Bill Hortz's picture

"It is often easy to overlook the risks of keeping everything internal and firms can miss the many benefits built into strategically choosing the outsourcing route." Ernie Kappotis, Intersource Consulting Group

[The Institute for Innovation Development recently talked with Ernie Kappotis, principal of the Intersource Consulting Group - a comprehensive regulatory consulting firm with an expanded sense of perspective - on fully understanding the risks involved for broker/dealers and RIA’s in keeping FINOPS and compliance functions in-house and the benefits for outsourcing them.]

Hortz: Why do most advisors and broker/dealers keep their financial operations and compliance functions strictly in house?

Kappotis: A lot of advisory firms and broker/dealers prefer to have their CCO and FINOP management in-house, where they feel they can maintain control and keep a pulse on their business activity and compliance issues.  However, it is often easy to overlook the risks of keeping everything internal and firms can miss the many benefits built into strategically choosing the outsourcing route.

Hortz: Can you recount for us what the major risks are in choosing to keep your CCO and FINOP management in-house?

Kappotis: From our outside perspective, we can see many risks, such as:

  1. The Way It’s Always Been Done Mindset: A lot of In-House CCOs and FINOPs use their experience as their greatest tool.  However, often times what worked in 2007 doesn’t work in 2017.  Regulators are sharper, and business is more complex.  Do your firm’s supervisory controls align with the business that your firm conducts? How are other firms in your business segment identifying their risks and controls?  If your CCO doesn’t work for any other BDs or RIA’s, how would he or she know?  FINRA examines from a diverse knowledge base.  Don’t you want the same?
  2. Limited Dimensionality: A lot of In-House CCOs and FINOPs operate under the constraints of their one broker-dealer, with its fixed set of businesses, consistent personnel, and longstanding corporate goals.  But there’s a huge market out there, filled with new ideas and strategies.  Remote CCOs and FINOPs play in fluid waters, continuously exposed to varying regulatory conditions, and forced to stay literate in prevalent regulatory pronouncements.  Remote Principals bring fresh perspective to business risks and opportunities.
  3. The Fear of 2 Principals: A lot of BDs have several Compliance Principals and one FINOP.  Why?  Wouldn’t you want to have more than one person who can calculate net capital (which by the way, could be requested by a regulator at any time) or who can file the FOCUS reports?  Shrewd broker-dealers have one FINOP available to review the work that the other FINOP prepares.  It may be advisable to hire an Outsourced FINOP for the purposes of reviewing the financial statements and FOCUS reports.
  4. Regulatory Exposure: It’s hard enough running a business in real-time for a B/D or RIA to expect its compliance staff to precisely operate in accordance with FINRA/SEC regulations at all times.  You need someone above the trees, to look at the trends, to envision the perspective that FINRA will bring. Just communicating with the regulators is an art in itself.

 Hortz: Well, enough about the risks of only having an in-house CCO and FINOP. What are the benefits to the remote CCO/FINOP approach?

Kappotis: Outsourcing adds many dimensions and opportunities: 

  1. The increased flexibility to make changes that can enhance your business and protect it from regulatory damage.
  2. The multi-dimensionality to stay updated with the regulations and adapt your advisory firm or B/D to its true risk environment.
  3. The addition of remote principals (both Compliance/CCO and Financial/FINOP) to bolster the knowledge base in your B/D or RIA.  Avoid mistakes, and better identify solutions for business growth.  
  4. Reduce regulatory exposure with a remote CCO who can interpret your B/D or RIA’s risk profile within the context of other firms in your business sector, and with a remote FINOP who reviews your firm’s financials under a lens sharpened by exposure to various other sets of financials in the industry.  
  5. Increase efficiency by having an overall Compliance & Financial Risk Profile that your employees can utilize to guide their tasks and objectives.  
  6. Reduce overall operating costs by as much as 30% or more by bringing on the Remote CCO and/or FINOP (on a monthly rate) versus full-time compliance and accounting staff.  

Hortz: Are there cumulative benefits specifically in outsourcing both CCO & FINOPS functions at the same time?

I believe there are a number of benefits in outsourcing both to the same team:

  1. A CCO/FINOP team from one consulting firm presents a unified front with the regulators. The authorities tend to feel more comfortable facing a consulting team versus a series of individual consultants from difference sources and geographic locations.  
  2. The regulators review the mixture of general compliance policies & procedures, transactions records, and the financial statements.  A balanced CCO/FINOP team can ensure that your firm’s business activities align, because the regulators will detect irregularities, inconsistencies, and discrepancies.  
  3.  A unified CCO/FINOP team with a comprehensive understanding of your business can tailor the specific needs of your firm internally, and can often provide further services more expediently than the competition.    
  4. When you strip away the costs of benefits, payroll taxes, and bonuses – and hire a remote 2-Person CCO/FINOP team, your firm can put its bottom line net income back into focus.
Hortz: Any final recommendations or thoughts you can share with financial services professionals on how to maximize success in the current operating environment of growing uncertainty and accelerating change?  

Kappotis: In this ever evolving business environment, particularly in financial services where regulations are constantly shifting, you can't afford to have limited resources and perspectives in your shop.  Your firm needs well-rounded comprehensive industry experts to help you navigate through the crevices of stock market regulation - and very often outside consultants are the only path to meet those kinds of very dynamic challenges.

This article was previously posted on Harvest Exchange.

The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their next-generation growth, differentiation and unique community engagement strategies. The institute was launched with the support and foresight of our founding sponsors - Pershing, Voya Financial, Ultimus Fund Solutions, Fidelity, and Charter Financial Publishing (publisher of  Financial Advisor and Private Wealth magazines). For more information click here.   


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