FINTECH CORNER: Compliance Audits Don’t Have to Be So Scary: Part 1


Anyone in the financial services realm will inevitably deal with multiple, shifting layers of regulations, and perhaps nowhere is this more true than for wealth management firms and financial advisors in the U.S., who are bound by guidelines from multiple agencies and actors on the state and federal level.

For national and regional enterprise firms operating across different jurisdictions, the ongoing cost of staff, systems, processes and leadership necessary for maintaining compliance can become very expensive—a 2020 LexisNexis study revealed that financial institutions around the globe spend $180.9  billion each year on financial crime compliance.

“Even as compliance budgets rise, firms are likely to find themselves on the receiving end of a compliance audit at some point in the coming years,” said Adrian Johnstone, president and co-founder of Practifi, a performance optimization platform for wealth management firms.

“Whether it’s a random review or a for-cause inspection, regulatory bodies routinely conduct audits of financial services firms to check that records, process and controls are all in order,” said Johnstone. “Although there are rare cases in which organizations go a decade or more without an audit, they are exceptions to the rule.”

Why Are Compliance Audits So Difficult to Manage?

Preparing for an audit can be a time-consuming, labor-intensive task itself, requiring large amounts of preparation and documentation before the auditors step on the premises. Wealth management organizations have to account for guidelines from federal and industry regulators, most notably the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (Finra), as well as those of the various states in which they do business.

Many firms lack the resources and personnel to cover all of that ground—they struggle to manage their compliance demands and are unable to maintain a sufficient dedicated, experienced compliance team. Even larger firms that are able to keep a dedicated staff to oversee compliance may struggle to train those employees on the latest developments and regulatory best practices. These organizations often lack a comprehensive compliance training program to onboard new hires and provide ongoing education.

Compliance teams often feel overwhelmed and unprepared to respond to audit notifications and documentation requests—notices that can occur with very little warning and that may force teams to compile comprehensive financial reports on short notice. When these notices come from the SEC or Finra, firms usually have two weeks to produce requested documentation and to prepare for an on-site inspection—thus audit preparation is a year-round requirement.

Once a compliance team is in place, they also need the right tools and technology to help manage the demands of the auditors, said Johnstone.

“A CRM designed specifically for advisory and wealth management firms will track events and documents that are relevant to any audit,” said Johnstone. “That includes client interactions, financial advice, signed paperwork and other significant details, helping firms create a clear audit trail.”

Whether an audit notice comes from Finra or the SEC, Johnstone offered a few best practices to help get through the process unscathed:

Best Practices for Compliance Audit Preparation

Respond to Requests and Notifications as Quickly as Possible

It’s important to respond to the audit notification itself as quickly as possible, but that mindset must also be applied to every step of the process along the way and every request and communication the regulator sends your way. Once the examination begins, things move quickly and it’s important not to fall behind. Furthermore, responding promptly gives auditors a better impression of your firm. If you encounter any issues or delays along the way, be proactive about informing the examination team so you can work out a solution.

Prepare All Requested Documentation for Review

It’s not enough to send auditors all of the records and files they’ve requested before your audit, you should also thoroughly review those documents yourself so you can proactively identify any issues and anticipate what questions or concerns auditors and inspectors may ask.

Make copies of all relevant records and pore over them with your compliance team, so everyone is on the same page and prepared for the audit. Come up with a list of answers to likely questions, as well as answers to any follow-up questions they may have. Keep that list handy for the on-site interview, so you don’t seem evasive by searching for answers.

“A fully-integrated CRM or business management platform can help compliance teams compile and prepare all the required documentation,” said Johnstone. “By providing a central location to store and track client and business documents securely, these platforms make it much easier to cover all your bases and put everything together before audit day.”

Assign Employees Specific Audit Tasks and Focal Areas to Manage

In-person audits can be extremely stressful, especially if your compliance team isn’t sure what their responsibilities are. Give each employee a task to avoid letting anything slip through the cracks. Designate a main point of contact to work directly with exam teams, responding to requests and managing the process before, during and after the audit.

Support Your Team with the Right Systems and Technology

Compliance teams, first and foremost, need to be equipped with the knowledge and the resources they need to stay on top of regulatory requirements. Support that knowledge with a training program to assess their understanding of SEC and Finra regulations and educate them on all the latest changes to those guidelines.

Compliance teams also need the technology to help them monitor every requirement, stay on top of audit timelines, track financial reporting and alert stakeholders to potential violations. A RegTech platform can help put eyes and ears on every timeline, request and requirement, keeping a firm’s regulatory obligations front and center.

“Documenting every client interaction, financial advice and delivered service will help firms stay on the right side of compliance as well,” said Johnstone. “Practifi’s business management platform is specifically designed for the needs of financial advisors and wealth management firms, capturing valuable information and creating a complete record of your client relationships. That’s one less headache to worry about when the auditors come calling.