40% Reduction in Compliance Costs: Automation Strategy

40% Reduction in Compliance Costs: Automation Strategy

Executive Summary

Legacy Bridge, a growing Registered Investment Advisory (RIA) firm managing over $850 million in assets, struggled with escalating compliance costs and time-consuming manual processes. Golden Door Asset identified key areas for automation within Legacy Bridge’s compliance framework, leading to a strategic implementation of RPA and integrated compliance tools. The resulting automation initiatives delivered a remarkable 40% reduction in overall compliance costs within the first year, significantly boosting Legacy Bridge's profitability and operational efficiency.

The Challenge

Legacy Bridge, like many RIAs, faced the increasing burden of regulatory compliance. Manual processes dominated their compliance workflow, creating several critical challenges:

• Excessive Labor Costs: Manually reviewing client account data, transaction histories, and regulatory filings consumed a significant portion of the compliance team's time. With a team of three dedicated compliance officers averaging salaries of $90,000 each, the annual cost just for personnel allocated to compliance was a substantial $270,000. A conservative estimate placed 60% of their time – and associated costs – on repetitive, manual tasks. This translates to $162,000 in unproductive personnel costs.

• High Risk of Errors: Manual data entry and reconciliation are prone to human error, increasing the risk of compliance violations and potential fines. A single data entry error during a quarterly filing could lead to a regulatory inquiry costing upwards of $5,000 in legal fees and staff time to address, not to mention potential reputational damage.

• Inefficient Reporting: Generating required regulatory reports, such as Form ADV updates and client account statements, was a cumbersome and time-consuming process. Preparing the firm's annual Form ADV Part 2A disclosure document, for example, took approximately 80 hours of combined staff time, including research, drafting, review, and submission. This translates to roughly $4,000 in lost productivity, using an average loaded hourly rate of $50.

• Strained Resources and Missed Opportunities: The heavy compliance workload left the compliance team with limited time for proactive risk management and process improvement. Instead of focusing on improving compliance systems, they were constantly reacting to deadlines and putting out fires. This prevented them from exploring more advanced compliance measures and strategic growth initiatives.

• Rising Third-Party Audit Fees: Due to perceived shortcomings in Legacy Bridge's compliance processes, the firm's annual third-party compliance audit was becoming increasingly rigorous, driving up audit fees by 15% year-over-year, reaching $17,250 the year before engaging with Golden Door Asset. This highlighted the need for improved internal controls and streamlined processes.

The Approach

Golden Door Asset adopted a phased approach to address Legacy Bridge's compliance challenges:

Phase 1: Comprehensive Assessment and Opportunity Identification:

We began by conducting a thorough assessment of Legacy Bridge's existing compliance processes, identifying key areas where automation could deliver significant efficiency gains. This involved:

• Process Mapping: Detailed documentation of current compliance workflows, including data sources, manual steps, and required reporting.
• Technology Audit: Evaluation of Legacy Bridge's existing technology infrastructure, identifying potential integration points for automation tools.
• Compliance Gap Analysis: Identification of areas where Legacy Bridge's compliance program fell short of regulatory requirements or best practices.
• Cost-Benefit Analysis: Quantifying the potential cost savings and efficiency gains associated with automating specific compliance tasks. For instance, we projected a 70% reduction in the time required to prepare quarterly reports by automating data extraction and formatting.

Phase 2: Strategic Automation Implementation:

Based on the assessment findings, we developed a customized automation strategy tailored to Legacy Bridge's specific needs. This strategy focused on automating the following key compliance processes:

• Data Monitoring: Implementing robotic process automation (RPA) to automatically monitor client account data for potential compliance violations, such as excessive trading or unusual transactions.
• Reporting: Automating the generation of required regulatory reports, such as Form ADV updates and client account statements, using data extracted from various sources.
• Training: Developing an automated compliance training program to ensure that all employees receive consistent and up-to-date training on relevant regulations and policies.
• Email Archiving: Implementing an automated archiving system to store all business-related emails in a searchable, compliant manner, ensuring adherence to regulatory requirements.

Phase 3: Integration and Optimization:

We seamlessly integrated the new automation tools with Legacy Bridge's existing business systems, ensuring data accuracy and consistency. This involved:

• API Integration: Connecting the automation tools with Legacy Bridge's CRM, portfolio management system, and accounting software using APIs (Application Programming Interfaces).
• Data Validation: Implementing data validation rules to ensure that the data extracted and processed by the automation tools is accurate and complete.
• User Training: Providing comprehensive training to Legacy Bridge's compliance team on how to use the new automation tools effectively.
• Continuous Monitoring and Improvement: Continuously monitoring the performance of the automation tools and making adjustments as needed to optimize their efficiency and effectiveness.

Decision Framework:

Our decision framework for selecting specific automation tools involved evaluating factors such as:

• Integration Capabilities: Ability to seamlessly integrate with Legacy Bridge's existing technology infrastructure.
• Scalability: Ability to handle the firm's growing data volume and transaction volume.
• Security: Compliance with industry-standard security protocols to protect sensitive client data.
• Cost: Overall cost of ownership, including software licensing fees, implementation costs, and ongoing maintenance costs.

Technical Implementation

The technical implementation involved the following key steps:

1. RPA Implementation for Data Extraction: We implemented an RPA solution using UiPath to automate the extraction of data from various sources, including Legacy Bridge's CRM (Salesforce), portfolio management system (Black Diamond), and custodial platforms (Schwab Advisor Services and Fidelity Clearing & Custody Solutions). The RPA bots were configured to automatically log into these systems, navigate to the relevant pages, extract the required data, and store it in a centralized database.

2. Compliance Tool Integration: We integrated several specialized compliance tools with Legacy Bridge's existing systems:

   • Compliance Risk Analyzer: Integrated with the portfolio management system to automatically scan client portfolios for potential compliance risks, such as excessive concentration in a single security or sector. This tool used pre-defined risk parameters based on regulatory guidelines and Legacy Bridge's internal policies.

   • Automated Trade Surveillance: Integrated with the custodial platforms to monitor all trading activity for potential insider trading, front-running, or other violations. The system used sophisticated algorithms to identify suspicious patterns and generate alerts for further investigation.

   • Email Archiving System: Implemented an email archiving system using Smarsh to automatically capture and store all business-related emails in a secure, searchable archive. The system was configured to comply with SEC Rule 17a-4, which requires RIAs to maintain accurate and complete records of all business communications.

3. Automated Reporting Module: Developed a custom reporting module that automatically generates required regulatory reports, such as Form ADV updates, client account statements, and suspicious activity reports (SARs). The module utilizes data extracted from the various sources and automatically populates the report templates, significantly reducing the time and effort required to prepare these reports manually.

Financial Terminology and Methodologies:

• Return on Investment (ROI) Calculation: ROI was calculated as (Cost Savings - Implementation Costs) / Implementation Costs.
• Discounted Cash Flow (DCF) Analysis: DCF analysis was used to project the long-term cost savings associated with the automation initiatives, taking into account the time value of money. A discount rate of 8% was used, reflecting Legacy Bridge's weighted average cost of capital.

Results & ROI

The implementation of the automation strategy yielded significant results for Legacy Bridge:

• 40% Reduction in Compliance Costs: Overall compliance costs decreased from $325,000 annually to $195,000, representing a savings of $130,000 per year. This was primarily driven by reduced labor costs and lower third-party audit fees.
• 80% Reduction in Time Spent on Reporting: The time required to generate regulatory reports, such as Form ADV updates and client account statements, decreased by 80%, freeing up significant time for the compliance team to focus on proactive risk management and process improvement. The 80 hours of staff time to produce Form ADV Part 2A was reduced to 16 hours.
• 90% Reduction in Data Entry Errors: The automated data monitoring and reporting tools virtually eliminated data entry errors, reducing the risk of compliance violations and potential fines. Data entry errors went from an average of 1-2 per week, requiring correction, to only 1-2 per quarter.
• 10% Reduction in Audit Fees: As a result of the improved compliance processes and reduced risk of errors, Legacy Bridge's annual third-party compliance audit fees decreased by 10%, from $17,250 to $15,525.
• Increased Efficiency and Productivity: The compliance team was able to handle a larger workload with the same resources, allowing Legacy Bridge to scale its business without increasing its compliance staff. The compliance officers were able to spend more time developing new strategies and preventative measures instead of simple maintenance.

Key Takeaways

1. Automation is Crucial for Scalable Compliance: As RIAs grow, manual compliance processes become increasingly unsustainable. Automation is essential for maintaining compliance while scaling the business.
2. Start with a Comprehensive Assessment: A thorough assessment of existing compliance processes is critical for identifying the right opportunities for automation and ensuring that the chosen tools align with the firm's specific needs.
3. Integrate Compliance Tools with Existing Systems: Seamless integration of compliance tools with existing business systems is essential for data accuracy and consistency. APIs and data validation rules can help ensure that data flows smoothly between systems.
4. Invest in User Training: Effective user training is critical for ensuring that the compliance team can effectively use the new automation tools. Training should cover both the technical aspects of the tools and the underlying compliance principles.
5. Continuous Monitoring and Improvement: The automation implementation is not a one-time event. It requires continuous monitoring and improvement to ensure that the tools remain effective and efficient.

About Golden Door Asset

Golden Door Asset builds AI-powered intelligence tools for RIAs. Our platform helps advisors streamline compliance, enhance client engagement, and uncover new growth opportunities. Visit our tools to see how we can help your practice.