Supervisory Procedures Overhaul Cuts Audit Time by 30%

Supervisory Procedures Overhaul Cuts Audit Time by 30%

Executive Summary

A leading Registered Investment Advisor (RIA) faced mounting pressure to streamline its supervisory procedures, leading to lengthy and expensive audits. By partnering with Golden Door Asset, the firm implemented a comprehensive overhaul, leveraging automated monitoring tools and standardized processes. This strategic approach resulted in a 30% reduction in audit time and a 20% faster identification of potential compliance issues, significantly improving efficiency and mitigating risk.

The Challenge

Before partnering with Golden Door Asset, the RIA, managing over $800 million in assets for high-net-worth individuals, struggled with inefficient and fragmented supervisory processes. This led to several critical challenges:

• Lengthy Audits: Audits routinely stretched beyond four weeks, consuming significant staff time and resources. Each audit required an average of 160 hours of labor spread across the compliance officer, portfolio managers, and client service associates. This equated to approximately $8,000 in labor costs per audit, based on an average hourly rate of $50.
• Increased Risk of Compliance Violations: The manual nature of the supervisory procedures made it difficult to identify potential compliance violations promptly. For example, instances of "cherry-picking" – allocating profitable trades to favored clients – went undetected for an average of 3 business days, resulting in potential regulatory scrutiny and reputational damage.
• Inconsistent Documentation: Review processes lacked standardization, making it difficult to track and document supervisory activities consistently. The lack of a unified system meant information was scattered across spreadsheets, emails, and physical files, creating inefficiencies and increasing the risk of errors.
• Rising Compliance Costs: The combined inefficiencies drove up compliance costs significantly. The firm estimated that it was spending approximately 1.2% of its AUM on compliance, exceeding the industry average of 0.8%. A major contributing factor was the time spent manually reviewing trade activity and client communications.
• Limited Scalability: The existing manual processes were not scalable to support the firm's anticipated growth. Management projected an increase in AUM of 15% annually, which would further exacerbate the existing challenges. The firm risked falling further behind in their compliance obligations if significant changes weren't implemented.

These challenges highlighted the need for a more efficient, automated, and standardized approach to supervisory procedures to reduce audit time, mitigate risk, and improve overall operational efficiency.

The Approach

Golden Door Asset collaborated with the RIA's compliance team to develop and implement a comprehensive supervisory overhaul, focusing on the following key areas:

1. Process Mapping and Redesign: The initial phase involved mapping the existing supervisory processes, identifying bottlenecks, and redesigning workflows to improve efficiency. We analyzed each step, from trade execution to client onboarding, looking for opportunities to automate and standardize.

2. Automated Monitoring Tools Implementation: We integrated ComplySci, a leading compliance monitoring platform, to automate the review of trade activity, client communications, and employee personal trading. This automated system flagged potentially suspicious activity, such as large or unusual trades, and escalated them to the compliance officer for further review.

3. Standardized Checklists and Templates: Standardized checklists and templates were developed for all supervisory activities, ensuring consistency and completeness. These checklists covered areas such as suitability reviews, anti-money laundering (AML) compliance, and Reg BI adherence.

4. Documented Review Processes: Formal review processes were established and documented for all supervisory activities. This included defining clear roles and responsibilities, setting review frequencies, and documenting the results of each review. These processes were designed to be repeatable, auditable, and scalable.

5. Training and Communication: Comprehensive training was provided to all employees on the new supervisory procedures and the use of the automated monitoring tools. Clear communication channels were established to facilitate the timely reporting of potential compliance issues.

6. Smartsheet Project Management: The entire project was managed within Smartsheet. This allowed for real-time tracking of tasks, deadlines, and responsibilities, ensuring that the project stayed on schedule and within budget. Smartsheet was also used to track the implementation of the new supervisory procedures across different departments and teams.

The strategic thinking behind this approach was to shift from a reactive, manual system to a proactive, automated one. By leveraging technology and establishing clear processes, the RIA could identify and address potential compliance issues before they escalated, reducing the risk of regulatory penalties and reputational damage.

Technical Implementation

The technical implementation involved integrating several key tools and processes:

• ComplySci Integration: ComplySci was integrated with the RIA's trading platform and CRM system to automatically monitor trade activity, client communications, and employee personal trading. The system was configured to flag potentially suspicious activity based on pre-defined rules and thresholds. For example, trades exceeding a certain dollar amount or deviating significantly from the client's investment objectives were automatically flagged for review. ComplySci also provided automated reporting capabilities, allowing the compliance officer to easily generate reports on key compliance metrics.
• Smartsheet Project Tracking: Smartsheet was used to manage the implementation of the new supervisory procedures. Tasks were assigned to specific individuals, deadlines were set, and progress was tracked in real-time. Smartsheet also provided a central repository for all project-related documents, ensuring that everyone was on the same page. We utilized Smartsheet formulas to calculate projected completion dates and resource allocation.
• Data Security and Privacy: Strict data security and privacy protocols were implemented to protect sensitive client information. All data was encrypted in transit and at rest, and access to the systems was restricted to authorized personnel. Regular security audits were conducted to ensure compliance with industry best practices and regulatory requirements. We deployed multi-factor authentication across all critical systems.
• Workflow Automation: Workflow automation tools were used to streamline the review and approval processes. For example, when a potentially suspicious trade was flagged by ComplySci, an automated workflow was triggered, sending a notification to the compliance officer. The compliance officer could then review the trade, document their findings, and approve or reject the trade.
• Key Calculations and Methodologies:
  • Audit Time Reduction: Calculated as (Original Audit Time - New Audit Time) / Original Audit Time * 100%.
  • Time to Identify Issues: Calculated as the average time between the occurrence of a potential compliance issue and its identification, measured in business days.
  • Cost Savings: Calculated as the difference between the original labor costs associated with audits and the new labor costs, based on the reduced audit time and hourly rates.
  • Compliance Cost Reduction: (Old Compliance Costs as % of AUM - New Compliance Costs as % of AUM) / Old Compliance Costs as % of AUM * 100%

Results & ROI

The implementation of the overhauled supervisory procedures yielded significant results:

• Reduced Audit Time by 30%: Audit time decreased from an average of four weeks (160 labor hours) to 2.8 weeks (112 labor hours). This translates to a savings of 48 labor hours per audit.
• Faster Identification of Compliance Issues: The time to identify potential compliance issues decreased by 20%, from an average of 3 business days to 2.4 business days. This faster detection helped prevent minor issues from escalating into major problems.
• Cost Savings of $2,400 per Audit: The reduction in audit time resulted in significant cost savings. Based on an average hourly rate of $50, the savings amounted to $2,400 per audit (48 hours * $50).
• Increased Efficiency: The automated monitoring tools and standardized processes freed up the compliance officer's time to focus on more strategic initiatives, such as developing and implementing compliance training programs.
• Improved Risk Management: The proactive approach to compliance helped the RIA identify and mitigate potential risks before they resulted in regulatory penalties or reputational damage.
• Reduced Compliance Costs as % of AUM: Compliance costs dropped from 1.2% of AUM to approximately 0.9% of AUM, representing a significant reduction and bringing it closer to the industry average. This was primarily due to the efficiency gains achieved through automation and standardization.

These results demonstrate the significant ROI that can be achieved by investing in efficient and effective supervisory procedures. The RIA not only reduced its costs but also improved its compliance posture and reduced its overall risk.

Key Takeaways

The following key takeaways can help other RIAs improve their supervisory procedures:

1. Embrace Automation: Leverage technology to automate routine tasks and improve efficiency. Automated monitoring tools can significantly reduce the time spent reviewing trade activity and client communications.
2. Standardize Processes: Develop and implement standardized checklists and templates for all supervisory activities. This will ensure consistency and completeness, and make it easier to track and document supervisory activities.
3. Document Everything: Maintain thorough documentation of all supervisory activities, including reviews, approvals, and any corrective actions taken. This documentation will be essential for demonstrating compliance to regulators.
4. Invest in Training: Provide comprehensive training to all employees on compliance policies and procedures. This will help ensure that everyone understands their responsibilities and is equipped to identify and report potential compliance issues.
5. Regularly Review and Update Procedures: Supervisory procedures should be regularly reviewed and updated to reflect changes in regulations, technology, and the firm's business.

About Golden Door Asset

Golden Door Asset builds AI-powered intelligence tools for RIAs. Our platform helps advisors proactively identify and mitigate compliance risks. Visit our tools to see how we can help your practice.