Calculating the Cost of Compliance for RIAs

Payout and compliance are two of the biggest factors financial advisors consider when deciding whether to start or join a Registered Investment Adviser (RIA). At first glance, running your own RIA can seem more profitable than joining a firm because you retain your full payout and can control your operating expenses. But to get a more realistic bottom-line comparison, it’s important to include the value of your time, brand reputation, and peace of mind.

Time Is Money

It’s easy to underestimate how much time principals spend on compliance-related activities, but some estimates for a solo RIA are as high as 40%.¹ Even if we lower that figure to just 20 hours per month (approximately 12% of a 2,000-hour work year), the cost of compliance for an independent RIA with less than $500M in AUM could actually be higher than the costs of joining an RIA platform.

The 2022 LPL High Performer Study found that among our high-performing / high-growth RIAs, principals focus at least 70% of their time on direct client and prospect interactions and minimize time on all administrative functions like compliance. The break-even point for a mid-size RIA occurs if a principal spends around just 12 hours per month on compliance-related tasks.

But 12 hours per month seems like a low estimate given the Securities and Exchange Commission’s (SEC) increasing focus on RIA oversight. To keep pace, RIAs will likely need to spend more time and money on compliance — which means less time and money devoted to revenue-generating activities. 

 In recent years, the SEC has enacted a series of rules and issued several notices with significant impacts to RIAs. As each of these rules are developed and released, RIAs must stay on top of communications and interpretations, assess potential business impacts, develop procedures, and possibly train staff to ensure compliance. Even with the help of outside compliance support, this can take considerable time.

Risk and Reputational Management

By almost any measure, the SEC’s focus on RIAs is growing. Since 2022, when the SEC began listing “significant focus areas” in its annual regulatory exam priorities report, eight out of nine focus areas have targeted RIA activity.

Meanwhile, the number of regulatory changes targeting RIAs is also on the rise. In 2022, the SEC issued 16 proposed new rules in the first three months of the year — only the second time it proposed that many first quarter rules in the 21st century.² In late 2023, it announced plans to adopt 25 rules in 2024.³

But the number of rules only tells part of the story. Their complexity and substantive impact on RIAs are also growing. As the SEC brings enforcement actions against firms and principals, these actions must be disclosed to clients, exposing the firms and individuals to brand and reputational risk.

Potential Regulatory Impacts to Personal & Business Finances

In every year since 2013, the SEC has noted that examining newly registered investment advisers is among its exam priorities. A single SEC exam can cause serious disruption at a time when your business needs your utmost attention. The preparation alone can take up to 100 hours of the principal’s time and additional spending for lawyers and compliance consultants to support you during the exam.

For an RIA with less than $500M in AUM, just participating in an exam can cost around $70,000. If the SEC issues a deficiency, it’s likely to take more time and money to remediate, which can easily push the total exam cost to $100,000. The median fine from enforcement actions — which aren’t covered under Errors & Omissions insurance — is $550,000.

Joining an RIA takes the compliance oversight and risk management burden off your shoulders. You’re still required to follow SEC regulations, but the firm you join carries the regulatory, financial, and reputational risk. In the event of any public action or settlement, typically they would be named and would be responsible for any monetary costs or fines — not you.

How LPL Financial Can Help

As a holistic wealth management firm — RIA, custodian, broker-dealer, clearing firm, compliance partner, and technology provider all in one — we can help you thrive, no matter what your path looks like. Reach out to learn how we can help you start your own RIA or join our RIA as a fee-only or hybrid advisor.