5 Questions to Ask When Hiring a Compliance Firm

For financial advisors who’ve aspired to go into business for themselves, the new year may be time to take the leap into firm ownership. But before you leap, take a look at compliance consulting firms for help navigating the complex world of registration and compliance.

The number of firms that filed a Form ADV, the disclosure document used to register with securities authorities, in 2019 was 33,978, according to the Securities and Exchange Commission. That’s up slightly from 33,910 in 2018. In the first quarter of each of those pre-pandemic years, registered investment advisors accounted for the highest percentage of SEC applications for registration, at roughly 46%. And despite COVID-19, the number of early-year registrations for RIAs continued to rise in 2020.

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RIAs, or firms with $100 million or more in regulatory assets under management, are required to register at the federal level with the SEC. In contrast, firms with lesser AUM generally are required to register with their home state. And while the lure of going independent to pursue entrepreneurship may be enticing, meeting the registration and compliance requirements is decidedly less exciting.

Interpreting the rules of registration and compliance can also be frustrating and confusing at times. Fortunately, there are a number of platforms and compliance resources available to help new business owners. In addition to inquiring about cost, experience and other basics, here are five questions to ask when hiring a compliance consulting firm.

— What’s the typical size of the RIA firms you work with?

— What’s your current capacity for accepting new clients?

— What services will I receive if I decide to engage your company?

— Can you tell me about a challenging client you worked with?

— What does your onboarding process look like?

Read on for more information on each compliance firm question.

What’s the Typical Size of the RIA Firms You Work With?

Depending on your company’s needs, consider working with a compliance firm that is familiar with your business setup and experienced at working with firms of a similar size. A solo practitioner with two support staff will have different needs than a partnership with 10 or more employees. Working with a consulting firm that understands the nuances and complexity of your setup will improve your overall experience and relationship from the start.

[See: The Best Podcasts for Financial Advisors.]

What’s Your Current Capacity for Accepting New Clients?

Compliance activities, including ADV amendments, can be both time-consuming and time-sensitive. Make sure the consulting firm you hire is staffed well enough to handle the needs of both existing and new clients.

Follow-up questions to ask include these:

— Will there be a dedicated compliance manager or point of contact for your business?

— What is your average response time when issues arise?

The last thing you want is a firm that’s too overwhelmed to handle your requests for help.

What Services Will I Receive If I Decide to Engage Your Company?

There are many pieces to the compliance puzzle, and RIAs should make sure they understand exactly what services are being provided. Aside from state or SEC registration, ADV updates and amendments, will the services include assistance with audits, internal record-keeping or business-resumption planning?

Newer firms may not be in need of audit assistance immediately, but knowing it is available is an important consideration. It’s not unheard of for a new firm to have its “audit number called” within the first 12 to 16 months of operation.

On the other hand, firms in business for five years or more may never have been audited. Whether your audit number comes up is a roll of the dice, depending on your state, the services offered by your firm and their overall complexity.

[Read: Guide to Fiduciary Liability Insurance]

Tell Me About a Challenging Client You Worked With

No one ever wants to discuss challenging client situations, but compliance issues can get messy, and you want to know how a company will handle a difficult scenario. When things get tough, it not only should run damage control, but it also should be able to provide solutions.

What Does Your Onboarding Process Look Like?

How you’re onboarded to work with a new company is as important as the ongoing services being delivered. A compliance consulting firm that has a clear path from prospect to paying client and service delivery will help streamline your experience. A solid onboarding will also help establish your expectations from the get-go. You’ll be in a better position to get what you’ve paid for and reduce misunderstandings going forward.

In the end, an RIA should work with a compliance consultant that meets its budgetary, operational and registration needs, is well versed in current and proposed regulatory changes and is flexible enough to meet the needs of a growing practice. Asking the right questions will give you an idea of what it might be like to work with a particular firm — and avoid headaches down the line.

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5 Questions to Ask When Hiring a Compliance Firm originally appeared on usnews.com

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