The BIG Reveal: Welcome to the Future of Compliance

The BIG Reveal: Welcome to the Future of Compliance

Last week I talked about changing a critical part of our industry to level the playing field for all asset managers. I was talking about compliance. For years now, there's been increasing development in fintech, but it's focused mostly on investing, trading, and business development applications. As these activities have become increasingly automated, a gap has developed between business operations and compliance programs.

And this technology gap is exacerbated by the SEC, which continues to issue new rules and regulations that impact registered investment advisers. While the current administration has tried to slow or reverse regulation, the fact remains that the bulk of SEC regulations applies to most investment advisers, regardless of whether they have $100 million in assets under management or $10 billion. New regulatory rules increasingly demand that registrants obtain, organize, and analyze substantial amounts of data through systems that either need to be built from scratch or were not designed for the new regulations.

So what does this mean for the competitive landscape in our industry? It means small and middle-sized advisers disproportionately feel the weight of federal regulation because the cost of compliance lowers operating margins and stretches the firm's limited resources. And all this is occurring at a time of continued technological development. Ignoring headline trends and fads , technology continues to lower operating costs in many industries, but to date, there has been a limited advancement in compliance tools for many investment managers. I'm not saying there isn't technology available to compliance officers. There are some options in the market, but they tend to be high-priced, limited in functionality, based on old technology, or some combination of the above.

In talking with many compliance officers who are aware of such products, one of the most common themes I hear is that the systems are too expensive, often running in the tens of thousands of dollars per year. That may not be an issue for large investment advisers, but many compliance departments at smaller asset managers don't have the budget to purchase expensive software that offers limited functionality. As a result, many compliance programs are still based on standard office tools, such as Microsoft Office (including Outlook), Adobe Acrobat, and a scanner.

I also know that many options have limited functionality and only cover parts of a compliance program. Some of these options may be inexpensive or even free if the adviser purchases other products or services from the vendor. But limited functionality means advisers have to create a patchwork of applications that don't integrate. Further, the vendors are not focused on continuing to develop the compliance applications. These applications are teasers or "value adds" that tend to languish in the land of limited updates. For the user of such products, these semi-automated programs are a step in the right direction, but they don't go far enough to close the technology gap between compliance and other business departments.

On the other hand, some of the available software is just plain old. Sure, it provides marginally useful functions, but it looks like someone designed it around the time of Windows 98. (Does EDGAR come to mind?) Some of these applications came from enterprise software that became obsolete when ushered in the era of Software-as-a-Service.

Part of the problem is the source of the products. For many of the applications that have limited functionality or are based on old technology, the producer of the application is a consulting firm. These firms, which may provide perfectly good consulting services, are not technology firms. As a result, they often develop a quick solution as a "value add" to their consulting services. The purpose of the application is not to truly automate a compliance program because that would cannibalize their consulting model. The purpose of the program is to drive you to their consulting services.

But enough of the problems, you want solutions; at least, that's what you've told me. So that's what we are building. This is a collective effort that needs inputs from end users, which is where you come in. For my part, all summer long I've been working with a team of crack developers to create the initial component of a technology system that will change the practice of compliance in the investment management industry--queue impact IM. We based our system on three principals: First, it must be simple and easy to use; Second, it must provide a level of integration unseen in the industry; Third, it must be cost-effective.

Let's be clear about what I'm talking about when I say simple, integrated, and cost-effective. When I say simple, I'm not talking about a system that looks like EDGAR or functions like old enterprise software. I'm talking about a system that is intuitive, easy to use, and, yes, sexy. I take inspiration from companies like Intuit, which produces TurboTax, and I'm bringing their model to investment management compliance. When I talk about integration, I mean real, cutting-edge integration. The kind of integration that is always two steps ahead of you. So when you add a new policy or procedure to your manual, the system knows if your Form ADV needs to be updated. When your policy requires testing, it's scheduled and prepped before you can exit the application. And when I say cost-effective, I'm talking about the kind of pricing that makes your CFO smile and your CEO sign on the dotted line. The sort of pricing that makes you adopt an automated system before hiring an entry or mid-level compliance officer.

Welcome, my friends, to CCO Tech. You can learn more about us at, and soon—very soon—you're going to see the beginnings of a disruptive technology that will change your business. Please visit our website and contact us with your ideas, questions, and demands for better compliance. You can even contact us to vent. We're here for you, and we're designing tools based on the feedback you've provided us.