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Measuring CROI (Compliance Return on Investment)

Compliance is considered a cost center by most; the more enlightened will view it as a form of insurance, protecting their financial standing and maybe even more importantly their personal and business reputation. Knowing your risk exposure will help you understand your potential liability as an enterprise. Business risks come in all shapes and size, and must be addressed by you in some manner. There are three actions you can take in response to an identified risk: 1) ignore it – it’ll be solved on its own; 2) accept it – absorb the consequences of the risk should it become a reality; or 3) insure against it – identify a plan to reduce or eliminate its impact on you and/or the firm. We are not talking about insurance in the traditional sense. We want to look at this from the perspective of protection – the raison d’etre for the regulators. They are building rule books, surveillance technologies, examination & sweep programs all designed all to protect the public against “bad actors”.
CROI differs from traditional ROI in that the return can be quantified as the financial savings from a fine plus the intangible cost of reputational savings against the cost you allocate for in-house and outsourced compliance. Your CROI will depend on the resources your compliance program has in place. The deeper the experience bench along with the total cost of that bench will produce a more favorable outcome. How do you measure the savings? Unfortunately, there is no schedule of fines that can be assessed by FINRA or the SEC; as for reputational risk; that can be measured by clients (and advisors) walking out your door.
A strong culture of compliance is not a new concept. Culture is one of those intangibles that everyone recognizes, but few can define. As a Supreme Court Justice once said, in another context, “You know it when you see it.” Traditionally, inculcating a culture of compliance has been challenging. Think of it the way you think of marketing; difficult to quantify the benefit associated with the cost, but vitally necessary nonetheless. We’ve seen a number of problems at securities firms that reflect a weak or non-existent culture of compliance. Scandal teaches us that compliance must be taken seriously. Having a strong culture of compliance is in the best interest of securities firms, because what’s good for investors is good business for those who serve investors.
We strongly believe that having a culture of compliance must be part of the firm’s core business model. We are proud to say that RegMaven stands by its philosophy and will work with you to establish a strong culture of compliance that guides and reinforces employees as they make decisions and choices each day, giving you the CROI you deserve and a better night’s sleep
Call upon us to learn more. 603.965.7791

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