by Cynthia Harrington
Investment advisors find themselves on the wagging end of the dog in the new regulatory environment. Between the accounting and investment scandals, the agencies charged with protecting investors have been working overtime.
The resulting body of new rules and regulations has created higher hoops for financial services professionals to jump through.
The most recent change to come down the path is the Securities and Exchange Commission amendment to the Investment Advisers Act of 1940. For 54 years, the original act guided advisors with a few improvements that were little more than bells and whistles. The new rules represent a sea change in the way advisors do business.
“The SEC sees themselves as having created a whole new aura of what’s expected,” says Mont S. Levy, JD, of Buckingham Asset Management LLC, in St. Louis.
Levy is principal of the $800 million-in-assets firm, and his realm of responsibilities is rather typical in the new era. He spends about half of his time in the newly required role of chief compliance officer. He also works with clients as an investment advisor, and helps run the firm as principal.
But he has hired help.
A compliance associate is now on board, and they’re creating a regular review schedule of the different compliance functions. “Basically, the SEC now requires us to have an internal audit function,” said Levy. “Because the agency requires not just that we establish policies, but they want to see active evidence of how we are meeting our stated supervisory policy.”
The new regulation caps a multi-year trend of increased requirements. Firms have had to craft and provide privacy policies, supply or offer to supply the expanded Form ADV to clients, and disclose more specific details of compensation arrangements. “Advisors are getting used to more rules and regulations being pushed down their throats,” said Ted Eichenlaub, a partner at Adviser Compliance Associates LLC, in Washington. Eichenlaub’s firm helps advisors track and interpret the new rules. “But there’s a general mood of hysteria out there as firms create these proactive compliance policies and procedures that reflect their business in a meaningful way.”
A second peg of the new SEC compliance regs requires each firm to name a chief compliance officer. While all advisors have someone performing the albeit-lighter duties of the past, the new CCO has both additional work and greater responsibility. “Naming a compliance officer seems to be no-brainer, an easy thing to do,” said Eichenlaub. “But when you scratch the surface you see that this is the SEC’s signal to the industry about where buck stops if there’s a compliance breakdown at the firm.”
Kochis, Fitz, Tracy, Fitzhugh & Gott Inc., of San Francisco, a firm with $1.1 billion in assets, has added CCO to the door of Michael Kossman, CPA. Kossman joined the firm four years ago to oversee all operations as chief financial and administrative officer. Kossman estimated that when he began with Kochis Fitz, he spent an hour a month on compliance, and now it’s up to two hours each week. “We’re almost done with our new documentation,” said Kossman. “But my role has also changed because I need to keep up with new regulations and requirements.”
Larger advisors with complex business models have focused the needed resources on accomplishing the initial tasks. Companies have hired and developed people, written new procedures and trained employees on how to implement the new rules, which must be in place by Oct. 5.
Complying with regulations is one of the back office tasks BAM Advisor Services helps smaller advisors with. “The new compliance manuals have to be customized to each firm,” said Levy. “The insider trading policy is standard, but if a firm does lots of IPOs or is state-registered versus SEC-registered, their procedures need to be specific to those activities.”
Not all feel as buffeted by the regulatory storm.
“As a practical matter, most of these changes fall under the category of common sense kinds of things to do,” said Irvin F. Diamond, CPA/PFS, CFP, at REDW Business and Financial Resources LLC, in Albuquerque, N.M. “If, ostensibly, you’d been doing your job right all along, the new rules might mean you’ve got a few extra pieces of paper around.”
Clients may also not yet be experiencing much if anything different about the way their advisors work. “The rules aren’t client-driven at all,” said Diamond. “In fact, with most clients, if we would tell them what we’re doing, they’d look at us like we’re a bit of a lunatic.”
In general, advisors need to keep up on the rules because clients do ask questions. “When the next issue hits the headlines, advisors do need to understand and be able to explain to clients what’s going on,” said Kossman.
Gradually, the new rules filter down to impact clients directly. Clients are getting used to more mail from advisors gradually. They used to get an ADV in addition to statements, reports and, sometimes, confirmations. But when the privacy rules were enacted, their mailbox load increased. “We offer our ADV to clients each year,” said Kossman. “We send out the privacy policy each year, but I expect that with practically all these things, clients toss them aside. Very few pay attention.”
Complying with the new anti-money laundering rules causes clients to provide verified identification. BAM recently sent out the request to all clients to provide their driver’s license to the firm. “It’s a sign of the times,” said Levy. “We haven’t seen any negative reaction or feeling of a greater sense of intrusion.”
Assessing the impact of the regulations will be an ongoing story.
The regulations have added a layer of costs to every company. Eventually, those costs will be passed on to clients or will further narrow advisors’ profitability. “If cost of services doesn’t rise, these new functions will at least slow down the potential price reductions that some in the industry have expected,” Levy said.
From the investors’ perspective, the regulations narrow the field in another important way. The time and effort now required to be in compliance make it harder to start a new practice. “Where we might see the biggest impact is for those wanting to just hang out a shingle to get started,” said Kossman. “Companies now spend months of attention to set up compliance functions, let alone the cost and support it takes to keep up to date.”
