The costs of complying with regulations in the financial services industry has soared in the three years since Dodd-Frank passed Congress in 2010, hitting smaller financial advisory firms particularly hard.
More than 93 percent of firms now have at least one, full-time compliance officer, according to the Investment Advisor Association’s 2013 survey of 462 compliance professionals. That is up almost 23 percent from the IAA’s 2009 survey.
“The biggest impact [of Dodd-Frank] is the introduction of a level of uncertainty into business planning,” says Brian Hamburger, MarketCounsel’s founder and managing director. This uncertainty of the regulatory landscape has caused many advisors to over-compensate to be sure they stay on the right side of the line, despite not knowing where the line actually is. “We’ve been fighting a ghost,” he says.
It's possible the costs will only increase considering regulators have yet to meet a third of the requirements. Of the act's 398 provisions, regulators have finalized 158 ruled and drafted 113 more, according to a report by New York-based law firm Davis Polk. That leaves 127, or 31.9 percent of the rules required by the legislation still to be written, even as the three year anniversary of Dodd-Frank approaches this Sunday.
“Most of the new rules are redundant and expensive,” says advisor Paul Byron Hill of Professional Financial Strategies. To keep up with all the new rules, Hill hired a compliance consultant in 2009 at $12,000 for his Pittsford, N.Y.-based practice—which services 80 clients with $120 million in assets under management.
Across the industry, compliance costs have also risen, with more than 33 percent of firms surveyed by the IAA paying over $500,000 in compliance-related costs in 2012.
Jim Goodland, president of Plymouth, Minn.-based Securus Wealth Management doubled his compliance costs since 2009, spending about $20,000 in compliance costs in 2012 for an office of 12 people. In addition to the costs, Goodland says he’s spending about two and a half hours a day on compliance-related tasks, most of which is spent on record-keeping and documenting.
Meanwhile, Austin, Texas-based Beck Capital Management’s chief investment officer estimated that compliance costs have quadrupled at his nine-person firm since 2009, rising from about $15,000 a year to $60,000 in 2012.
“It’s relatively harmful to small firms versus the larger ones,” Frank Beck says. He too has hired a compliance officer, but the firm also employs outside firms for mock audits and general reviews to make certain the office is in compliance with new rules they may not be aware of.
“We’ve blurred the line between risk and compliance,” Hamburger says. Many, many firms are casting a wide net over compliance as a failsafe against risk, as well as increased audits.
But Hamburger argues that more examinations by both the SEC and FINRA will not solve the problem. “More frequent exams aren’t going to fix this or catch more bad guys.”