Compliance is one of a firm’s biggest responsibilities — but it’s also one of the most complex.
With constantly changing regulations, staying on top of new rules and processes while maintaining high-quality client service can be challenging. While most firms and advisors don’t intentionally choose to fall out of compliance, small issues can lead to bigger problems, ultimately potentially resulting in fines, penalties, and legal and reputational issues.
Watch out for these five red flags that could signal bigger compliance issues.
1. Unclear Procedures
Uncertainty opens the door to errors and potential compliance issues. One of the biggest compliance risks for firms isn’t employees overtly breaking the rules but becoming complacent or unsure. Overlooking minor issues can lead to significant compliance oversights. Employees need to be aware of processes and procedures for what to do when they see something out of order. The most effective processes involve all employees and are regularly re-evaluated and updated as regulations change. Regular compliance audits and reassessments of your firm’s reporting plans will help you develop current, employee-supported compliance procedures.
2. Disparate Data Sources
Strong compliance requires clean data. If firms and advisors can’t trust that their information about clients is accurate, they can’t be completely confident that they are staying compliant, especially in the onboarding process. Unfortunately, many firms put client information in multiple systems, such as contact information in a lead management platform, financial basics in a portfolio management system, and personal details in a customer relationship manager. Spreading information across these disparate systems makes it challenging to ensure the data is correct and check for potential discrepancies, which can cause a firm to fall out of compliance.
3. Not Maintaining Records
The SEC’s Books and Records rule includes an extensive list of documents, records, and communication that advisors must store physically or digitally for years. Some required records include email correspondence and social media posts, which some firms don’t realize they need to maintain. Without keeping compliance at the forefront of one’s mind, it’s easy to delete an email or forget to store a document. Digital document storage is more secure and simplifies the compliance process for advisors to retain documents for the correct amount of time, even as regulations change.
4. Unsecure Digital Files
Like maintaining Books and Records, firms need to ensure their document storage is secure. Firms can store items in the cloud, but those systems must follow specific protocols and security measures. Many firms don’t have robust document security features, which puts them at risk for noncompliance and exposes their clients’ information to vulnerabilities. Accounts or forms that are inaccurate or incomplete are considered Not in Good Order, or NIGO. When these forms are incomplete, advisors have to go back to clients to get correct information, potentially leading to additional time and resources and falling out of compliance. A major culprit for NIGO documents is paper forms — across the financial industry, issues with paper applications accounted for 60% of firms’ total NIGO rates. Moving towards an online storage solution like Docupace can help reduce the risk of losing documents and provide a more secure experience for clients.
5. Skipping Onboarding Steps
All new client accounts must go through AML (Anti-Money Laundering) and KYC (Know Your Customer) processes to protect against identity theft and money laundering. These processes can be cumbersome and often involve entering and verifying client information in multiple places. Firms may be tempted to skip some onboarding steps, but that can be a slippery slope for noncompliance.
Even when firms follow all onboarding steps, performing them manually can cause compliance issues. A manual search creates the possibility of human error or an employee missing suspicious activity. Rather than manually combing through verification sources, digital tools can automatically search all databases for more accurate results.
Many red flags can be avoided or corrected with a secure data management platform like Docupace. Automating document management and streamlining compliance issues ensures client and firm data is stored safely and securely. Click here to learn more and schedule a discovery call.
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