Financial advisor Rick Bloom is better equipped than most to handle an SEC audit. Both a lawyer and a CPA, Bloom runs Bloom Asset Management in Farmington Hills, Mich., a registered investment advisor with $830 million in assets under management. When the regulators stopped by for a review of his operation this year, Bloom made time in his schedule to accommodate their needs, a process that took about a week. Handling such work internally is not something he plans to do again the next time they come knocking, he says; he's now talking with companies that can manage his compliance responsibilities. “Even though I have the education and knowledge to handle it, you know what? My time is not as well spent there,” he says. “I look at it from a dollars and cents standpoint. What would bring more revenue to the firm? I can hire someone who can do just as good a job as I can on the SEC thing, but I can't necessarily hire someone who can deal with my clients as well as me.”
New data suggest more RIAs are thinking like Bloom. Charles Schwab's RIA Benchmarking Study last year reports that 38 percent of firms were outsourcing their compliance functions, up from 27 percent in 2010. Most of the outsourcers were small to mid-sized firms with assets of $25 million to $250 million. The savings resulting from moving compliance out of the office were material — 26 percent, Schwab estimated. The survey of 820 RIAs, with more than $300 billion in assets, was done in February and March.
“It's the Dodd-Frank law that got people thinking, ‘I've got to do so much in such a short period of time that I'd like to get some help,’” says Nick Georgis, vice president for practice management and strategic business development for Schwab Advisor Services. He expects the numbers will continue to rise. The compliance website for Schwab advisors is the most active in terms of page hits compared to anything else that the custodian provides, he says — about 1,500 hits a month. New rules took effect this year governing “plain English” requirements for advisors' ADV brochures. And next year, about 4,000 advisors with less than $100 million in assets will begin answering to state regulators instead of the SEC, raising new questions about what's expected. “It's very clear what the SEC is looking for in terms of a culture of compliance, in terms of what they audit for,” Georgis says. “The need to be compliant has always been there. It just feels like things are moving so quickly.”
With the vast majority of RIAs tending toward the small size — more than 41 percent manage less than $100 million in assets, according to the Investment Adviser Association — many advisors feel hard pressed to keep up with regulatory changes, says George Tamer, director of strategic relationships at TD Ameritrade. “You can't ask a small business owner to stay on top of all the regulatory changes — be an expert in that, be an expert in growing your business, be an expert in client retention, be an expert in human capital management. There's just too much going on, and that's why you definitely see a trend toward outsourcing the non-revenue generating activities,” Tamer says.
Advisors have a range of choices when they consider outsourcing. Work can be done piecemeal, with experts advising on specific issues, or advisors can take a more holistic approach. Brian Hamburger, founder and managing director of the regulatory consultancy, MarketCounsel, in Englewood, N.J., says the latter approach can uncover problems that wouldn't be found if an advisor was just seeking a solution to a particular need, such as rewriting an ADV brochure. “People are becoming savvier consumers of compliance,” he says. “If you're going to get value out of any outsourcing relationship, the key is to have trust and confidence in who you've hired.”
Bloom says he expects to spend $15,000 to $20,000 a year to outsource all his compliance needs. Is that cheaper than how he's doing it now? It's a good question. Bloom outsourced his payroll functions years ago, but he can't put his finger on what difference that decision has made on his budget. “But I'll tell you this: It saved me gray hairs,” he says. A similar deal on compliance “is going to be well worth it.”