The scope of compliance responsibilities in the rapidly evolving wealth management space has made outsourcing a standard practice. While the SEC prohibits outsourcing the chief compliance officer (CCO) role, many firms have found that partnering with third-party experts for their other compliance needs increases their flexibility, allows them to access innovative technology and is more cost-effective.
Working with the best compliance tools, platforms and services can be a critical driver of a firm’s success. But not all vendors are created equally. There are several red flags that firms should be aware of when considering extending an existing relationship or starting a new one.
Disjointed Systems
A third-party provider with disjointed systems is a massive red flag. There are plenty of vendors still running legacy systems that do not integrate seamlessly. For example, you’ve got tool A that keeps your audit and certification data. You’ve got tool B, which is your marketing and ad review tech stack. You’ve got tool C that’s doing your e-commerce surveillance.
When audit times come, you get a request from the SEC looking for information. If your vendor cannot pull this information quickly, you can have a major issue that reflects poorly on your compliance program. Requesting extensions because you’re waiting on a vendor to provide you with the information that’s been requested creates a problem for your firm in the eyes of regulators.
Stability Of Staff
You want to work with service providers that offer you access to a stable group of core employees you can rely on to answer questions and solve problems. With the mission-critical and time-sensitive nature of compliance, having a partner you can trust to be there for you at all times is critical.
Having a partner you can trust to be there for you at all times is critical.
When you call your vendor, you don’t want to be sent directly to voicemail or have to navigate a complex call tree. You also don’t want to talk with someone brand new every time you need to reach out. If you have a regulator on the phone or across the table, you need to be able to reach out and get in touch with the person who has the experience and knowledge to get you the answers you need. With monetary and reputational risk at stake, working with a vendor who experiences constant employee turnover is a red flag. Look for a more stable partner.
Difficulty Pulling Reports
In the best case, the vendor you work with should provide you with access to a system that allows you to pull up a dashboard, enter a query and get the data requested by the regulator in real time. This level of efficiency and competency may even result in regulators not needing to ask the next set of questions because they will recognize your compliance program is up to speed.
If you have to continually go back to your vendor for data, it can delay the entire exam process. Helping regulators complete their exam as quickly and efficiently as possible is a win for all involved. If your vendor does not facilitate this, that’s a red flag and you may want to look elsewhere.
Vendor Lock-In
After years of outsourcing compliance functions, many firms find themselves trapped by vendor lock-in, which limits their flexibility, hinders innovation and drives up costs. When looking for a new partner, if you believe it will be difficult to disengage at some point in the future if needed, that’s a red flag.
A partnership should never feel like a hostage situation.
While having a strong, mutually beneficial working relationship with your vendors and third-party providers is critical to operating a successful business, a partnership should never feel like a hostage situation.
By finding the right partner, wealth management firms can maintain control over their data, improve operational flexibility, and stay ahead of industry changes without fearing vendor lock-in.
Vendor Sprawl
If you inventory your compliance vendors and determine you are managing relationships with multiple firms, tools and platforms, you may be inviting problems.
Compliance departments had good reasons for adding vendors as new technologies emerged to address pain points. However, as regtech matures, there is less of a need for disparate, reactive and siloed tools. In today’s environment, the best platforms are intelligent, integrated and ahead of the curve, especially when it comes to addressing a firm’s compliance, cybersecurity and data infrastructure needs.
In determining if consolidating compliance service providers makes sense, firms should look for a partner with a single command center that reduces vendor sprawl, cuts risk and streamlines operations.
Outsourcing is an essential strategy for wealth management firms aiming to develop, implement, and sustain a strong compliance program. Staffing an entire department, building an in-house tech stack, and keeping up with constantly changing regulations can be prohibitively expensive. However, it’s the responsibility of decision-makers to select their partners carefully. With AI and other digital tools, regtech companies are emerging rapidly. Conducting thorough due diligence to identify red flags and other concerns is crucial and can help firms avoid costly errors.
Sid Yenamandra is the Founder and CEO of SurgeONE.ai, a compliance, cybersecurity and data services platform for wealth management that unifies the offerings of RegVerse, Kovair, Security Snapshot and MGL Consulting.
