommends four key actions to build a successful compliance function at a newly formed RIA, most of which require outside support:

  • Consulting:  Find a consultant and a lawyer to provide guidance through the regulatory registration process and beyond. These individuals should be former industry professionals or regulators. 
  • Outsourcing:  Make sure the individual that is providing outsourcing compliance services has the proper registrations and experience to perform the functions assigned. 
  • Technology:  Building an open architecture of compliance and supervision technology is the foundation of growth of a firm. This is because the evolution of a firm’s business is unpredictable, as are changes in rules and regulations.
  • People:  Hiring and keeping experienced employees is the most critical element of any successful business. Not only is the cost of hiring and training new employees very expensive but when an employee leaves, they take all of their institutional knowledge with them. 
Tech is a must!

Ressler adds, “Using compliance and supervision technology greatly assists firms in keeping up with the changes.  In fact, leveraging the resources of your vendors to keep up with a fluid compliance landscape is essential from a cost and compliance standpoint.”

Find the Right Support

With the wide and sometimes bewildering array of options available for compliance consulting, technology and outsourcing, breakaway advisors may find selecting the right partners a monumental task. 

Avnet states three keys to finding the right fit.

First, a new RIA must “align with a firm that actively lives and breathes wealth management compliance day in and day out. There are plenty of providers out there who claim to have expertise in this space, but many of them actually have worked more with other segments of the financial services space.”

Next, Avnet counsels partnering with firms that employ professionals with extensive experience as in-house compliance officers. “You want to work with people who have sat in the compliance officer’s seat on an in-house basis and can think in those terms on your behalf.”

Finally, Avnet recommends finding a compliance firm that provides extensive support. “Find out what compliance start-up workflows they will take point on, and what ongoing compliance workflows they will handle. Make sure it covers everything reasonably possible.”

“The capacity of your vendors will greatly influence the effectiveness of your compliance program,” Ressler adds. “It may cost more initially but, in the long run, you will have a partner that will keep you current, provide the best tools and can help you grow versus a smaller vendor that you can outgrow, leaving you with the economic burden of having to change vendors and the high cost of converting your historical data.”

Increasing Compliance Hurdles for Startup RIAs

The compliance road ahead looks steep for newly formed RIAs. 

The regulators are coming!

One regulatory affairs expert in the wealth management space who declined to be named in this article said, “Any time you see a bull market that has lasted for years start to break down, you will inevitably have a surge of legal and regulatory actions against wealth management firms of all kinds.  Independent RIA firms will not be immune to such trends.”

The expert added that regulators have already commenced enforcement of Reg BI on the broker-dealer side of the industry, and that it is only a matter of time before RIA firms have similar experiences..

Opportunities for Compliance Services Firms

Aside from Essential Edge and CRC, other compliance service providers such as NRS and RIA in a Box (both subsidiaries of ComplySci) see opportunity at the intersection of the RIA segment’s fast growth and the increasingly complex challenges of the compliance supervision space.  

Compliance specialist firms know that despite the cost and resources required to find the right partners and prepare a breakaway-established RIA to manage its compliance duties, the need for compliance services will only increase going forward. 

“You cannot base your compliance program on the theory that we will invest in good times and cut back in bad times,” says Ressler. “The greatest risk to any organization is reputational risk and there is no faster way to destroy a company’s reputation than with regulatory actions and customer complaints.”

Julius Buchanan, Managing Editor at Wealth Solutions Report, can be reached at

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