A recent flurry of deals may indicate that financial advisors are looking for more technology to handle compliance obligations.
Dynasty Financial Partners and MarketCounsel, a regulatory and compliance consulting firm, announced on Tuesday an investment in SmartRIA, a fintech company that automates advisor workflows, provides data governance, trade monitoring services, and digitally stores a firm’s policies, manuals, books and records. Two days later, regulatory and compliance firm ComplySci announced the acquisition of RIA in a Box, a compliance and cybersecurity software company.
Both deals follow Orion Advisor Solutions’ acquisition of BasisCode Compliance.
Executives say the trend is driven by increasing regulatory complexity and cost pressure.
“As the regulatory and risk landscape continues to evolve, RIAs find themselves allocating outsized internal resources to protect the firm and maintain their regulatory compliance program,” MarketCounsel President and CEO Brian Hamburger said in a statement.
And after the explosive growth of the RIA industry, regulators have moved beyond simple spreadsheets for their inspections, said Orion general counsel Kylee Beach.
“Anyone who’s gone through an SEC audit knows that the SEC’s own technology game has been upped significantly,” Beach said. “You need to be able to match their technology capabilities.”
Compliance hasn’t traditionally been a major focus for advisors’ technology budgets. Just over 40% of advisors said they’ve adopted compliance software, according to Financial Planning’s 2021 Technology Survey. Only a quarter of advisors said they plan to spend on upgrading their current compliance solutions.
A separate study from Hearsay Systems, which builds digital communication technology for financial services firms, found only 25% of firms across the industry are implementing automation into compliance processes. As a result, manual processes are stretching compliance teams thin, said Iain Duke-Richardet, Hearsay’s vice president of compliance strategy.
“The quantity and complexity of digital communications for financial services have exploded in our hybrid and remote work environments, and compliance teams often lack the resources — both human and machine — to effectively manage this increase in volume,” Duke-Richardet said in a statement. “With compliance team sizes expected to remain steady, technology must be leveraged to carry the weight.”
Firms are realizing that they can no longer treat compliance as a small side function to running a successful business, RIA in a Box CEO Will Bressman said.
“Increasingly, financial services firms of all shapes and sizes are recognizing that this is a core component of their operations,” Bressman said.
A theme of all three deals is increasing efficiency. For example, Orion will integrate BasisCode’s software into its existing dashboard for a single user experience. A major pain point for a chief compliance officer is needing a separate program to do each task, such as review advertisements, run mock audits or analyze risk, Beach said.
“That no longer cuts it. It’s a waste of time to look at multiple sites,” she said.
Dynasty will implement SmartRIA Pro into its own platform for advisors on the Dynasty network, and MarketCounsel will use the technology to deliver its compliance management program to member firms.
“We can give our RIA member firms peace of mind without having to hire more team members or utilize multiple, disparate technology systems,” Hamburger said.
RIA in a Box is ComplySci’s third acquisition since receiving $120 million in July from private equity firm K1 Investment Management. It purchased National Regulatory Services, which specialized in compliance consulting and education, in October, and illumis, a data aggregator that tracks political contributions, in November. The plan is to combine these technologies, ComplySci’s existing capabilities for institutional investors and RIA in a Box’s specialization with independent advisors into a comprehensive ecosystem that can serve firms across the financial services spectrum, ComplySci CEO Amy Kadomatsu said.
Rather than technology that can solve a single issue, advisors want, “a single pane of glass to look at in order to understand a compliance program,” Kadomatsu said.
However, new startups see an opportunity to disrupt companies like ComplySci with newer technology. For example, superior broker data feeds, tailored reporting and customizable workflows have helped Paragon Data Labs grow its clients 600% over the last year, according to CEO Jefferson Mitchell. The startup raised $1.75 million in November.
Paragon is able to offer a better user experience for firms of any size, Mitchell said. While larger compliance firms are trying to catch up by acquiring startups and integrating them, new firms can build those connections natively, he added.
“A lot of the existing platforms have been around for decades, and of the areas where we commonly hear feedback is that they [don’t have] a great user experience,” Mitchell said.
Kadomatsu disagrees that ComplySci is playing catch-up with its latest acquisitions. Both companies had excellent organic growth in 2021, and the combination can help them both increase scale, she said.
“We continue to see incredible innovation and change and transformation in what compliance officers see on a day-to-day basis,” Kadomatsu said. “It’s creating opportunity for technology partners to be able to help compliance teams make sense of all the data they are inundated with.”
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