Your Compliance Program Must Go Beyond Regulator Requirements

August 1, 2017

Your Compliance Program Must Go Beyond Regulator Requirements


We often encounter managers that do not comprehend the critical role that their compliance culture can play in driving assets under management higher. Rather than embrace their compliance program as an opportunity to offer investors another distinguishing feature about their business, they view compliance as a source of cost-cutting.  In so doing they are unknowingly harming their firm’s brand.

Compliance Provides Critical Distinction

The greatest resistance to building a proper compliance program resides with small managers. Not to say that their business is easy – it is not. There are very little entry barriers and the asset management industry as a whole is mature in its life cycle. These two dynamics result in fierce competition for AUM which puts downward pressure on margins. In the history of investment management there has never been a more critical period to go to great length to distinguish your business. Good performance returns are by no means a guarantee that assets will follow. Rather, in order to thrive you have to convey that your firm has the very best operations for its size. If a manager cannot make this argument, its ability to raise assets becomes increasingly hampered.

You Need a Winner’s Mindset

Many managers tell me that their compliance program is “fine” as their most recent regulator audit discovered “only three deficiencies” which have since been addressed. ‎In a world where investors have tremendous choice and go to great lengths to scrutinize managers including their operations, managers who are content with being “fine” will likely not thrive. Differentiating yourself from the pack requires a winner’s mindset. One must not simply try to meet regulators’ requirements but rather exceed them. This mindset acts as a positive differentiator for the firm and benefits the investment industry at large.

Perform a Risk Assessment

Prior to hiring a compliance professional, as a first step my recommendation for young managers is to perform a Risk Assessment. Principals need to fully grasp their business’ known and unknown risks. This becomes a very valuable, educational exercise. Once gaps are identified, the Risk Assessment should document when, how and by whom these gaps will be filled. Every firm is different – the key is the keep the dynamic documentation of gaps current.

Following the completion of the Risk Assessment the firm is positioned to select how best to address their compliance program. Do they engage someone internally and if so a senior or a junior individual? In either talent flight or a falling-out can become a setback to the firm. The other option is to outsource compliance to compliance professionals. The benefit here is the immediacy of assistance and ability customize a transition plan that best suits your needs. Moreover, your firm is well-served in its early years being treated as client rather than as an employer.

Concluding Remarks

‎A solid compliance program can help to distinguish your firm from the crowd so long as your marketing effectively communicates it. Today’s managers that do not fully embrace compliance are far less likely to win mandates. Make certain that you have identified all of your risks and how you will dynamically document and address them. Investors and regulators want managers to be forthcoming about their deficiencies. Doing so will place your compliance program in the “best-of-breed” category. In today’s world where there are finite assets to manage your firm cannot afford not to be categorized as such.

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  • By David Rowen  0 Comments   1