Kitces: How Your Web Presence Helps Convert Referrals to Clients

Compliance for the 'Biggest Knucklehead'

Lisa Crafford, principal, Platform Strategy & Consulting at BNY Mellon's Pershing, asked what breakaways and new firms who enter the RIA space should expect when they enter the "new world of freedom" offered by independent firms.

"The biggest shift that happens is just the dynamics of how marketing intersects with compliance in the world of independence versus the world of being in a wirehouse or in general in a large-firm environment," Kitces replied.

"There are a lot of things that are particularly conducive to sort of scale and efficiency in a large-firm environment," he said, conceding "big firms have buying power, they can get a lot of stuff cheaper, [and] they can negotiate better deals."

However, "there is sort of this perverse anti-compounding effect that happens with scale when it comes to compliance," he said, adding: "It's a phenomenon that I call LCD compliance, which is short for lowest common denominator compliance."

Explaining the problem that happens at many large brokerage firms, he said the chief compliance officer and compliance team have guidelines that are pretty straightforward: "Make sure none of the reps in this organization do anything that gets the firm in trouble."

One challenge in a large-firm environment, however, is that, "depending on the firm you're in, there are hundreds of reps, there are thousands of reps, there may be more than 10,000 reps, which means 99% of the compliance team has never met 99% of the advisors," he said, adding: "All we know is that somewhere out there, there is a complete boneheaded idiot who's going to do all this stuff that we know that you are not supposed to do because they don't know any better, can't help themselves or they're actually one of our few bad apples in the industry that will really do some bad stuff if we don't stop them."

Because of that, a compliance team's task is to "write compliance rules that will not get us in trouble with any of the reps in our firm, which is a nice way of saying 'write the rules so that the one biggest idiot in your entire organization will still get captured by the compliance rules, processes and procedures that you put in place,'" he said.

The end result is that "we get stuck in these conversations talking to compliance, who are basically treating us like children or idiots who haven't been doing this for 10 or 20 or 30 years because they've written these LCD compliance rules … to capture the lowest common denominator — whatever the one biggest knucklehead in the whole organization can do," he said. Everybody at the entire firm "gets stuck at that level of compliance, and it creates a lot of frustration for us," he noted.

The Indie Channel

The large-firm compliance culture "crams down marketing opportunities to the point that we can't even do all the things" that the Financial Industry Regulatory Authority and Securities and Exchange Commission "allow — we can only do the things that a compliance officer believes is safe based on what the biggest idiot in the organization can possibly do in a lowest common denominator environment," he said.

And that is "what actually drives a lot of us to leave the brokerage environments" and go independent, he said.

The independent channel is more flexible — "not because it's like the wild west with no rules," but rather because when you own your own advisory firm, "you can write your rules to what the rules actually are because you know you and the people in your firm," he said.

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