Top Compliance Mistakes RIAs Make (and How to Avoid Them)

Unfortunately, even the most diligent firms can stumble into costly pitfalls when it comes to compliance regulations. Are you confident in your compliance practices?

Familiarizing yourself with common mistakes that RIAs make—and how to avoid them—will protect your firm, streamline your operations, and keep you ahead of regulatory changes.

We outlined trusted compliance strategies, below, to safeguard your business and maintain your firms reputation.

Not understanding or misinterpreting regulations

Whether dealing with conflicts of interest, advertising, record-keeping, or cybersecurity, RIAs operate in a world of constantly changing regulations. Simply keeping up with the latest changes can be a challenge, which is why a well-organized compliance department is essential.

Some of the more common issues in this area include:-

Lack of familiarity with SEC regulations

A key role of the compliance department is communicating regulations to the broader workforce. First, they must understand the changes, create the relevant procedures and handbooks, and ensure the information is presented in a simple-to-understand format.

For example, the SEC Marketing Rule (Rule 206(4)-1) consolidates previous regulations covering advertising and cash solicitation rules, bringing them into a single framework. It clearly defines:-

• Types of advertising
• The use of testimonials and endorsements
• Acceptable performance statistics
• Record-keeping requirements

Historically, areas of this regulation have been open to interpretation, but this is not true today.

Misunderstanding fiduciary duty requirements

While many of the elements of fiduciary duty are obvious and straightforward, a lack of attention to detail has seen some firms receiving financial penalties. There are numerous duties, such as:-

• Due care and attention
• Avoiding conflicts-of-interest
• Full disclosure
• Competency
• Safeguarding client assets
• Putting client interests first
• Confidentiality

It is also important that RIAs understand how the various duties are interconnected, such as full disclosure and avoiding conflicts of interest. Even if a potential conflict of interest occurs in the normal course of business, there are still disclosure obligations.

Common issues

• Reliance on outdated compliance processes
• Missing nuances in new regulations or state-level requirements

Solutions

• Regular training for staff on the latest regulations
• Partnering with compliance technology providers to ensure adherence to regulations

Failing to implement tough compliance policies

RIAs must have robust compliance policies. Even if some policies seem extensive, they offer a form of protection from regulatory penalties.

Common struggles we see from RIAs include:-

Weak or outdated compliance manuals

Internal compliance manuals must reflect the current SEC regulations. While paper manuals should be updated on any changes, it is quicker and easier to update and circulate digital copies to employees with specific guidance on the changes made and how they may impact their daily activities.

Inconsistent enforcement of internal compliance policies

With many grey areas regarding compliance, it is always better to err on the side of caution. Inconsistency and failure to enforce internal compliance policies undermines trust and causes issues with employees and regulators.

Common issues

• Lack of documented policies for key areas
• Inconsistent application of policies across staff

Solutions

• Conduct regular reviews of compliance policies
• Use compliance software to centralize and enforce standardized processes

Poor record-keeping practices

Accurate and up-to-date records are also a critical element of the audit process, which assists with the smooth running and growth of the business. It's important to appreciate the importance of record-keeping practices, as they ensure that regulatory standards are followed and support the business if questions are raised from outside sources.

RIAs often report issues with record keeping in several areas, including:

Failure to maintain accurate and up-to-date records

Unfortunately, some RIAs fail to follow simple guidelines regarding records, leading to weakness in areas such as trade confirmations, client agreements, email communications, and more. This is a critical element of the regulatory process, and where shortfalls are identified, regulators are likely to take a very dim view.

Record retention requirements

Depending on the type of document, RIAs are legally obliged to retain copies for between 3 to 7 years. In fairness, many RIAs will go above and beyond this minimum requirement.

Common issues

• Missing documents during audits
• Disorganized or decentralized filing systems

Solutions

• Implement automated data storage and archiving solutions
• Use centralized document management tools with secure access controls

Inadequate advertising and marketing oversight

This is one of the more complex areas of regulation, as advertising and marketing channels and techniques, as well as investment products and services, are continually evolving. Central to this area of regulation is client protection from potentially misleading offers.

A constantly changing area of regulation, some of the more common issues include:-

Publishing misleading data

Whether looking at performance data or testimonials, there are stringent regulations under SEC marketing rules. A common issue between RIAs and regulators is that sometimes, because the information is not presented in context, it can come across as misleading. If in doubt, double down on the context so there is no room for misunderstanding.

Disclosure requirements with advertising and marketing material

Transparency is a critical element of modern-day regulation, especially in the world of investment and financial advice. Some RIAs have been found to produce legitimate advertising and marketing material suitable for many clients but have failed to make subtle disclosures regarding potential conflicts of interest. Transparency is the key!

Common issues

• Inconsistent review and approval of advertising content
• Failure to file required materials with regulators

Solutions

• Create a pre approval process for all advertising and marketing material
• Utilize software to ensure advertising compliance and track disclosures

Neglecting cybersecurity and data privacy

There is no excuse for neglecting cybersecurity and the importance of data privacy. Whether looking to save on costs, simply ignoring the regulations, or taking a "it won't happen to us" approach, this is very dangerous and can cause significant regulatory issues and brand damage.

Some of the more common issues in this area include:-

Insufficient measures to protect sensitive client data

We know that more than 50% of ransomware attacks target the financial services industry due to the value of confidential financial information. There are now strict regulations regarding cybersecurity, which was specifically mentioned in the SEC's outlook for 2025. Savings in this area may assist short-term cash flow, but there may be potentially huge long-term consequences.

Failure to comply with privacy laws

This is a relatively complex topic, with numerous national, state, and even international regulations to consider. However, too many RIAs are failing to comply with privacy laws. This area is likely to see further regulation in the short, medium, and long term, and a failure to protect client data could lead to irreparable brand damage.

Common issues

• Weak password protocols or lack of two-factor authentication
• Delayed response to cyber incidents

Solutions

• Regularly update and test cybersecurity protocols
• Provide employee training on data security best practices
• Adopt encryption tools and secure communication systems

Insufficient employee training

Whether some employers assume their employees are up to date or prefer to direct their investment elsewhere, insufficient employee training is an issue not only in financial services but also in numerous other industries. For many, the problem is that funding focused on employee training is often seen as a cost rather than an investment—these views need to change.

A topic often overlooked, some of the more prominent issues in this area include:-

Employees unaware of their compliance responsibilities

It is the role of an employer to ensure that every employee is aware of not only the business culture and internal practices but also their collective and individual compliance responsibilities. Unfortunately, one weak link in a company's regulatory chain can cause untold damage. Conversely, employees must also know and fulfil their compliance responsibilities.

Lack of specific training

Initial and ongoing training is essential, whether taking on a new employee or switching an existing employee to a different role. Some RIAs fail to invest in and undertake employee training, but it's critical, even where the individual may be deemed to have sufficient knowledge already. It's also important to note that training is not a one-off event but an ongoing investment and regulatory obligation.

Common issues

• Mistakes due to misunderstandings or lack of clear guidance for employees outside the compliance department
• Overreliance on compliance officers for compliance responsibilities outside the realm of their given duties.
• i.e. Compliance officers are not the only ones responsible for many factors in the case of regulatory duties.

Solutions

• Develop a compliance training calendar for regular education on employee and broader company responsibilities
• Use online learning modules and workshops tailored to compliance requirements

Inadequate preparation for regulatory audits

As an RIA, the best way to prepare for a potential regulatory audit is to assume that you will have a knock on your physical or virtual door tomorrow morning. This way, your records should be up to date, and all of the information should be available when the regulator does call. This may take a degree of preparation and the introduction of new procedures, but it's certainly worthwhile.

As they say, fail to prepare, prepare to fail. Here are some common issues we often come across:-

Reactive rather than proactive approach to audits

While understandable to a certain extent, as management and employees focus on everyday business, preparation can remove huge elements of stress when it comes to regulatory audits. If you can portray a controlled environment to the regulator, this would be well received, aside from the obvious benefits to the business.

Missing or incomplete documentation

When looking to carry out an audit, missing or incomplete documentation will, at best, extend the process and, at worst, mean that the regulator can't complete it. There are obvious regulatory repercussions, but this does not reflect well on the management, employees or internal procedures. Failure to complete an audit could lead to a more in-depth investigation by the regulator.

Common issues

• A last-minute scramble to gather records required for an audit
• Penalties for non-compliance due to lack of preparation

Solutions

• Utilize a compliance calendar like this one to track filing and audit deadlines
• Simulate mock audits to identify gaps in compliance processes

Overlooking emerging compliance areas

Investment markets are constantly evolving, with new products and services emerging regularly. In recent years, we have seen the emergence of cryptocurrencies, ESG, and growing demands for diversity across all businesses. Previously, these topics may have been an option for RIAs, but they are now a legal regulatory obligation for many.

A challenging area of regulation and relatively fast-moving, there is a lot to consider with particular challenges such as:-

Ignoring new regulatory focuses

Whether considering cryptocurrencies, ESG, or other emerging regulatory issues, there is generally a time lag between their emergence and the enactment of regulations. Theoretically, this should give RIAs time to prepare, but unfortunately, many ignore this opportunity to address emerging regulatory issues. This can be detrimental to the business and also attract negative attention from regulators.

Failure to update internal processes

Some of the more common topics overlooked by RIAs include DEI (diversity, equity, inclusion) and environmental sustainability. Initially, it can be difficult to see any direct benefit for the business, but in time, competitors, clients, and regulators will pay closer attention. It's also important that management and employees are all singing from the same hymn sheet, with updated internal processes a valuable means of keeping everyone up-to-date and in line.

Common issues

• Failing to adopt forward-looking practices
• Falling behind competitors in emerging opportunities

Solutions

• Stay up-to-date on trends through industry reports and regulatory announcements
• Use compliance software to document and monitor ESG-related practices

How To Avoid The Top Compliance Mistakes We See RIAs Making

As an RIA, a proactive approach to compliance is critical to the well-being of your business, client trust, and your relationship with regulators. We have seen that the key to long-term success for RIA firms is internal procedures, employee training, and open channels of communication. Remember that funding towards compliance and regulation is an investment, not a cost.

At RIA Compliance Technology, we specialize in providing RIAs with the tools and expertise to turn compliance into a strategic advantage. Whether you're looking to strengthen your policies, implement cutting-edge compliance technology, or train your team to stay ahead of regulatory changes, we have the solution.

Check out all our compliance software solutions:

• Simple Compliance Portal
• Simple Compliance Calendar
• Simple Email Archive
• Simple SMS Text Message Archive
• Simple Trade Monitor
• ADV Solutions

Ready to safeguard your business and build trust with your clients?

Contact us to discover how we can empower your compliance strategy.