A 3-Step Process for Achieving Financial Advisor Compliance

In the ever-evolving world of finance, compliance is king. Financial advisory firms, in particular, operate in a highly regulated environment where clients’ financial security is paramount. Financial advisor firm leaders need to prioritize compliance to maintain trust, protect clients, and steer clear of costly legal troubles.

Staying compliant requires:

• Regularly reviewing specific procedures
• Analyzing aggregate data about advisor performance
• Identifying compliance red flags
• Automating compliance audits for efficiency

Here we’ll explore the costs and hurdles of achieving compliance at your advisory firm, and the three key steps to help get there.

In fiscal year 2024, the SEC doled out $8.4 billion in orders for financial remedies—the highest amount in SEC history.

As a leader, it’s up to you to make sure that your firm has the knowledge, training, and tools needed to stay compliant with financial advisor regulation requirements. Otherwise, you'll be responsible for paying the price.

Regulations are increasing, including the SEC Marketing Rule and Regulation Best Interest. Home office and compliance teams have to upgrade their review procedures with increased scrutiny of the proposal activities of advisors.

Managing oversight of your advisors is time-consuming. We want to make it easier with performance insights and an automated approach to compliance monitoring and audits to save time and money.

Step 1: Aggregate all your advisor data

The performance of individual advisors can significantly impact a financial advisor firm’s compliance standing. Analyzing aggregate data about advisor performance can help firm leaders identify trends and areas for improvement.

Tech solutions can monitor advisor firm compliance and share details of how advisors are (or aren't) staying compliant with key regulations such as SEC compliance, Regulation Best Interest, Department of Labor rules, and Client-Focused Reforms. These tools can help you sift through large datasets, spot deviations from expected compliance standards and trends and pinpoint areas that may require updates before a compliance breach can occur.

Step 2: Identify any compliance flags

The Red Flags Rule, which is part of the Fair and Accurate Credit Transaction Act, requires financial institutions and creditors to integrate detection systems that prevent identity theft and internal compliance problems.

Pay close attention to client complaints. They can be early indicators of compliance problems. Analyze the nature of complaints to identify recurring issues and address them promptly.

Additionally, monitor transaction patterns for unusual or suspicious activity. This is especially important for firms handling high volumes of trading or managing assets for clients. Identifying irregularities early can prevent potential legal issues.

Step 3: Take action to ensure advisors are compliant

No one can have eyes and ears on the daily happenings of every advisor. That’s why, as part of taking action, you need to regularly encourage employees to report any compliance violations safely and securely. Getting to this information faster can keep an issue from growing into something more complicated to handle.

You should also implement an all-in-one solution that can automate processes like compliance monitoring and reporting. These systems can continuously monitor regulation changes, audit your operations, and update internal procedures with, in fact, less manual work on your part.

External marketing collateral needs just as much compliance policy as internal materials and operations. Part of your compliance action plan should be to rewrite procedural documents and policies that address client communications, digital media, and case studies.

The SEC Marketing Compliance Rule, which went into effect in early 2021, created a solitary integrated rule that reimagined the regulatory guidelines for financial advisor marketing strategies. The details spell out rules for transparency, honesty, and integrity around how advisor firms share information. Compliance and marketing teams should create a specific compliance plan tailored to all marketing content.

What hurdles might cause you compliance headaches?

Some advisors who take on extra work outside of your firm could potentially risk compliance infractions depending on the demands and nature of the work. Also, advisors who work hybrid or remote for your firm may need additional security and compliance measures when working away from the safeguards of a physical office location.

Home offices need an easy and seamless way to ensure their advisors comply with key regulations. A tool that can automate these and many other processes while delivering insightful data reports stops those interruptions before they can happen. Morningstar's Enterprise Analytics can do all of that and then some.

Enterprise Analytics is a business intelligence platform that allows the enterprise home office teams to gain valuable insights on compliance, business, and performance metrics from the activities of advisors using Morningstar's Direct Advisory Suite. It's a comprehensive, configurable, and convenient hub that provides actionable insights to ensure compliance with specific regulations.

The bottom line is...

Compliance is not just a box to check; it’s a culture that financial advisor firms must foster from the top down. Firm leaders play a crucial role in ensuring that their organizations stay compliant, protect their clients’ interests, and avoid legal pitfalls.

Regularly reviewing specific procedures, analyzing aggregate data about advisor performance, identifying compliance red flags, and automating compliance audits are essential strategies to achieve this goal. In an industry where reputation is everything, financial advisor firm leaders who prioritize compliance are not only adhering to the law but also safeguarding their client’s financial well-being and the long-term success of their businesses.