With several big changes and complex new rules, regulatory compliance is a going concern for wealth advisory firms of all sizes. Keeping up with the number of regulations firms and advisers must follow is burdensome, with regard to both time and money. But the even larger cost of noncompliance has been played out by wealth management firms and seen in the headlines over the last number of years.
It is likely the cost of staying compliant for most firms, will help firms avoid paying the price for non-compliance. However, the cost of non-compliance is more than just regulatory penalties which seriously cripple a firm, it also causes brand damage and many times forces employees to spend valuable time on tasks that they do not normally do.
Here is everything you need to know about the true cost of noncompliance.
Fines and penalties levied by regulators for infractions
The most obvious cost of noncompliance is the fines and penalties seen in trade publications. In the fiscal year 2021, the SEC assessed more than US$3.9 billion in fines.
The fines and penalties vary according to the nature and severity of the compliance issue. Some instances bring a US$5,000 fine. Others garner a temporary suspension as a FINRA member. And, of course, compliance issues can lead to multi-million-dollar fines against advisers and the firm itself. One of the most notable recent instances is FINRA’s action against Robinhood, which was ordered to pay nearly US$70 million for supervisory failures and non-compliance.
Lost time, reputational damage and resource drain
Non-compliance leads to greater costs than just paying penalties. Seemingly tangential costs also significantly impact a firm, especially in today’s competitive market. Damage to a firm’s brand or reputation, such as bad press, a loss of client trust, or a decline in employee morale, is costly. One study found that although the average penalty is US$2 million, non-compliance leads to an average revenue loss of US$4 million and US$3.7 million in lost productivity, meaning that the regulatory fine itself is just the beginning.
In the post-pandemic world, trust is more important to consumers than ever, and they are willing to change providers if they feel that trust is at risk. A survey by Deloitte found that 30% of a company’s annual revenues are at risk of consumer backlash for regulatory noncompliance — a staggering portion of the bottom line is contingent on reputation and it can come undone quickly when not staying in compliance.
Additionally, a lack of compliance can open the door to legal issues and additional fines or penalties. By putting clients’ information at risk and not staying in compliance, firms face the chance of legal action, which can start a lengthy and expensive process that eats up valuable resources.
Finally, there is the opportunity cost of non-compliance. By spending time rounding up documents and working through the red tape of compliance issues and penalties, employees and advisors are spending less time building the firm and growing client relationships. A firm’s time and resources are not infinite, and any distraction by a noncompliance issue takes away from opportunities to grow and improve.
Cost to comply < risk of not
Investing in a robust compliance system is just that: an investment. But it is a necessary cost of doing business that yields significant returns. Although compliance often comes with a cost (larger firms spend an average of US$10,000 per employee on compliance efforts), it is a fraction of the cost of non-compliance. In general, the cost of non-compliance is three times greater than the cost of compliance. Some firms avoid systemising their compliance efforts and fail to dedicate a portion of their budget to compliance technology and compliance programs because they do not want to pull resources away from the bottom line. They do so at their own risk.
However, the positive impacts of staying in compliance, include a strong reputation, client trust, and increased productivity. These positives are proven to far outweigh the costs of being caught in non-compliance. An investment in compliance technology and compliance programs is an investment in your firm’s growth and potential. Instead of paying more money later for damage control to right a sinking ship, you are proactively investing in keeping your business in line with regulations.
Non-compliance is costly in its direct penalties and hidden costs that have a long-term impact on a firm. Investing in proactive compliance measures is the way to go to avoid the cost and headache of being caught in the dark web of noncompliance.
