The added costs of compliance and regulation are putting more pressure on money management firms of all sizes, but smaller shops are feeling the most heat.
Money managers expect a 10% to 20% increase costs in the coming year to meet tougher regulatory requirements, according to a survey of 40 asset managers by Boston-based Cerulli Associates.
Karen Keene, senior analyst, said she expects firms will spend 8% to 10% of their operating budget on compliance in 2005, up from 6% to 8% this year.
The biggest push to comply with the Securities and Exchange Commission came this fall, when managers had to install a chief compliance officer and develop compliance policies and procedures by Oct. 5.
Outsourcing the work "would be nice, but it doesn't work within our budget," said Patricia Hall, co-founder of Beacon Investment Management, Raleigh, N.C., which has $42 million in total assets under management.
In addition to her role as compliance officer, Ms. Hall, serves as office manager and corporate secretary. She said she relies on Thomson Media's National Regulatory Service for compliance-related forms, updates and reminders. Samuel Bass serves as president of the firm.
Roughly $3,500 of Beacon Investment's $407,000 2005 operating budget will be spent on compliance and regulation, up 40% from $2,500 in 2004, Ms. Hall said.
Some companies may face a bigger crunch. As a two-person operation, Beacon is keeping most responsibilities in-house. "It's just the two of us," Ms. Hall said. "I just do a lot of things."
At Knightsbridge Asset Management, Newport Beach, Calif., which has $190 million in total assets under management, John Prichard also has a triad of duties. Mr. Prichard, managing director, portfolio manager and chief compliance officer, said his focus this year has been on learning new regulations, as well as tightening up procedures related to ethics, employee trading, and the settlement and allocation of trades. He also shares ideas with other money management firms through The Southern California Compliance Group, which has more than 50 members meeting quarterly in various Southern California locations.
"We resisted leaning on our own securities attorney," he said. "It's really expensive to turn to an attorney to understand and formalize compliance. We thought about hiring a consultant, but resisted that as well (because of the cost)."
While the decision to keep head count at a minimum helps control expenses, it takes a toll on how the firm spends its time and resources, Mr. Prichard said.
"It's an opportunity cost of time usage, primarily," he said. "I spend time talking to my partner about compliance issues as opposed to doing (stock) research. I think if we continue to grow, we will hire someone or use an outside consultant."
