As you may know, starting a Registered Investment Advisor (RIA) firm is an exciting venture. You're building a business focused on helping clients achieve their financial goals. However, the path to launch, and day-to-day operations, often gets bogged down by one pervasive and often misunderstood challenge: compliance.
Many new RIA founders find themselves paralyzed by the complexity of regulatory requirements. They fear the SEC or state regulators, over-engineer their processes, and dedicate excessive time and resources to compliance activities that don't always align with the actual risks of their business.
This overcomplication stems from several common mistakes:
- Fear of the unknown: The legal jargon and regulatory documents can be intimidating, leading new founders to assume every rule is a complex, time-consuming hurdle.
- One-size-fits-all thinking: Many new RIAs try to implement the same extensive, often overly bureaucratic, compliance programs used by large Wall Street firms, rather than tailoring a program to their specific business model and client base.
- Misguided advice: Online forums can sometimes lead to the implementation of unnecessary procedures and documentation because that advice is either too generic or too nuanced. On the surface there will be similarities, but you will not have the same exact experience as the last person.
The truth is that compliance doesn't have to be a bureaucratic nightmare. It's about establishing a culture of integrity and implementing a sensible, scalable system that meets regulatory requirements while allowing you to focus on growing your business and serving clients.
Below are five simple ways new RIAs can avoid overcomplicating compliance:
1. Tailor Your Compliance Program to Your Business Model
The core principle of effective compliance is that it should be relevant to your specific risks. A firm managing simple passive portfolios for retail clients faces different risks than a hedge fund or a firm dealing with complex derivatives.
- Action Step: Conduct a thorough risk assessment specifically adapted to your firm's services, client base, and operational structure. Your compliance manual and procedures should directly address those risks, not theoretical scenarios that either do not or may never apply to you.
2. Leverage the Right Technology (Without Overdoing It)
Technology can automate monitoring, documentation, and reporting tasks. Tools like CRM systems, portfolio management software, and other platforms can significantly streamline operations. However, there’s something to be said for not integrating compliance software with other platforms.
- Action Step: Choose integrated systems that talk to each other. Don't fall into the trap of buying a dozen different software solutions that create more work trying to connect them. Focus on essential, scalable tech that handles core functions like client onboarding, trade monitoring, and data storage securely.
3. Keep Documentation Simple and Relevant
Regulators want to see that you have thoughtful procedures in place and that you follow them consistently. They don't need a 500-page manual filled with boilerplate language.
- Action Step: Create clear, concise, and easy-to-read policies and procedures. Ensure that every employee (even if that's just you to start) understands their responsibilities. Regularly review and update your documentation to reflect on how you run your business, not just how you think the SEC or state wants you to run it.
4. Integrate Compliance into Daily Operations
Compliance shouldn't be an after-thought or a "once-a-year" check-the-box exercise. It works best when it's a natural part of your firm's culture and daily workflow.
- Action Step: Incorporate compliance reviews into regular activities. For example, the process for approving a new marketing piece should include a brief compliance review before it's published. This continuous integration makes compliance a habit, not a chore.
5. Seek Targeted, Scalable Advice
While professional guidance is often necessary, decide if a long-term engagement (in our view that means one year) or a short-term engagement is best given your circumstances.
- Action Step: Seek help from a compliance firm who specializes in both new and growing RIAs and established RIA. Look for services that offer scalable solutions, provide foundational support during the early days but allow you, if you so choose, to take on more responsibility as you grow and become more comfortable with the requirements.
By focusing on these core principles—tailoring your approach, leveraging technology wisely, keeping documentation simple, integrating compliance into your workflow, and seeking targeted advice—new RIA founders can navigate the regulatory landscape with confidence and efficiency, ensuring they meet their obligations without getting bogged down in the morass.
