Every year, as RIA compliance consultants, we talk to thousands of current and prospective registered investment adviser (RIA) firms about their business model, needs, and business plan moving forward as they look to either grow and expand their business, or just protect what they currently have after years of hard work. Many times these conversations revolve around the compliance responsibilities the advisory firm will have based on its size and current jurisdictions in which it is registered.
In reality, there is no prototypical RIA firm that we speak with- these interactions range from state-registered investment advisory firms with less than $1 million of assets under management (AUM) to SEC-registered firms notice-filed in numerous states across the country managing billions of dollars. Even though we consult with such a broad and diverse range of different RIA business models, there is one common theme that many investment advisers think about their specific firm- that it is Plain Vanilla.
When getting to know an investment adviser’s business, we often ask the adviser to describe the general background and business model of the RIA firm. Regardless of the firm’s size, registration status, or location, around 80%-85% of these advisers will begin by stating that the firm is Plain Vanilla. What the adviser is trying to convey is that the firm’s business model is far more simplistic and easier to manage than other investment advisory firms, so as a result the firm’s compliance responsibilities or needs must be very straightforward as well. While an advisory firm with $5 million of AUM servicing only a handful of clients may have fewer compliance responsibilities than an RIA firm with $500 million of AUM servicing a few hundred clients, it does not mean that the advisory firm will be less scrutinized by the relevant regulatory authorities or less likely to be audited solely based on the firm’s assets under management or number of clients.
Every state or SEC-registered RIA firm is subject to get audited at any time regardless of size, location, or business model, and we have recently been seeing a higher frequency of regulatory audits. Some states are attempting to audit investment advisory firms as often as every 18-24 months. Whether it is a surprise audit when an examiner shows up unannounced (this practice is more common at the state registration level) or an audit announcement letter informing the firm that an examiner will be examining the firm in the coming weeks, both the states and the SEC are attempting to visit as many advisory firms as possible. In short, investment adviser regulators do not look at any RIA firm as Plain Vanilla. Every investment advisory firm has a number of ongoing compliance responsibilities that it will need to adhere to regardless of how simple and vanilla the firm may be.
As RIA compliance consultants, we want to remind investment advisers that their firms are often not as plain vanilla as they may believe. Almost every investment adviser we speak with will describe their firm as small, whether they are just starting out or have been running a successful advisory firm business for many years managing hundreds of millions of dollars. Regardless of the firm’s size, there is almost certainly a smaller, more plain vanilla investment advisory firm being audited as we speak. As such, RIA firms should not be surprised when the state or SEC drops by to perform a regulatory exam, as it is not a question of if, but when, regardless of the advisory firm’s size or business model.