The old proverb “hope for the best and prepare for the worst” applies to many things — not the least of which the prospect of being audited by the Securities and Exchange Commission. (For more, see: What Triggers an SEC Audit?)

While no financial advisor wants to be audited, compliance experts believe the ideal time to prepare for this contingency is before an audit letter is received. Indeed, advisors should be prepared at all times for an audit — even if, like their peers, they hope they'll never be subjected to one.  

Prepare, Prepare, Prepare

The best way to ensure you're ready for an audit is to make preparation part of your regular routine of running your business. If you know where everything is and are organized, there will be no last-minute panicking or scrambling if you get that call from the SEC. (For more, see: Surviving an SEC Audit: Tips for Advisors.)

Here are some definitive steps advisors can take to ready themselves:

  • Organize all records. SEC auditors demand vast amounts of records, which must be hastily produced the moment an audit starts. Having a business to run is no excuse for failure to comply in a thorough and timely manner. And expect the unexpected. Even with a head start, specific requests are bound to complicate matters. So start putting records together today, and scramble less tomorrow. (For more, see: Starting a Small Business: Record Keeping.) 
  • Stay current. Establish a monthly routine of refreshing data to reflect the most up-to-date vendor and client lists possible. It’s also critical to maintain current ADV and AUA forms. The former applies to investment advisors managing more than $25 million, and details fundamental information like assets under management (AUM), investment style and key personnel. Form AUA (assets under administration) represents the overall size of an institution's custodial portfolio. This measurement is distinct from AUMa, which refers to a firm’s actively managed assets. Both forms ADV and AUA may be obtained from local SEC branches or the regulator's website, www.sec.gov. (For more, see: Policing the Securities Market: An Overview of the SEC.)
  • Establish an audit protocol. A blueprint describing how employees should act and what they should expect goes a long way in helping them become familiar and comfortable with the audit process before it happens. Such demystification reduces tension, minimizes mistakes and builds confidence. (For more, see: Get a Job in Compliance.)
  • Run a mock audit. Much like an audit protocol can mentally prepare employees for the main event, mock audit sessions led by a third party will help staffers get over performance anxiety and work out weaknesses in their demeanor — without the stress having actual regulators in the room. Mock audits also demonstrate a commitment to getting it right — a fact that impresses regulators, letting them know you’re taking them seriously. (For more, see: When Financial Regulators Let You Down.)
  • Prepare for enforcement action. Most audits don’t uncover serious violations, but there has been an uptick in informal recommendations resulting from audits. To plan for such an outcome (and the associated fines), firms should get in the habit of cutting attorney costs by slashing billing time and using in-house tools like Bates stamping and production charts when preparing documents for attorney review. (For more, see: Top 5 Software Programs Used by Financial Advisors.)
  • Ask questions. Finally, advisors shouldn’t be afraid to show up armed with questions to ask regulators; this will streamline the audit process for everyone involved. Knowing if your firm has been targeted randomly, if the audit is the result of a specific cause, or if it’s just part of an industry-wide sweep will help you put together the right cadre of information, most appropriate to the specific nature of the inquiry. (For more, see: Understanding the SEC.)

The Bottom Line

Audits, by nature, are unwanted and unpleasant realities of being a financial advisor. By getting your proverbial ducks in a row — before being hit with a formal inquiry — you can ease and simplify the process, lower costs, and minimize the fallout. (For more, see: A Day in the Life of a Financial Advisor.) 

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.