Navigating the compliance maze

Empowering RIAs with rebalancing and trading technology

Table of Contents

Introduction

For registered investment advisors (RIAs), navigation of the ever-evolving landscape of compliance and regulatory requirement changes can feel like walking a tightrope.

Adhering to the new  regulations is challenging, but also crucial for maintaining trust with clients. Often limited by compliance complexity and regulatory liability, growth-challenged RIAs can quickly become overwhelmed with the operational needs of their practice.

18% of RIAs

employ compliance professionals

Facing suitability standards, best execution requirements, risk management and recordkeeping challenges, RIAs must wear multiple hats to ensure they’re meeting their fiduciary obligations and protecting their clients’ best interests. However, many RIAs find themselves at a disadvantage. Less than one-fifth (just 18%) of RIAs employ compliance professionals, and these roles can be taxing on firms at lower levels of AUM and become more necessary as firms grow.1

One area of increasing need is technology to keep the compliance challenges from becoming critical barriers to a firm’s success and growth. Fortunately, rebalancing and trading technology advancements have emerged as invaluable tools for RIAs to navigate this regulatory landscape efficiently and effectively.

This whitepaper explores how leveraging rebalancing and trading technology can empower RIAs to streamline their workflows and gain valuable tools for achieving and exceeding compliance standards.

SECTION 1 The compliance conundrum

RIAs operate within a tightly regulated environment governed by numerous laws and regulations, including the Investment Advisers Act of 1940, the Securities Act of 1933, the Securities Exchange Act of 1934, and various rules and guidelines established by the Securities and Exchange Commission (SEC) and other regulatory bodies. Compliance with these rules is non-negotiable, and failure to adhere can result in severe penalties, damage to reputation, and loss of client trust.


58% of independent broker-dealer (IBD) advisors said assuming greater compliance responsibilities and 52% said greater liability when operating independently are major concerns if they leave their current firm for an RIA.1 Among RIAs, compliance responsibilities, the time required to run a business, and burdensome operational responsibilities are their top three significant challenges.1

 

RIAs face several major obstacles in a constantly evolving regulatory environment:

Keeping pace with changing regulations

New rules and amendments are frequent, demanding constant adaptation and compliance updates.

Ensuring best execution

RIAs must prioritize obtaining the best possible client outcomes in every trade while maintaining transparency.

 

Managing risk exposure

Proactive risk identification and mitigation are crucial to safeguarding client assets and preventing potential breaches.

Maintaining accurate records

Detailed documentation of investment decisions and client communications is essential for audit readiness and regulatory compliance.

Compliance costs were the only segment to experience a significant cost increase (1.7 pp) besides compensation, and compliance restrictions experienced the largest jump from last year.1

Although compliance burdens are considered a top challenge across the RIA channel—31% of RIAs consider compliance a major challenge—smaller practices are more encumbered by compliance responsibilities and uncertainty regarding RIA regulation and oversight, which is natural considering they do not employ 
specialized compliance personnel.1

69% of advisors named compliance restrictions that limit 
functionality or impose other limitations a top challenge with the 
use of technology.2 Compared to hybrid RIAs, independent RIAs are less likely to view compliance restrictions, time required for implementation, and incompatible systems as major obstacles to embracing technology.1

 

69% of advisors

named compliance restrictions that limit functionality or impose other limitations a top challenge with the use of technology.1

SECTION 2 Four ways rebalancing and trading technology empowers RIAs

Rebalancing and trading technology has evolved significantly in recent years, offering RIAs sophisticated tools to streamline their operations while ensuring compliance with regulatory requirements. 

Here are four key ways rebalancing and trading technology can address compliance challenges and empower RIAs to reduce risk and refocus their time in meaningful ways.

Monitoring drift portfolio adjustments

Ensure timely and objective rebalancing based on target allocations and risk tolerance at the account or household-level.

Reduce potential compliance violations with different levels of restrictions, proactive investment policy validation, and model tolerance checks and eliminate manual errors and potential biases.

Technology can identify potential violations such as concentration limits, restricted securities, or prohibited transactions in real time, allowing advisors to take prompt corrective action.

Detailed audit trails and documentation

Maintaining meticulous records is crucial for demonstrating compliance, justifying decisions, and simplifying compliance reviews.

Documenting trade decisions on a per-trade or per-review set basis and permanently archiving all trades gives you peace of mind.

Rebalancing and trading technology can offer built-in audit trail functionality, recording every transaction, decision, adjustment, and communication within the platform, creating a transparent and verifiable documentation trail that facilitates audits and regulatory inquiries.

Order management systems (OMS) and trade execution controls

Avoid trade errors and never miss post-trade discrepancies such as missing trades, transactions without corresponding trades, mismatched quantities, price discrepancies, or other reconciliation errors – while maintaining a compliant framework for trade operations.

Rebalancing and trading technology can allow RIAs to implement pre-defined compliance rules and restrictions to prevent unauthorized trades, ensure best execution practices, generate real-time confirmations and audit trails, and enforce regulatory constraints, thereby reducing the risk of compliance breaches.

Ensure post-trade compliance with automated trade reconciliation, trade memorandums, confirms/affirms, and order archives.

Regulatory and client reporting

Compliance and client reporting are time-consuming yet essential aspects of RIA operations. From ADV filings to having to provide client-specific disclosures, rebalancing and trade technology can enable you to generate reports for various regulations (transaction reports, trade blotters, position summaries), saving time and ensuring accuracy and timely submission.

At the same time, demonstrate first-rate responsiveness and attention to detail with customizable, client-facing reports using the most relevant data to you and your clients.

SECTION 3 Choosing the right technology partner

By embracing rebalancing and trading technology, RIAs can gain a powerful ally in their quest for compliance and efficiency.

These tools automate tasks, streamline workflows, and empower RIAs to proactively manage risk, protect clients, and build stronger relationships. In today’s complex regulatory environment, 
technology is no longer a luxury; it’s a necessity for RIAs to thrive and deliver exceptional service to their clients.

The right technology partner should meet any RIA’s need for scalability to accommodate future growth and changing needs. Whether your firm is processing 1,000 or 20,000 accounts per day, rebalancing scalability and efficiency should be no different from that of a small firm—where one person would wear the hats of model manager, advisor, portfolio manager, trader, and compliance officer—and a larger firm where these functions are distributed across different individuals or departments.

RIAs also need flexibility to meet the needs of each touch point and user role. A rebalancing and trading solution should provide the flexibility to either condense flow down to one person or expand the process to multiple people with additional workflows as needed. 

Such workflows include:

  1. An investment policy overlay to ensure adherence to client-specific mandates
  2. An approval process for the advisor to review and approve suggested trades
  3. Pre-trade compliance using restrictions, equivalents, target customization, asset location preferences, and order generation
  4. Post-trade reconciliation
  5. Order management and trade execution

SECTION 4 Ensuring compliance while building client trust

In an era of increasing regulatory scrutiny and complexity, RIAs must leverage every available resource to ensure compliance and mitigate risk. Rebalancing and trading technology has emerged as an indispensable asset for RIAs to navigate the regulatory landscape confidently and efficiently. By harnessing the power of these technologies, RIAs can streamline their operations, achieve compliance efficiently, proactively manage risk, protect client interests, and build stronger relationships, ultimately delivering exceptional service while solidifying their position as trusted advisors.

RedBlack provides real-time compliance and restriction validation, so an RIA’s clients know they will remain invested according to their specific policy statements and other requirements – even after extensive automated rebalancing conducts hundreds or thousands of trades. RedBlack's pre-and post-trade compliance tools provide further peace of mind, as they reduce risk by using multi-tier modeling capabilities to improve efficiency and consistency, eliminating or minimizing potential exposures. 

Sources

  1. Cerulli Report: U.S. RIA Marketplace 2023
  2. Cerulli Report: State of U.S. Wealth Management Technology 2023

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