In a new episode of the Financial Planning Podcast, RIA compliance expert Scott Gill described the biggest compliance burdens faced by advisory firms and how to approach them.
A 15-year industry veteran, Gill launched
During a career that includes tenures with Wells Fargo Advisors, J.P. Morgan Private Bank, E-Trade Financial and Carolinas Investment Consulting, Gill has managed more than 500 SEC and state-level registrations for RIAs and 300 annual Form ADV updates. The registration form represents
In the podcast conversation with FP Chief Correspondent Tobias Salinger, Gill answered the following five questions about Form ADV, going independent and other compliance-related topics among RIAs.
1. Our topic today is going independent. What do you think are the biggest compliance challenges of leaving a brokerage to launch an independent RIA?
2. Your firm has handled several hundreds of Form ADV filings. I feel like I have written about 100 stories of compliance cases involving Form ADV. What will be the most difficult sections of the ADV and brochure for a new RIA at launch?
3. Let’s shift to the choice of keeping a BD registration or not when launching an RIA. What do you think are the key factors advisors should keep in mind when making that decision?
4. In many RIAs, advisors act as the formal chief compliance officers. That duty they’re taking on is a big recruiting point for large RIA platforms and consolidators, as well as broker-dealers. How can new RIAs manage the compliance load without being part of a large firm?
5. Compliance is always part of the equation in wealth management. It’s one of the most common topics on FP and always part of the industry discussion. You play a pivotal role in helping RIAs that are joining the independent movement. So how much will compliance concerns slow down this massive movement of trillions of dollars into RIAs each year?
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Transcription below:
Tobias Salinger: (
Welcome back to the financial planning podcast. This is Tobias Salinger. I am your chief correspondent of financial planning. We're really pleased today to have as our guest Scott P. Gill. He's a senior RIA compliance consultant with synergy RIA compliance solution. Thanks so much for joining us today.
Scott Gill: (
Thank you for having me. I appreciate it. I'm really excited about
Tobias Salinger: (
It. Excellent. Well, as a 15 year industry veteran Gil previously served as director of compliance for XY planning network. In five years, he built and developed the compliance infrastructure as a network grew from about 150 R IAS to more than 1200 Gil has managed more than 500 S E and state level registrations for RAAs 400 hours of compliance consulting and 300 annual a DV updates earlier in his career. He had 10 years with Wells Fargo advisors, JP Morgan, private banking, E-Trade financial and Carolina's investment consulting. So we'll just dive right in our topic. Today is going independent. What do you think are the biggest compliance challenges of leaving a brokerage to launch an independent RIA?
Scott Gill: (
Yeah. Thanks so much for asking. It's an extremely relevant question. You know, I, I think most that have gone through the process would agree that one of the biggest compliance challenges of going independent is the firm initial registration process. You know, for someone who has never gone through the process, it can be tough more specifically, it's challenging to navigate the jurisdictional issues. Each state has their own rules and requirements, and the SCC of course has regulatory guidelines and processes. So it can become overwhelming trying to make the connection between what the advisor's jurisdiction will approve and the type of advisory business that the firm will operate. So advisors tend to get concerned about raising red flags with their fee structures and or services and whether or not their jurisdiction of registration will impact their ability to grow their business. So that's one of the more prevalent compliance challenges that we'll see for transitioning advisors.
Scott Gill: (
And then from there, it's the anxiety of having to run your own compliance program. And so in most cases, you know, advisors are running their own compliance program for the very first time. So many breakaway advisors don't have the desire or quite honestly the expertise to be a compliance officer. And I mean, let's be fair. It's not the most exciting field of study, right. But it is just that a field of study, it takes time learn the intricacies of RIAA compliance. And so I talk all the time about compliance program design or the process that a registered investment advisor leverages to develop its compliance systems and processes. And so basically what we're talking about here is the process of evaluating the elements of a firm's operations that will dictate the formation and ongoing supervision of the firm's compliance program. So that's the foundation. And so just like anything else, if you don't develop a solid foundation to the firm's compliance program in the post registration period, then the potential negative impact increases with time. So after the registration is complete, an insufficient compliance program, design process leaves the compliance officer feeling like you don't know what you don't know.
Tobias Salinger: (
And it's such an important topic that, you know, often escapes notice when, when there are so many advisors and, and practices, uh, going independent all the time, your firm has handled several hundreds of form ADV filings. My head was spinning a little bit as I was, uh, reading off those, those numbers of how many you've handled over the years. I feel like I've written about a hundred stories of compliance cases in evolving the form a D V what will be the most difficult sections of the, a DV and brochure, uh, for, for a new RIA to handle at its launch.
Scott Gill: (
Oh, sure. So in my experience form ADV part one, it's all around daunting for newly independent advisors. There are so many element of that form that we consistently explain to advisors. And what's frustrating is the underlying concept. Isn't that complex at all. It's just the way the form is structured, that makes it difficult to interpret. Now form ADV part two, a advisors tend to struggle with items four and five the most. So item four is where we detail the types of services the firm will offer. And item five is where we discuss the terms and conditions around client fees. And there are some complexities around these concepts, but I think the reason advisors struggle so much with these sections is because the items extend far beyond compliance, right? So for example, advisors have, have to consider their marketing strategies when outlining their fees, because that ties into the way that they will build their website and produce social media content.
Scott Gill: (
There are operational considerations. For instance, when creating a suite of services firms have to be certain that the service model is scalable and that it won't lead to a backlog of client request and tasks. There are even technology considerations, right? When selecting software to facilitate billing and invoicing processes, something like that, the firm has to be aware of any potential limitations of the service providers that they will use for those functions. So it's often not as easy to say, you know, we offer financial planning and investment management services and we charge X, Y, Z fee. It's not that simple. There are multiple layers of practice management decisions that need to be made when creating form ADV part two.
Tobias Salinger: (
Well, there are always so many questions with within questions when it comes to these important compliance topics, listeners, we are speaking with Scott Gill of synergy, RIA compliance solutions. We're going to take a very short break and then we'll be right back with more. And we're back, we're speaking with Scott Gill of synergy, RIA compliance solutions. Let's shift over to the topic of keeping a BD registration or not. When launching an RIA, what do you think are the key factors advisors should keep in mind when making the decision of whether to retain, uh, a BD in or a BD relationship of any kind when, when they start an RIA,
Scott Gill: (
Right? Sure. Revenue, right. You know, if the broker dealer registration is providing a source of revenue that the advisor either needs to launch their own firm, or if the advisor is relying on revenue from the sale of financial product to pay their bills, then that's clearly the main factor at play here. And we hear that all the time. Other than that, I think it's about flexibility, right? While broker dealers are not known to facilitate flexible arrangements with advisors that allow the advisor, the freedom to operate their practices independently, there are still various agrees of supervisory control that broker dealers leverage on advisors. So if the broker dealer runs the compliance program with an iron fist, then that's going to have some impact on the advisor's decision as to whether or not they will stick around. And finally, I'll say it's about the exams, right? Advisors tend to have some apprehension about their series seven and series 63 ELAP. You know, those examinations are somewhat of a safety net in the industry. And so that's to say that if something doesn't work out with the current employer, a series seven series 63 and a clean U four can usually find a job somewhere in the industry to keep food on the tape. When you allow as examinations to lapse, it feels like you're removing that safety net. So many advisors have concerns about that during the transition process.
Tobias Salinger: (
Interesting. And, and continuing on that point, as well as something, uh, you mentioned earlier, which is just that at many RIA advisors are the formal chief compliance. And that duty that they take on is a big recruiting point for these large RIA platforms and consolidators as, as well as the broker dealers, how can new RIA manage the, the compliance load without being part of a large firm?
Scott Gill: (
You know, this is a core component of what we see every day from the consulting side of the business. And I like to keep it simple time or money. I always ask advisors that are taken on the role of CCO, which they would prefer to invest time or money. Right. Compliance is a bit like taxes, right? First of all, most people don't wanna do it. Right. And secondly, it's something you can take the time to learn to do yourself, or it's something you can pay someone else to do for you. So do you wanna spend the time learning about compliance and building procedures, or do you want spend the money where we see advisors get into trouble is when they do neither. Right. And I call that kicking the can down the road, right. But, but in all seriousness compliance, really isn't rocket science. It's reading to gather familiarity with the regulations, defining a set of tasks to be executed routinely and maintaining an operational structure to keep track of your files and your documents, the investment advisors act of 1940 stipulates that policies and procedures must be reasonably designed to prevent violations of the act.
Scott Gill: (
And the trick there is that there's a tremendous amount of flexibility in what constitutes reasonable. However, this goes back to compliance program design what's reasonable for one firm may not be reasonable for another. So in short, new RIA owners will sleep better at night. If they either spend the time to create reasonable supervisory procedures that fit their firm's compliance program, or if they invest in experience consultants or employees to implement compliance processes for them time or money, make that decision early
Tobias Salinger: (
Well, compliance is always part of the equation and wealth management. It's one of the most common topics on financial planning on our website and, and in our, our monthly issues. And it's always part of the industry discussion. You play a pivotal role in helping in RIAs that are joining this movement towards independence in wealth management. But as you point out compliance is a, a big part of this decision to, to launch an RIA and, and the amount of tasks that advisors take on each day in their practices, just in, in your opinion, how much will these compliance concerns, uh, slow down this, this movement of trillions of dollars and hundreds of advisors into RIAs each year?
Scott Gill: (
Hmm. Well, you know, I'll be honest. I don't think that compliance concerns are going to slow down the movement at all. You know, if anything, I think the evolution of compliance service models for independent RIAs will speed up the movement. Now, there are two reasons behind this theory for one, I believe that as more advisors go independent, there will be an increased focused on the supply side for streamlined registration and compliance program management processes. I believe tech knowledge vendors are gonna step up to the plate and improve their task management and reporting systems to keep up with the demand. I believe regulators will become former regulators and will take their knowledge and expertise to the consulting side of the business to help advisors streamline their compliance programs and consultants such as myself. We're constantly exploring innovative ways to create cost effective solutions for registered investment advisors.
Scott Gill: (
Also, I anticipate that regulators will adjust their examination practices to stream line exams for small state registered firms. I believe this movement is larger than compliance and will manifest itself by shifting the entire industry as a whole kinda like a cruise ship. You know, it it's slowly turning, but it's turning for sure. It takes a long time, but once it starts turning it's, it's not gonna stop. And the second reason that that supports my theory is the nature of your comparison. If you look at independent financial advisors as a peer group, and you analyze that group, what you'll find is that individual advisors lean heavily on their takeaways from experiences of other advisors. And so here's what I mean, picture this advisor, a that's been with a broker dealer for years as one of their fellow advisors at the broker dealer. They leave to go independent call that advisor B.
Scott Gill: (
So advisor B goes independent, but advisor a is hesitant to do so. Maybe they have a baby on the way, or for some reason they need consistent income. A year later advisor a notices, the success and the freedom, the flexibility that advisor B is enjoying with his or her newfound independence. That's so powerful that peer comparison is so pervasive among independent advisors in our environment. And so now advisor a is thinking, Hey, if advisor B can do it, why can't I, let me reach out to advisor B and find out more about how they're running their business and that's all it takes. The next thing, you know, advisor a is launching their own firm and the movement continues. So I don't see compliance concerns slowing down the movement at all, and I'm excited about it.
Tobias Salinger: (
And we're excited to get to speak to one of the people helping to, to lead that movement through, through your work. Thank you so much for joining us today. Scott Gill of synergy, RIA compliance solutions.
Scott Gill: (
Thank you.
Tobias Salinger: (
And thank you for listening to the financial planning podcast. This episode was produced by horizon with audio production by Kellie Malone and Wen-wyst Jeanmary. Special thanks this week to, Scott Gill of synergy RIA compliance solutions, rate us, review us and subscribe to our content at www.financial-planning.com/subscribe. From Financial Planning, I'm Tobias Salinger. Thanks for listening.