How RIAs Can Simplify Compliance With Software


By Adrian Johnstone, Practifi

With the U.S. economy continuing to grow ahead of expectations, there is plenty of demand for the services of Registered Investment Advisers (RIAs). According to the FT 300, which tracks the top-performing RIAs in the U.S., total funds under-management increased only slightly this year from $1.1 trillion to $1.2 trillion. But the average number of clients for FT 300 RIAs went up from 761 to 817. This comes as institutions and high net worth individuals continue to search for value in a climate of low interest rates. More than a decade on from the global financial crisis, the Fed’s funds rate is still half pre-crisis levels.

As we continue into this election year, the Fed will likely continue to face pressure to cut interest rates further in a bid to stoke the economy. And while low interest rates drive consumer activity and economic growth, they also mean lower returns for investors. This will mean plenty of opportunity for RIAs, who can help their clients—both institutional investors and high-net-worth individuals—make their money work harder for them.

But with that opportunity comes risk.

The U.S. financial sector is one of the most heavily-regulated in the world. From financial disclosure rules to anti-money laundering laws, RIAs face an increasingly demanding compliance challenge at both state and federal level. In this article, we explore how dedicated business management software can help RIAs take advantage of the attractive market opportunity while remaining compliant with all relevant rules and regulations.

Compliance challenges for RIAs

Let’s start by exploring some of the common compliance challenges faced by RIAs. It is these challenges that dedicated software needs to help address, so that RIAs can focus on delighting their clients and growing their businesses.

  1. Fiduciary responsibilities: under federal law, RIAs are required to act in the interests of their clients. This means providing investment advice that is in their best interests and avoiding any potential conflicts of interest or divided loyalties.
  2. Compliance policy: RIAs must have a documented policy setting out their procedures for complying with federal regulations. This policy is required to be reviewed annually and covers issues such as accuracy of disclosures, safeguarding client assets, privacy protection and business continuity plans.
  3. SEC filing: the Securities and Exchange Commission (SEC) mandates that RIAs file certain information on a regular basis. This includes an annual update document (Form ADV), a current email address of the main point of contact and accurate reporting of funds under management.
  4. Disclosure statement: RIAs must ensure that they have a written disclosure document and that this document is presented to all clients and prospective clients. Material changes must be circulated to clients on an annual basis.
  5. Code of ethics: the SEC requires RIAs to maintain a code of ethics governing the conduct of their employees. This is to ensure that individuals making investment decisions on behalf of clients do so ethically.
  6. Accounting records: RIAs are required to maintain certain accounting information and other similar documentation relating to the day-to-day operations of the business. These records may be inspected by the SEC.
  7. Contractual requirements: RIAs will have signed contracts with their clients. The SEC has particular requirements that need to be included in those contracts.
  8. Anti-money laundering: federal law requires RIAs to disclose and report on cash movements over $10,000 and any unusual transactions as part of anti-money laundering (AML) laws.

How compliance software can help

With so many rules and regulations to navigate, RIAs need all the help they can get. Fortunately, business management software built with compliance in mind can make the job of remaining compliant a lot easier, allowing advisors and business owners to do what they do best.

Capturing all client interaction

A big part of meeting compliance requirements for RIAs is the proper recording of client information. Business management software automates the process of storing and organizing all information about the same client.

Pulling together client information and making it more easily accessible reduces the burden on RIAs when it comes to complying with federal rules. For example, RIAs can get notifications when disclosure statement updates are due. And when they need to file information with the SEC, accessing and collating it will be a lot simpler.

Integrating with RegTech apps

One of the many benefits of using dedicated business management software for RIAs is the ability to integrate with third-party apps.

RegTech – or Regulatory Technology – refers to the growing range of cloud-based software platforms, specifically designed to help the finance industry meet its regulatory requirements. According to a recent report from KPMG, the accounting firm, RegTech will account for 34% of all regulatory spending in 2020.

Collaboration between leading business management software providers and RegTech firms allow RIAs to get real-time tracking and alerts on potential compliance issues. They can bake compliance into their workflows and business processes

As well as the obvious benefit of spotting and addressing regulatory problems, this setup can also form part of the formal compliance policy all RIAs are required to have.

Creating workflows

Processes and systems are only effective if you have good people. RIAs, like any business, can only prosper if they have capable and trustworthy employees. But processes and systems really matter. Creating the right structure around the right people will set your business up for success and growth.

Dedicated business management software enables RIAs to create workflows that support their advisors and help them ensure they follow the right steps when handling clients and looking after their investment portfolios. For example, users can set up workflows that ensure AML disclosure requirements are being met.

As an RIA scales, one of the biggest challenges is maintaining high standards of compliance on growing teams. When your entire team fits round a table, you can keep a tight handle on compliance and regulatory issues personally. But as that team expands and new faces join, business owners naturally become more detached. This is when dedicated business management software can make a real, positive difference. It can significantly reduce the chances of reporting requirements being overlooked and help your team stay onside with the regulators.

Key takeaways

Here is a quick summary of what we covered in this post:

  • The strong U.S. economy and low interest rates have institutions and high-net-worth individuals looking for value.
  • This represents a great opportunity for RIAs to grow their businesses, but they face an increasingly complex regulatory environment.
  • Federal rules place various requirements on RIAs from fiduciary responsibilities and disclosure documents through to SEC filing and AML reporting.
  • Dedicated business management software for RIAs can help in a number of ways. Examples include: capturing and collating client information; integrating with RegTech apps; and supporting the creation of compliance-focused workflows.