Three Crucial Considerations When Selecting a Verification Firm: People, Process, and Fees

Every year, around this time, budget reviews for the upcoming year often prompt firms to review long-term service providers. While firms meticulously scrutinize their budgets, verification providers are also assessing fees for the following year to determine if an increase is justifiable. If you haven’t yet evaluated your current verifier, the CFA Institute’s verification questionnaire offers valuable questions for your consideration. In addition to the CFA Institute’s questionnaire, this article provides supplementary insights that may prove beneficial as you evaluate your existing verification firm or search for a new one.

People

People constitute the most pivotal component of any verification process. The firm you engage and the individuals they enlist for your verification must possess experience, knowledge, and a strong commitment to the task. Furthermore, it’s essential to consider how a verification firm plans for the future. Over the past decade, we’ve observed several mergers and acquisitions among verification and compliance firms. Strangely, one of the most important questions, not included in the CFA Institute’s questionnaire, is related to succession planning: “What is the succession plan for the firm?” As the owners of verification firms approach retirement, this question is often overlooked, leading to inadequate succession planning or the sale of firms to competitors.

Another vital question to ask is, “What caliber of staff will be working on the engagement?” Verification firms typically assign one senior-level person and one junior-level person to their engagements. Sometimes, the junior-level team member may have less than a year of verification experience and ends up doing most of the work. Understanding your engagement team is crucial for a successful and efficient verification process. [Do we want to add a sentence here, similar to the Fees section, that addresses Cascade’s difference? “At Cascade, partners are involved in the regular communications/emails/phone calls before during and after the verification, and even our junior-level staff working with clients have more than 5 years of GIPS compliance verification experience.”]

Process

It’s imperative to inquire “Does the verification firm consider regulatory requirements beyond the GIPS Standards when reviewing your marketing materials.” With the SEC Marketing Rule now in full effect, this question holds greater importance than ever. Some verification firms choose not to comment on any aspect of the SEC Marketing Rule. However, we believe this approach is misguided. Verification firms often position themselves as performance experts, making the SEC Marketing Rule an important part of any RIA’s GIPS compliance process. As a client, you shouldn’t hesitate to seek their insights on the performance aspects of the SEC Marketing Rule.

An additional aspect to evaluate is “How frequently does the verification firm communicate before, during, and after the verification process?” Effective communication during the verification process significantly impacts its timeliness. Questions to consider include whether you will have timely email follow-ups and regularly scheduled weekly, bi-weekly, or monthly calls during the verification, and how the verification firm stays informed and keeps your firm informed about industry-specific regulatory changes.  At Cascade, clients receive timely call summaries for every regularly scheduled call that keep your entire team informed on key issues and next steps, and your entire verification team—including partners—participates in those calls and call summary communications. Frequent communication from your verifier ensures that your firm receives the information it needs for a successful compliance program.

Fees

With the SEC Marketing Rule considerations impacting GIPS Reports this past year, it’s important to know what guidance is or isn’t included in your verification fees:  “Do verification fees encompass consulting regarding the performance aspects of the SEC Marketing Rule?” This question could be a determining factor in your decision to hire a specific firm. Some verification firms charge additional fees for consulting on performance requirements of the SEC Marketing Rule, while others include this service as an integral part of their offerings. Recognizing that investment management firms often have external compliance providers to assist with regulatory disclosures and documentation, verification firms have the expertise to provide valuable insights on the performance aspects of the rule.

Firms could do well to ask about fee increases: “Does the verification firm enforce automatic fee increases and how are increases communicated to their clients?” Some firms have implemented substantial fee hikes without adequate client communication. At Cascade Compliance, we take a different approach: when you become a client, we freeze your fees for the initial two years and guarantee a fee increase cap moving forward. As a 100% employee-owned company, we have the autonomy to control pricing and manage costs and competitive staff retention packages, offering our clients the peace of mind of working with the decision-makers.

In conclusion, selecting a verification firm is a critical decision that should be made after careful consideration of people, processes, and fees. By asking the right questions and evaluating these three key components, you can make an informed choice that aligns with your firm’s needs and expectations. Remember, choosing the right verification partner can have a substantial impact on your organization’s success and compliance program.

Cascade Compliance has over 45 years of combined experience working with SEC Regulations, the GIPS standards, and performance.  Our employees have worked with hundreds of firms in the U.S. and abroad.  One of the best parts of working with clients is getting to share expertise and knowledge of best practices across the industry.  Whether you are a client of ours or not, we are here to help you get better at what you do and answer any questions you may have.  Contact us at connect@cascadecompliance.com.