How Fintechs Grow Without Outrunning Their Compliance

Featuring Mitch Avnet, Founder & Managing Partner of CRC-Oyster, and Devin Sullivan, Deputy General Counsel at Altruist.

Fintech is at an inflection point. More companies are stepping into regulated territory: standing up broker-dealers, registering as investment advisers, and building the infrastructure regulators expect from day one.

In Episode 2 of Built to Scale, we sat down with Mitch Avnet, who guides tech-enabled firms through registration and operational build-out, and Devin Sullivan, a former SEC rulemaking attorney whose in-house career runs through Robinhood, AngelList, Cash App, and now Altruist.

CRC-Oyster: Compliance Risk Concepts / Oyster Consulting

Transcript

Built To Scale Rebrand Kickoff

SPEAKER_00 0:02

Welcome to the Built to Scale podcast with CRC Oyster. This is the new, rebranded Oyster Stew podcast following the acquisition of Oyster Consulting by Compliance Risk Concepts. Thanks so much for joining the Built to Scale podcast with CRC Oyster. I'm joined today by Mitch Avnet, the founder and managing partner of CRC Oyster. Hey Mitch, how are you? I'm doing well. Thanks so much for having me, Michael. Of course. And a special guest, Devin Sullivan, Deputy General Counsel at Altruist. Devin, thanks so much for joining us.

SPEAKER_02 0:45

Well, thanks for having me, Michael, and exciting us.

Devin Sullivan’s Path To Fintech

SPEAKER_00 0:48

Absolutely. We're very lucky to have you. Devin, it uh it would be helpful for the audience if you could give a quick background on uh on your history. Where did you where did you start? How'd you get here? And would love to learn more about uh your career.

SPEAKER_02 1:02

Yeah, absolutely. Thank you. I started my career, legal career, at a large law firm, like so many do, a firm called Hogan and Hartson in Washington, D.C. It's now called Hogan Levels. Following that, I joined the SEC staff in the division of investment management in a rulemaking role and was there for four years working on rules uh governing investment companies and investment advisors in particular. In 2011, I moved to the West Coast and went in-house, started at uh large uh financial services firms, Wells Fargo and Franklin Templeton. And then in 2019, I made a left turn for FinTech and joined Robin Hood, a pre-IPO. And since then, I've been at uh companies including Angelist, Cash App, and now Altruist, uh, where as deputy general counsel, I'm I'm responsible for product and regulatory legal matters.

SPEAKER_00 1:52

So, in terms of kind of looking at the environment today, I think we're seeing an explosion in fintechs. And we've seen that for probably the last several years, and then there was a little bit of a slowdown about three or four years ago. And then over the past 18 to 24 months, we've really seen the growth and really at an interesting inflection point now with fintechs. Devin, would love to hear your thoughts as being on the outside and advising those firms, and then on the inside helping grow and scale. What did you look for in terms of partnership scaling? How did you view that while you were both inside and outside?

SPEAKER_02 2:29

Yeah, I mean, I'll probably speak more about the inside

The Outside Expertise Stack

SPEAKER_02 2:32

part of it, but you know, in particular at fintechs, so the fintechs that I've joined have all been highly regulated. They've had broker dealers and or investment advisors in each circumstance. And, you know, I think with fintech startups, they naturally grow from generalists to adding more specialists as time goes on. You know, you start with engineers, obviously, because you have to have a product in order to have a business. Regulatory obligations begin immediately. And so a company has to figure out how to meet those, particularly with limited resources and they're particularly limited early on. And so the thing that I found or that I've learned in the process is that these fintech companies that are entering highly regulated businesses have to develop a stack, if you will, of external expertise in order to scale in a compliant manner. And, you know, obviously outside legal counsel is a part of that. But I found in particular that getting outside expertise on the compliance and operational side is absolutely crucial. And that's that's how I began to work with Mitch, you know, at a Past Company and have continued to work with him and CRC up to up to the present day.

SPEAKER_00 3:42

Thank you. And Mitch, you know, would love your thoughts as well, kind of helping firms and working with talented individuals like Devin and others. How do you view kind of helping grow and scale as a partner some of these fintech firms?

SPEAKER_01 3:56

When we launched in 2013, if you asked me how often I thought I would be going to Silicon Valley or working with fintech startups, my answer in 13 would have probably been not at all. We were very focused on what I would call traditional financial services markets. Fast forward to 2017, 2018, we really started to see the opportunity come to fruition in terms of working with tech-enabled companies who were building newer, better ways to skin the cat in terms of offering financial services to the masses. The term we always were hearing back then was democratization of financial services. But the point being, we were meeting so many smart people who had been building better mousetraps, let's call it. But so very smart, very technically astute, but little to no experience operating in heavily regulated markets, like you know, dealing with FINRA or the SEC. So, with that said, there was a need for our expertise, but more importantly, there was a need for our sort of expertise at CRC Oyster that could really distill what the client, the fintech-enabled companies were looking for, and really translate that into the regulatory requirements or the impact of those requirements on those companies. And the truth of the matter is the only reason they needed to become a broker dealer andor an investment advisor was the utility of having those registrations because their business model necessitated it based on how they wanted to be compensated for doing that business.

SPEAKER_00 5:38

And Devin, any thoughts on that?

SPEAKER_02 5:40

That describes uh my experience working with CRC entirely. So, I mean, when I was at large companies, the two large companies, I obviously worked with outside counsel and you use outside counsel for many different things, but one of them is their expertise in working with many different firms. Like you're if you're an in-house lawyer, you have you're getting great experience at the particular firms where you are, but you don't necessarily have that bird's eye view of how other firms are addressing particularly difficult legal problems. The thing that I've learned, and and it's been since joining FinTechs and working with CRC is that you need some of that same expertise for those same reasons on the compliance and operational side. It's it's very difficult to build uh compliance and operational systems and processes from scratch without understanding how other firms have done it. So, you know, I have found it's been incredibly effective to go to Mitch and and CRC to get that information in building those systems and processes and in advising my internal clients on on doing so. I mean, part of FinTech, obviously, is uh, as Mitch mentioned, remaking the way that financing services has worked in the past and particularly applying technology to make it more efficient and cost effective and the like. But I don't think you can successfully innovate unless you understand how others have done things in the past. And CRC folks have that breadth of knowledge and they act as creative partners in building upon those past processes or figuring out a new way to do them, in particular uh in using technology.

Self Clearing And Other Pitfalls

SPEAKER_00 7:22

And Mitch, looking at what what Devin had just walked through, does anything stand out to you as pitfalls or certain things that fintechs that get right have the ability to scale versus going the wrong direction and then kind of facing their own demise, right? Given the experience that you've had and Devin has had in terms of advising and helping grow, scale, and operationalize these ideas into full-blown entities. Are there any certain areas that you look at as either things that a firm needs to do or pitfalls that a firm should try and stay away from in order to receive commercial success?

SPEAKER_01 8:00

It's a great question and it's the right question. It's not that these firms are setting out to do things the wrong way or trying to take shortcuts to get to an outcome. I think it's the lack of education and knowledge, and that's not unique, or and that's not a criticism, but it's the truth. And often we'll talk to fintech companies or tech-enabled companies, I should say, and they're under the impression that they can stand up these businesses with little to no internal resources or the utilization of external support. Great example is we get fintech companies coming to us all the time saying we want to set up a self-clearing business. And they really just don't understand the intense operational support that's required. And a lot of that middle and back office expertise is very hard to find. And so if you were going to try to staff something like this and go out and hire teams of people, that would be very hard to do on a de novo basis. What you really need to think about, and that's where your legal, your accounting, your ops, your compliance partners come in, is you need to work with those who have been there, who have done it, who have been the practitioners, and not only help you with the guidance and advice, but also help you with staff augmentation and really helping you to think about what do those first 12 to 24 to 36 months look like until you can fully operationalize it internally as you scale the business.

SPEAKER_00 9:40

And Devin, any thoughts?

SPEAKER_02 9:41

Number one, I've worked uh at two companies with clearing firms, and I couldn't agree more that it is an intense thing to build and that it's absolutely essential to get external expertise in doing so. I think if there are pitfalls, particularly in the brokerage space, it's you know, circumstances where you're building a product and you're or you're building internal operations, you're having engineers do it, and it's not properly supervised by folks who have their licenses and the expertise uh uh at the end of the day. And the other part uh that I didn't mention in in working, say, with CRC or uh other compliance consultants is it, and I want to say I agree that you can't staff it up immediately. But I've worked with CRC in the past where uh you know we've brought on personnel uh uh as contractors to help us scale the business. They're external, but they're working with us internally, and that's been very successful.

What To Own Versus Outsource

SPEAKER_00 10:34

Mitch. So when we take a look at at fintechs and tech-enabled firms, they can't build everything in-house, especially early on in their journey. How do fintechs make smart decisions about what to own versus what to outsource?

SPEAKER_01 10:47

So I think one of the things that we see that's very common as it relates to that scenario, that question, is they want the utility, let's say, of a broker dealer, but they're smart enough to know that they don't have the licensed principles, they don't have the expertise of operating a FENRA-regulated broker dealer. And so they're like, we want to set this up, but we want to do this where there's enough guardrails in place so we're not overstepping into an area that we don't understand. That's why we're hiring you. So, great example. When we're registering a broker dealer for the first time, you have to have a minimum of three principles for that broker deal: two series 24s and a series 27. The most common thing that we see is we want you and your team to do that. Can you give us the principles? And what do we do here to ensure that we're not overstepping so that we at the let's call it techco are inadvertently causing our folks to be uh licensed as principals. So there are ways to do that, and these organizations want that sort of guardrail in place. And and the way that we we guide and advise our clients to do that is number one, when you're going through the registration process, you can have all the principles, not the securities principles, but you call it the principles of the fintech company, sign attestations that they're not going to be involved in the day-to-day operations. We work closely with council to ensure that operating agreements are written in such a way that a power and authority isn't given to someone or multiple individuals that can bring them into the broker dealer world. And then the way that we set up their governance oversight programs is you can set the strategic goals and objectives for the broker dealer, but then it's our job, the principles of the broker dealer, to affect those. And so that's an area where we see our clients saying, we want to rely on you. Tell us how we do that without stepping over a line that we don't want to.

SPEAKER_02 12:56

I just to riff on that a little bit, even beyond Mitch just talked about sort of starting up a brokerage from scratch, but I'm at a company now where brokerage has been operating for some period of time, but there still are opportunities to assess where we need additional outside help or expertise. And I think that often shows up where you know you've scaled to the point where internal folks can be overwhelmed by the workload. At that point in time, like it's important to figure out whether you need to hire, whether you need to seek outside help from CRC or others. The other is when you know an existing business tries to go into new areas of business and nobody internally has bird's eye view of how to get into that other business, how to develop policies, procedures, internal controls, et cetera. And at that point, like I've I found working with external uh compliance and and operations experts uh like CRC has been it's been very helpful.

SPEAKER_00 13:53

And I think one of the most exciting and and possibly dangerous moments for a fintech is when they decide to expand, right? So either it's a new product, a new vertical, a new customer segment.

Expansion Risks And Compliance Reality

SPEAKER_00 14:05

So from your experience and and Mitch or Devin, or both of you, can you guys walk us through what that inflection point actually requires?

SPEAKER_02 14:14

Yeah, I mean, I I I can speak about it. I think from the in-house side. I mean, we obviously we have these companies develop product roadmaps, and at times those product roadmaps will add a new line of business that you know is highly regulated or that's regulated differently. Uh, and then there's a process of developing a uh product requirements document, having legal counsel, internal legal counsel and compliance experts sort of ferret out all the particular legal and regulatory issues, and then work with the business to figure out whether we have the internal resources to staff it. And if we don't, then it I think it's time to get creative and in looking at your sort of outside expert stack.

SPEAKER_01 14:55

Absolutely. From my perspective, it's really refreshing when you have an organization that is strategically thinking about where they want to play or where they want to go next. But more often than not, we see folks who are attracted to shiny objects. And um, and so they really immediately want to go where they think the the ball is going, right? And what happens is then you get into the world of the one-offs, and we want to do this because this opportunity landed on our desk, and we think we can do this and we and we want to give it a shot. That's awesome, but you cannot do that, and this is how we would guide our clients and our and anyone who came to me and asked this question is it's great if you want to take this strategic next step, but you can't do it in a world where you have no operational infrastructure to support it. Even if you've been presented with the most amazing opportunity that nobody else in the world has been presented, I will tell you, as somebody who will attest to history repeating itself, is when you get into the world of the one-off, you will have a problem. Because guess what? If you are not operationally set up to support it, you're gonna have operational breakdowns, and operational breakdowns lead to compliance issues, and compliance issues lead to regulatory problems. If you're serious about wanting to play in a certain area, then you have to have that strategic roadmap and that outlook. And if you want to get there faster, there are ways to potentially do that, i.e., you can work with a third party who's already built it and create some sort of channel partnership with that party while you're building it yourself. Or you could take the step back and say, this is important enough that we're gonna take the next three, six, or nine months to build this correctly because we truly want to be in this business rather than taking advantage of an opportunity that may or may not be there tomorrow.

SPEAKER_02 16:52

In fintech, there's this concept of minimum viable product where you're shipping a product that works and that you hope customers love, but it's not the fully built-out product yet. I think it's an excellent concept and allows companies to dabble into scale and to and to do all the things that they want to do. But with these regulated entities, there isn't sort of a minimum viable product from a compliance perspective, if that makes any sense. Regulators don't care that you're just a startup or that you, you know, that you're new at this. They expect uh, for good reason, strong compliance programs to start with.

SPEAKER_00 17:29

So, one other thing, kind of looking at the growing and scaling of a fintech,

Flexible Models That Reduce Fear

SPEAKER_00 17:34

right? And and sometimes founders or executive teams, they sometimes resist to bringing in outside help because it's almost like an admission that they don't have it figured out or there's a loss of control. How do you reframe that? You know, Mitch, when you're having conversations with fintechs that are reaching out to you and talking about either standing up a broker dealer, investment advisor, or just general support, how do you kind of frame the partnership between the executive team and CRC Oyster, you know, so that it really is a collaborative approach, not something where they don't know it, so they're outsourcing it. How do you work with them?

SPEAKER_01 18:12

Front and center is flexibility. So we look to provide a flexible model that can scale up or scale down as needed. And so when we understand the aspirations of the client, and some clients may say we want a fractional model because that's in line with who we are strategically. More often than not, they look at this as a point in time till they hit that inflection point where they can say, now we want to internalize this. And that was the goal of CRC and CRC Oyster from the start, is we wanted to help companies get to that point where we were eventually working ourselves out of a job. And we were comfortable in doing so because we would figure out other ways to work with that client. If and when the client gets there, we're happy to work with them, to turn it over to them and still be there as a resource. And that in and of itself is disarming to those who might be skeptical about the model and what it means and how you unwind that once you're ready to internalize it. We believe so much in what we do, we give clients a 60 day out, no matter what. And so you can't do that unless you know the model works. And so I don't want anybody to be stuck long term with something that they don't need. I want to help them figure out what it is they need and be a value-added partner to help them get there. And if you're dealing with folks who are suspicious or skeptical of the model, I think it just takes an honest, direct conversation to get to the point where they see what this is and what it isn't.

SPEAKER_02 19:45

Yeah, I agree with all of that. I tend to frame it as so resources at a startup are scarce and just it by nature. And so I think that executives are naturally looking to allocate resources most efficiently. And I think oftentimes when you're starting in a new line of business, new regulated line of business, the most efficient allocation of resources is to outsource some of those, you know, some of the operational and compliance functions to begin with. Hiring is very expensive, obviously, in terms of time, obviously in terms of money. And, you know, if you're just trying to figure out whether this line of business or this product works or as product market fit or the like, oftentimes the most efficient way to get into it is to leg into it using, say, CRC or other experts, and then bring that expertise in-house. If you have the good fortune that that line of business or product is scaling.

SPEAKER_01 20:39

And the other thing we should talk about is it's not necessarily when you're starting net new. And Devin, you and I have been through this together in a number of iterations. There are mature businesses at times that need stopgap support. And so it's not only about starting from scratch. It's sometimes you have a mature business model, but there are times where you need those resources because you may have had internal turnover, somebody may be going out on a maternity leave, whatever it is. So these sorts of situations really lend themselves to our business model because it's not only when we're looking for these long-term relationships. Of course, we want those long-term relationships, but part of a long-term relationship is being able to provide your clients with point solutions on a just-in-time basis as they need it.

SPEAKER_02 21:31

FinTechs are leanly staffed by nature. And in the startup world, there's lots of movement of workers. I mean, people gain very valuable experience very quickly at startups, and you know, they may leave for another one. I think you probably find more staffing gaps at startups than you would Morgan Stanley. Lots of people go there and stay there for their entire careers. That really isn't usually the startup model. And so there have been circumstances where. It's been essential to fill a gap that all of a sudden have as a result of turnover, that nature of turnover. And it's incredibly important to have that resource at hand as necessary.

SPEAKER_00 22:12

Overall, Mitch, what should

Customer Service Complaints And Social Media

SPEAKER_00 22:14

firms be thinking about outside of just compliance and operations?

SPEAKER_01 22:18

They need to think about how they're going to staff their customer service desk or their customer success desk, however they want to call it, because the regulators are going to be very focused on that. And I'll talk about it from a regulatory perspective, but maybe Devin, you can share some real-world perspective in terms of things that you've seen. But from a regulatory perspective, especially if you're setting up self-directed sorts of businesses where your customer service desk or customer success individuals are there to field questions. And most of the time, especially in these self-directed sorts of businesses, and vis-a-vis Robinhood and all those who look and feel or want to be doing what Robinhood is doing, is how are you staffing that business from a customer success standpoint? Because in these businesses, you're going to get calls, texts, emails, however, it's coming in about why did my trade not settle? Where's my cash? Why can't I access the app? You guys suck. Like whatever it may be, you have to educate those folks because now they're operating in a regulated environment, and you need to track and deal with customer grievances from a FINRA perspective. You have to report your quarterly customer complaint statistics. And there's all these hosts of fields that are applicable. Most people erroneously think about that. Customer complaints are sales practice or predatory selling or unauthorized trading. Most customer complaints are operational in nature. And it can be like, where's my money? And so you need to be able to track that and deal with that and have people who are educated to deal with that. And most importantly, have somebody overseeing or supervising those folks who has the right expertise, experience, and licensing to deal with that. But interested in your thoughts on that, Devin.

SPEAKER_02 24:14

The regulatory piece is absolutely correct. I think even on the commercial side, though, I mean, these fintechs are trying to displace incumbents. And the only way that they can do that is by delighting their customers. That is the goal. And I've been lucky enough to work at fintechs that we're obsessed with customer service and ensuring that the customers were happy with our products and services. Where that falls down, or if it falls down, it can be catastrophic for a fintech. Uh customers going to social media to complain about it can be a significant problem. I imagine the customers of United Airlines complain about it on social media all the time. It doesn't pose any sort of significant threat to them, but it does for startups in the fintech space.

SPEAKER_01 24:57

Back in the early days of doing this and working with organizations as they were looking to operationalize social media, one of the thoughts is, well, just to take that post down. You don't take the post down. You show how you've dealt with it. And so it's an opportunity because you only get so many shots.

SPEAKER_02 25:13

I couldn't agree more. I think trying to run one of these businesses without a social media presence is just unrealistic. And I agree with you when a company is responsive to customer complaints and is demonstrably so, you know, it can work in their favor. Absolutely.

SPEAKER_00 25:29

Great.

Closing Thanks And How To Follow

SPEAKER_00 25:30

Well, I want to thank Devin and Mitch for joining us today and talking about a little bit behind the scenes in regards to fintechs, how to grow and scale the issues and the roadblocks and how to overcome them. So with that, I want to thank our special guest, Devin Sullivan from Altruist and Mitch Avnet, the founder and managing partner at CRC Oyster, for joining and look forward to everyone tuning in to the next episode of the Built to Scale podcast with CRC Oyster.

SPEAKER_02 25:57

Thanks so much for having me. Thank you.

SPEAKER_00 26:06

Thank you for listening to today's podcast. For more information, you can find us at compliance-risk dot com or oyster LLC dot com. Don't forget to subscribe so you never miss an episode. Take care, and we will see you soon.