The True Cost of Compliance: Why Handling It Yourself Is Hurting Your Business

Compliance is extremely, extremely important for financial services firms of all sizes.

What was once seen as a mere box-ticking exercise has evolved into a never-ending battle to keep up with the web of rules and regulations.

Many have tried to tackle it all in-house, but the true costs of that approach are becoming painfully clear.

In this article, I’ll shine a light on the real expense of trying to manage compliance without an expert and explain how the right support can free up your team to focus on growing your business while ensuring you stay firmly on the right side of the law.

The Escalating Burden of Compliance Costs

The compliance burden just keeps getting heavier with each passing year.

Compliance costs refer to the direct and indirect expenses associated with adhering to the constantly evolving regulatory requirements governing the financial services industry. These costs can encompass everything from hiring specialized personnel and implementing robust technology systems, to the opportunity cost of diverting valuable staff resources away from revenue-generating activities.

There are some key factors that are contributing to rising compliance costs:

Proliferating Regulations: With new rules and guidelines emerging almost on the daily, keeping pace with these changes requires significant investments of time and resources.

Heightened Scrutiny: Regulators are exerting greater oversight than ever before, leading to more frequent audits and the need for watertight documentation and procedures.

Security Threats: The rise of sophisticated cyber attacks and data breaches has heightened the need for robust data protection and cybersecurity measures.

The result is a perfect storm that is straining the resources of RIAs both large and small.

Compliance has evolved from a mere checkbox to a mission-critical function that demands specialized expertise. And the financial toll shows no signs of abating.

A Closer Look at Compliance Enforcement Data

The sobering reality of the compliance landscape can be seen in the latest enforcement statistics released by the U.S. Securities and Exchange Commission (SEC) for fiscal year 2023.

The data paints a picture of a regulatory environment in flux, with the SEC imposing record-breaking fines and sanctions in an effort to crack down on misconduct.

Over the past year, the SEC handed down nearly $5 billion in monetary penalties – the highest annual total in history.

Additionally, the SEC barred 133 individuals from the securities industry, the highest number of officer and director bars obtained in a decade.

Perhaps most striking were the SEC’s whistleblower awards, with over 18,000 new whistleblower tips in 2023 (a 50% increase from the year before), awards reached an all-time high of $600 million.

This indicates a growing willingness among industry insiders to report wrongdoing, underscoring the urgent need for firms to have robust compliance procedures and controls in place.

Enforcement reports don’t lie. The risk is higher and higher and higher every single year if this isn’t taken seriously.

Considering the Costs of In-House Compliance

Hiring a dedicated Chief Compliance Officer (CCO) is a significant financial undertaking for any financial advisory firm. Executive-level CCO salaries can range from $180,000 to over $300,000 per year, with the added burden of benefits, training, and retention efforts. And that’s just the tip of the iceberg when it comes to the true costs of an in-house compliance function.

Beyond the hefty price tag of a CCO, firms must also account for the expenses of assembling a support team of compliance analysts and specialists. The collective price tag can easily reach $500,000 or more annually – a substantial investment that many smaller and mid-sized firms simply can’t justify.

And we’re still not done calculating the cost of compliance.

Firms that keep compliance in-house also shoulder significant hidden expenses, including:

Time and Resources: Compliance is a full-time job that requires constant attention. Pulling key personnel away from revenue-generating activities to handle compliance tasks represents a major opportunity cost. Executives and advisors end up spending hundreds of hours per year responding to regulatory inquiries and audits.

Lack of Expertise: Too often, firms appoint compliance responsibilities to individuals without specialized training, such as the CEO, COO, or HR manager. These “accidental compliance officers” almost always lack the proactive mindset and in-depth knowledge needed to stay ahead of evolving rules and industry best practices.

This is all assuming that your compliance program is actually compliant (and continues to stay compliant with each new regulatory update.)

If you get slapped with an enforcement action, you’ve got major fines to pay and a hit on your reputation to recover from on top of everything else.

Ultimately, the true cost of maintaining an effective in-house compliance function is often grossly underestimated. Many forward-thinking firms are discovering that partnering with specialized compliance providers like My RIA Lawyer can deliver far greater cost-efficiency and legal expertise.

Compliance mistakes happen way too easily

Is it worth risking the business, your employees, your family time, and everything else you’ve worked so hard to build?

The financial services industry is full of compliance landmines that can detonate with devastating consequences if not taken seriously.

Seemingly minor missteps can lead to enforcements that threaten the very survival of a firm, diverting crucial time and resources away from core business objectives.

A prime example is the recent SEC enforcement action against several prominent financial firms for failing to properly supervise employee communications. The firms were fined over $80 million for allowing advisors to conduct business through unauthorized personal messaging apps and email accounts.

This lapse in oversight exposed clients’ sensitive information to significant security risks.

Regulations are constantly changing, requiring meticulous monitoring and updating of policies, procedures, and controls.

Tasking in-house personnel with this responsibility is a recipe for costly mistakes. Ultimately, the cost of non-compliance far outweighs the investment in proactive risk mitigation.

Firms that take a reactive approach often find themselves hemorrhaging time and resources in the wake of enforcement actions, distracting them from their core business objectives. Proactive outsourcing of compliance responsibilities is a strategic choice that can deliver long-term peace of mind and position firms for sustainable growth – without risking the livelihood of the business, its employees, and its clients.

The Limitations of Relying on Compliance Consultants

The compliance torch often gets handed off, whether it’s an admin, an advisor, the operations manager, or a partner… someone has to do it.

But this approach is far from ideal. These internal stakeholders, no matter their role, simply don’t have the specialized expertise required to oversee a comprehensive compliance function. They may be able to set up a basic compliance calendar or leverage some off-the-shelf technology, but that’s about the extent of their capabilities.

Worse yet, many firms then rely on third-party compliance consultants to fill the gaps. While these consultants may provide a veneer of compliance, the reality is their involvement is often haphazard and reactive.

Compliance consultants may deliver some generic policies and procedures, but they are not proactively monitoring regulatory changes, identifying vulnerabilities, or offering meaningful legal guidance that’s actually customized to your business.

There is no safety net for relying solely on a compliance consultant. Their opinions and recommendations carry little weight with regulators, who expect firms to have dedicated in-house expertise or access to qualified legal counsel. A consultant’s input simply does not carry the same legal authority as advice from a reputable outsourced compliance and legal team.

Firms that take this route are gambling with the very future of their business. It’s only a matter of time before a compliance lapse slips through the cracks.

The stakes are simply too high to entrust compliance to anyone other than a dedicated, expert-driven function.

Whether that means building an in-house team or partnering with an outsourced provider like My RIA Lawyer, firms must ensure they have access to the legal expertise and proactive oversight required to navigate the regulatory landscape.

The Best Solution for Compliance: Outsourcing

Some business owners may take the same approach to compliance as they do to insurance.

“Do I really need it? I’ve never been in an accident.”

Outsourcing compliance isn’t just a cost-effective alternative; it’s a strategic move that enhances expertise, mitigates risks, and fosters a more efficient and scalable business model.

So the answer is “YES.” You really do need it.

There’s no way around it. This is not the time to cheap out on securing the future of your business.

By partnering with a dedicated compliance provider like My RIA Lawyer, firms can access a level of specialized expertise that simply cannot be replicated in-house.

My RIA Lawyer stands as a true partner, not just a service provider, ensuring your compliance needs are met with unparalleled professionalism and proficiency. Our approach to identifying and mitigating risks, coupled with our deep understanding of the regulatory landscape, provides the peace of mind that in-house or consultant-based solutions simply cannot match.

Make the power move – outsource your compliance for a future-ready financial firm. Protect your business, your employees, and your clients from the devastating consequences of non-compliance.

Join My RIA Lawyer and unlock the full potential of your firm.