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Turning Compliance into a Competitive Advantage

Compliance issues are a reality of life for every participant in the financial services industry.  Many firms view compliance as a burden, and it is true firms must thoughtfully deploy resources in order to meet the various requirements applicable to their respective businesses.  This includes meeting the expectations of clients and regulators.  It is not easy and comes at a cost.  However, firms following a path of least resistance are missing an opportunity to shape a requirement into an advantage.  Just as devoting resources to developing research ideas, managing portfolios, or creating a beautiful marketing presentation help to drive business, a well-developed compliance program is essential to providing clients with a sense their advisers are operating as prudent stewards of their capital.  Proper attention to compliance also will protect a firm from suffering potentially costly lapses and damaging reputational harm.

At my previous firm, we were regularly evaluated by some of the largest money managers in the world, for whom we sub-advised assets.  These due diligence sessions delved deep into our operational and compliance programs, often resembling a sophisticated regulatory examination.   A lot was riding on these sessions.  A lackluster compliance program may jeopardize an existing relationship or disqualify the firm from winning a prospective mandate.  Our senior leadership understood this principle and supported our legal and compliance departments with resources and participation (for example, our CEO served on our compliance committee).  We understood the world of compliance is one that is evolving as business, regulation, and technology change.  Accordingly, as these changes occur, we would evaluate how and if our program should be modified to meet these changes.  With this approach, we were prepared and looked forward to the opportunity to showcase our work.  And it paid off for us.  A comment we often would hear is that as a boutique manager, we had a compliance program and operational infrastructure, which rivals much larger firms.  This provided us with a sense of pride as we put our firm in the best position to exceed the expectations of those evaluating it.   Our compliance program allowed us to attract and retain assets, support a robust investment and client service process, and contribute to growing our firm.

How does a firm turn compliance into a competitive advantage?  It starts at the top.  Support of senior leadership is essential.  It is not only important for compliance to be given the means to maintain and improve a compliance program, but employees also pay very close attention to the actions of their senior leadership.  If something matters to the CEO, and is taken serious by the CEO, then the rest of the firm will notice and follow that lead.  Unfortunately, the opposite also is true.  Leadership that merely pays “lip service” to compliance, and worse, openly ignores protocols, will breed a culture that likely will suffer compliance breakdowns.  It also is important to empower a knowledgeable Chief Compliance Officer to administer and enforce a firm’s compliance program.  If someone breaches a compliance policy, or a firm’s Code of Ethics, then the CCO should have the ability to properly address the issue, with the CEO’s backing.

Compliance departments also should be in regular contact with other departments around the firm.  Much has been written about the importance of a CCO having a “seat at the table” rather than hearing news at a later time.  Regular contact with other departments will allow compliance to understand issues around the organization, even those without a compliance element.  Where an issue presents itself, including compliance in business discussions will allow the firm to identify and manage issues up front, rather than launch initiatives only to later learn some aspect may be problematic.  These interactions will save time and cost.  This approach also will encourage a compliance department to work collaboratively with business counterparts to define the best path forward, rather than simply oppose doing anything new.     

Some firms make the mistake of viewing compliance solely as a cost of doing business that must be properly managed.  The financial services industry is among the very best industries in the world.  Millions of individuals around the world count on our industry every day to provide advice and opportunities to create wealth and financial stability.  A strong compliance program is an essential part of any well-run, successful financial services business, and with the proper approach may prove to be a competitive advantage for your business.

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