For Registered Investment Advisers and financial advisors seeking a profitable exit, enterprise value is key. After grinding for decades to build a successful practice, you want more than a book of clients and an average revenue multiple to negotiate your sale. A well-run business is worth more than the sum of its parts, and sophisticated buyers realize this. Having a recognizable brand, consistent, repeatable processes, and a strong compliance program helps ensure your firm that can survive without its founder and garner attractive bids when the time comes to retire or merge.
Notably, RIA compliance failures can sink your prospects for a good exit even when other sources of value remain intact. Think about what happens to your best clients when you receive an SEC order. They have to be notified promptly, and you don’t get to sugarcoat the violation in verbal conversations or in written communications. The SEC order stays on your ADV for years, greatly hindering your prospecting efforts. Not only might your current growth stop in its tracks, but even key long-term clients could move on to your competitor once your violations become public.
Therefore, your enterprise value depends heavily on building and executing a solid compliance program. The problem is that, because RIA compliance doesn’t produce revenue, it is often seen as a necessary evil to small advisors rather than a source of firm value. Founders want to spend as much time as possible on client acquisition and relationship management and as little as possible on email monitoring, trade analysis, advertising review, ADV updates, and the like.
How an RIA deals with its compliance obligations varies from DIY, to hiring a compliance consultant, to having a dedicated staff member in house who handles compliance matters--or any combination of the above. Each of these has advantages and disadvantages. For example, it’s tempting to follow the DIY approach to save costs, but to do so successfully you really have to know what you are doing, and you need the resources to keep everything organized. On the downside, DIY becomes impractical as your firm grows in AUM and staff size. When a firm owner has run the RIA compliance program without a systematic approach and plans to depart after selling the practice, enterprise value can take a hit.
RIA compliance consultants can provide answers and resources in a turn-key solution, but they are not free. In addition, the RIA firm’s CCO also must still oversee the consultant’s activities, per the regulators. If the tools and technology belong to the consultant (rather than the firm), then the firm remains chained to that consultant or risks losing its workflow upon a vendor change. As above, because a consulting relationship is vendor-based, it probably does little to add enterprise value unless you have also own your systematic approach, program, and processes that can continue if a consultant change is necessary.
Hiring a full-time staff member to serve as your RIA Chief Compliance Officer costs even more, but if that person intends to stay on and has done a good job building and overseeing your compliance program, then keeping the CCO at the helm adds significant enterprise value. The CCO should have the tools and resources to continue improving and monitoring the compliance program under the new ownership.
What all the above solutions share is a need for technology to give the compliance program structure and to save administrative hours for the DIY’er, the CCO, and even the consultants working on your compliance program. Below are some key criteria to consider when constructing your compliance program so you can start off right and get the most value for the effort expended.
Systematic – Your compliance program should approach common tasks (like email archival and review, personal transaction reporting, ADV updates, etc.) according to a set schedule that matches your Policies and Procedures manual language.
Repeatable – There is no need to “reinvent the wheel” every year. After making the up-front effort to design your system, it should keep you on track until you make deliberate changes to reflect updated regulations or to overcome any deficiencies found during a regulatory review.
Transparent, Understandable, and Teachable – Your program and supporting technology should follow the “substitute teacher” principle, meaning that a qualified individual should be able to figure out how to carry out compliance duties without great effort. (A teachable compliance program/system will also help you during an SEC audit.)
Scalable – The program you use for your small firm should work for a larger firm so that, as you grow, you needn’t replace your entire program. This is a critical issue when implementing technology. You don’t want to waste a lot of effort programming a system you will have to replace in a few years.
Interchangeable – If you use your own software solution from the outset, you can replace your consultant, CCO, and even yourself without having to undergo a software conversion. This certainly saves you the cost of new software and programming and may even give you a pricing advantage when hiring someone else to monitor your compliance program for you.
The RIA Compliance Technology suite of compliance technology products specifically addresses the all the above needs, giving you a truly streamlined, turn-key solution that is scalable, whether you administer your own program or rely on others to manage it for you.
Our Simple Compliance Portal, Simple Email Archive, Simple Social Media Archive, Simple Web Archive and Simple Trade Monitor were all built by Chief Compliance Officers to simplify your compliance needs and automate what can be automated.
DIY’ers can quickly set up our framework and calendar for documenting completed tasks, forensic testing, and a single “go to” dashboard for compliance. Our technology is also optimized for RIAs who with compliance consultants or teams. Both you and the consultant/team will enjoy complete workflow transparency so you can see the progress of each item and stay on top of anything that might be falling behind. This transparency can be expanded to include even the executive team and board members as needed.
Isn’t it time to minimize the time spent on compliance without sacrificing quality so you can focus on activities that drive firm growth? Contact us today at 714.475.2155 or click on the button to schedule a call or demo.