Since the SEC
Every year, financial advisors have to wonder if their annual review process is thorough enough or if it will be the source of a violation someday down the road, said Chris DiTata, vice president and general counsel of RIA in a Box, the compliance and cybersecurity software company
While annual reviews are conducted internally, they are a key component of regulators’ examinations. But they don’t have to be a source of stress, DiTata said. In an interview with Financial Planning, DiTata shared some tips and recommendations for how advisors can make the process as painless as possible.
This interview has been lightly edited for length and clarity.
Financial Planning: If financial advisors have to conduct reviews every year, why is it such a stressful process?
Chris DiTata: The stress is largely in completing it at the end of the year without having done the interim steps throughout the year to lighten the load.
It’s impossible to conduct a true annual review in a day or two. You need to be doing things like reviewing client accounts for proper paperwork, testing your cybersecurity programs and performing due diligence on third parties throughout the year. These are things that can’t be done in the span of a day or two, even a week. If you're not doing that lift on a frequent basis, you're going to end up with a time crunch on your annual review and the inability to properly perform it.
FP: In a worst-case scenario, what could happen if advisors do run into this crunch?
CD: You can certainly be written up for a deficiency in an exam. That is probably the most common form of fallout from an inadequate annual review. If it's truly not performed, especially if you’re a repeat offender, or if it’s “check the box” and you're not performing a thorough review, then that’s where you’d potentially see a fine come in.
FP: What sort of regulatory developments should advisors pay attention to when it comes to annual reviews?
CD: The thing to note is that no year is going to have zero regulatory developments. There is always going to be something to review, and each regulatory development has a different applicability to different firms. Not every firm is going to spend the same amount of time on each regulatory development.
FP: Is there anything specific over the last year that firms need to be aware of?
CD: A very simple one is Form CRS. If SEC-registered firms are not updating their policies and procedures manuals to address initial delivery, review and ongoing obligations for your form CRS, that's going to be a pretty glaring red flag and may indicate to a regulator that there are other deficiencies in your program.
FP: What would you recommend to advisors when it comes to their firms’ documents?
CD: The main document that is governing your day-to-day business is your policies and procedures manual. Let's acknowledge that that needs to be reviewed on an ongoing basis and should be updated throughout the year. That aside, you do want to review other firm documents at least once throughout the year, ideally spread out and prior to the actual annual review date. Those would include your form ADV, template advisory contracts, base financial planning or advisory agreements, your website and marketing materials. You don't have to re-review every piece of marketing, but you do want to, even after CCO review, spot check a few marketing pieces to make sure that both the content is correct and that you went through the proper processes.
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FP: Has this changed the
CD: The SEC marketing rule is a sweeping change. It is both more permissive in certain instances, such as testimonials and third-party endorsements, and more restrictive in certain areas, such as performance advertising. An SEC-registered firm that has adopted this already needs to be aware of the full suite of changes implemented by the rule. For firms that have not yet adopted it, they need to do so by November, and they better get cracking.
FP: What about client holdings and fees? What do advisors need to be doing to make sure everything is copacetic?
CD: Similar to something like email review, you want to be taking a frequent, periodic and random sampling of client accounts to determine whether there is anything that needs to be done. That goes from simple steps like making sure that your advisory agreement is executed to making sure that you have updated investment profile information and making sure that fee calculations are correct, that you’re not undercharging the clients or, more importantly, overcharging the clients.
FP: Anything else advisors should keep in mind when preparing for annual reviews?
CD: The hub of your compliance program should really be a compliance calendar. Something like what RIA in Box or other third parties offer that is going to schedule out these obligations that you need to perform throughout the year and ideally automatically synthesize what you have done throughout the year into an annual review report.
