New Fidelity survey shows advisors are running scared about compliance costs
RIAs, compliance experts and a research group diverge wildly on future costs but a baseline increase in the single-digit thousands seems inevitable
5 min read- Advisors increasingly worry new regulations will cut into profitability, according to a Fidelity survey.
- Outsourcing compliance offers potential savings and preparation for evolving regulatory demands.
- Experts disagree on the extent of cost increases, with some calling concerns "fear mongering."
- Smaller firms face ADV form updates and potential state regulation changes, impacting compliance costs.
Advisors like Jane Williams of Sand Hill Global Advisors clearly are worried.
Williams, CEO, recently outsourced Sand Hill’s compliance to Central Point, Ore., -based Focus 1 Associates, one of a host of such newly sprung-up compliance companies. Sand Hill is paying a $10,000-$12,000 annual retainer.
She’s hopeful the new arrangement will save the company some money, but more importantly, set it up for the new regulatory regime, which may involve FINRA, or more of the SEC, or some combination. (See: Groundbreaking SEC study would smash old regulatory system, creating fiduciary brokers and more regulated advisors.)
Palo Alto, Calif.,-based Sand Hill, which manages about $1 billion, formerly used an SEC-focused attorney, but that bill had skyrocketed in the past several years.
Further escalation
“We’re entering an era … in which we believe there is going to be yet a further escalation of demand on us,” she said. “Our sense is that it’s going to get tougher.”
Her sense is shared by many advisors: 80% of about 400 surveyed recently by Fidelity Institutional Wealth Services during a webinar on Dodd-Frank said they were worried that new regulations would cut into their profitability over the next two years.
New regulatory world dawns with oppressive ADV Part 2 form
But just how worried ought an advisor to be? Are we talking about a 2% increase in compliance costs or a 50% increase?
“I think it’s an issue that does bear some study,” said David Canter, executive vice president for practice management consulting for FIWS, noting that advisors just seem to be waking up now to the fact that they could be facing a whole new regulatory climate.
Experts are notoriously reluctant to pin a number on a future increase in an uncertain time. But the best source I found – a TowerGroup study from 2009 – predicted that the typical investment advisor, managing about $100 million, would see their compliance costs rise to about 15% of revenue under an entirely new regulatory regime. That’s about what broker-dealers pay for compliance under the rules-based regime of FINRA.
(Investment advisor compliance has always been cheaper because RIAs function under a principles-based system).
Not everyone thinks it’s time for advisors to batten down the hatches.
Fear mongering
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“It’s all noise right now,” says Brian Hamburger, founder and managing director of Englewood, N.J.,-based MarketCounsel. “To beat that drum now is nothing but fear mongering.”
Indeed, the first set of regulations mainly affects those firms with complex businesses, said David Tittsworth, executive director of the Investment Adviser Association.
“If you’re in derivatives … I think you’re expecting an entirely new regulatory scheme,” Tittsworth said, also noting that the surprise audits of firms that custody their assets in house increased costs. See: SEC details new.
As RIA compliance complexity explodes, two big outsourcers merge to keep pace
Plain vanilla investment advisors face two significant changes so far: the new ADV forms, which, when outsourced, cost a few thousand dollars to fill out for the first time, and the switch to state regulation. The latter means that advisors with less than $100 million in AUM must register in all of the states in which they have five or more clients.
State regulators have said they plan to audit advisors more frequently than the 9-10 year cycle the SEC was on – but the reality of that promise probably depends on more funding from the cash-strapped states. See: What advisors should know about the next sweeping change: the switch from SEC oversight to state regulation and It’s looking official: Advisors switching to state oversight to face many more audits.
Hamburger says that small advisory firms can in fact handle this first set of compliance changes seamlessly and without significantly added costs.
Zachary Gronich, president of New York City compliance firm RIA IN A BOX, agrees, saying he believes compliance costs will increase “not much at all.”
No outrageous new costs
“For the state registered people, I’m not really seeing any outrageous new costs beyond that new ADV 2a/2b.”
Advisors, of course, are in the business of worrying about the future, and many of them are preparing for the more radical overhaul they expect.
Those with the least amount of AUM are likely to face the heaviest burdens. Consider: the typical $100-million-AUM advisor was paying about 8% of revenue for compliance costs when the TowerGroup’s study and others were done. But Sand Hill, with a much larger AUM, pays 1.5%-2% of revenue for its compliance, including hard and soft costs, education and dues, Williams estimates.
Williams of Sand Hill, which was founded in 1982, also has the benefit of looking backwards. Her compliance costs tripled over the past 10 years. When her firm was part of the publicly held Boston Private Financial Holdings, she also saw what other regulatory regimes are like in the financial services world. (She and her partner purchased the firm back in June 2009).
She’s bowing to the inevitable: “This doesn’t seem necessary to your business. However, you’re going to have to do it,” she says.
Correction: An earlier version of this story included an incorrect title for Brian Hamburger, and an incorrect location for his firm.
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