Compliance Bracketology: Cutting Nets, Not Corners

By: Amber Tatman
Senior Director, Compliance Advisory Services

For three weeks each Spring, basketball fans catch the fever. Brackets are completed with an often-unwarranted sense of confidence. We think this is our year as we make our picks and eagerly anticipate the battles ahead. We celebrate the underdog, marvel at the buzzer-beaters, groan when game-deciding free throws are missed, and mentally steel ourselves for the ribbing we’ll receive from our so-called friends who attended other schools if our team chokes. 

While the falling confetti and the inspiring rendition of  “One Shining Moment” signals the end of the madness for another year, the best programs, like the best advisers, don’t hibernate or rest on their laurels. They know that building a successful culture takes diligence, discipline, and a relentless focus on fundamentals. If you want to play in March, you need to prepare all year. You can’t cut corners if you want to cut down the nets.  

Fundamentals 

In basketball and in life, you don’t rise to the occasion; you fall to the level of your fundamentals. You can’t suddenly become a great program the minute a regulator arrives, just like a sub-par shooter doesn’t suddenly master free throws when the game is on the line. Fundamentals aren’t flashy, but daily habits matter much more than last-minute heroics. Tournament history is replete with higher seeds that took an opponent lightly after an easy win and were sent home early. Why? Because they forgot the fundamentals that got them there.  

For advisers, fundamentals include consistent documentation, creating and following a compliance calendar, continuous learning, and regular, targeted training instead of a generic annual slide deck.  Valuing every possession means every day is an opportunity to improve.  Protecting the ball and avoiding unforced errors requires daily focus on compliance by everyone in the organization. In March, one bad possession can send a team home; for advisers, one bad decision can turn an uneventful exam into an enforcement nightmare.  

Playbook 

The compliance manual is the adviser’s playbook. Well-crafted, effective policies and procedures aren’t aspirational statements referenced only when regulators call. Done well,  the compliance manual is an adviser’s strategic advantage.  

Defense 

Defense wins championships.  Advisers contend for championships daily by delighting clients and putting client interests ahead of their own. This includes full, fair, and accurate disclosure, proper identification and handling of conflicts of interest, and safeguarding client information.   

Coaching  

Good coaches, like CCOs, instill discipline and knowledge, using both encouragement and tough love. They must read the floor, design the plays, adjust the line-ups, and get the best out of their teams. Good coaches don’t allow complacency after a win. Even a successful regulatory exam is not permission to relax.  

Culture  

Culture is the key to long-term success. Ethically challenged basketball programs eventually pay for their lapses (eventually), as do compliance programs. It may be tempting to cut compliance budgets, overrule the CCO, or pacify a recalcitrant superstar. Such firms may even experience short-term wins like increased RAUM or a clean regulatory exam. However, culture has a tendency to reveal itself despite band-aids, camouflage, and subterfuge. Are you willing to bench your best player who won’t play by the rules?  Do you instill high standards and accountability? If your AUM goes up while your compliance budget is stagnant, it will be reflected in your culture. Are you building a program that wins an occasional game or building a legacy? 

Game Film 

Strong basketball programs relentlessly review game film to analyze what went well, what went wrong, and identify opportunities for improvement. Good advisers do this through a robust annual review and periodic testing. Advisers should scrutinize every violation, exception, and near-miss, and ask whether the play design (policies) or execution (procedures and training) could be improved to prevent recurrences. The best teams and advisers don’t measure success exclusively by win/loss ratios, but by whether they would be proud to watch their game film with clients or regulators.  

Bracketology 

Completing brackets is practically a civic duty during March Madness. Comparing matchups, reviewing bench strength and coaching styles, and identifying upset risks is both an art and a science. Adviser bracketology includes rigorous and regular risk assessments and comprehensive business continuity plans, succession plans, and incident response plans. Where are the areas of biggest risk? What is most likely to go wrong? Which policies and procedures or additional resources are necessary to better address the risk? The best players see the whole floor, and the best assessments reflect not only where the ball is now, but where it’s going.  

Bench Strength  

Like the best basketball programs, advisers often engage specialized support to strengthen their programs. If you’d like to improve your odds of success, compare brackets or just talk smack about your least favorite teams, we’re here to help you reduce regulatory madness so that you can enjoy the madness on the court.