Compliance Costs: Double the Trouble

There isn't a broker or financial advisor who hasn't been hit with reams of new compliance responsibilities in the past several years. But just how much is it actually costing firms?

There isn't a broker or financial advisor who hasn't been hit with reams of new compliance responsibilities in the past several years. But just how much is it actually costing firms? The Securities Industry Association set out to answer that question. In a study conducted in February of this year, the trade group found that annual industrywide compliance costs have nearly doubled in the past three years — to $25 billion in 2005 from $13 billion in 2002, or 5 percent of the industry's annual net revenues.

The SIA estimates that most of the increased cost was unnecessary — caused by duplication of examinations, regulations and supervisory actions, as well as inconsistencies and a lack of clear guidance.

The vast bulk of new compliance costs — about 94 percent — are staffing-related, the study says. Respondents quantified staff-related costs by estimating the percent of time employees spent reporting to department management on compliance-related work and measuring that against their overall compensation.

Out-of-pocket spending on legal, audit, accounting and other services also soared, while capital spending on technology almost tripled over three years, the SIA said.

And then there's opportunity cost. For example, branch managers now spend 30 percent to 40 percent of their time on compliance-related activities, compared with 8 percent to 10 percent five years ago, and CEOs now spend up to 25 percent of their time on compliance-related activities, versus 5 percent five years ago, the SIA found. And that means less time devoted to developing new business. New products and services that took weeks to introduce five years ago can now take up to a year, the study says.

Percent of Net Revenue Spent on Compliance: 2005
All firms 13.1%
Large firms 14.9
Mid-sized firms 17.5
Small firms 8.6
Average % Increase in Cost Since 2002 for All Firms, On Weighted Basis
Accounting services 135.7%
Legal Services 140.2
Audit Services 88.2
IT Suppliers & Vendors 144.6
Other services 473.7
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