How RIAs Can Protect Client Data from Third-Party Breaches

As a registered investment advisor (RIA), you’re entrusted with sensitive client data, including personally identifiable information (PII), financial account details, and investment portfolios. When this data is compromised, RIAs face regulatory scrutiny, reputational damage, and broken client trust.

Third-party data breaches are particularly concerning for RIAs. RIAs use third parties for services like safeguarding assets and executing trades. Each third-party product or service introduces new cybersecurity risks and vulnerabilities.

This blog covers practical steps RIAs can take to protect client data from third-party breaches.  

How Third-Party Data Breaches Impact Registered Investment Advisors 

It only takes one third-party vulnerability or data breach to create issues for your RIA. Even if internal security is strong, a third party’s weak spot opens the door for your firm to be breached. The consequences of a third-party data breach are far reaching – impacting operations, reputations, compliance, and finances, just to name a few.  

Third-party data breaches impact your RIA firm in several critical ways: 

• Increases regulatory scrutiny and enforcement: The Securities and Exchange Commission (SEC) expects RIAs to ensure proper client data protection. This expectation extends to third-party risk management. Not to mention, RIAs have a fiduciary responsibility to act in the best interest of their clients. A third-party breach may trigger an investigation, penalties, or enforcement actions. 
  
  Related: Inside the SEC’s New Vendor Management Requirements
• Damages client trust: Clients entrust your firm with their financial futures and personal data. When a breach occurs – even when it’s the result of a third party – clients hold your firm responsible. When client trust is broken, it’s difficult to regain.  
• Causes financial losses: Addressing a third-party data breach brings immediate costs – time to restore services, time to investigate, costs to recover data, breach notification and credit monitoring services, etc. There are also long-term costs, including lawsuits, regulatory fines, and increased insurance premiums.
• Disrupts operations: Depending on the scope of the third-party data breach, some services may be unavailable and core functions are compromised. Your RIA may need to shift focus from serving clients to managing the breach and recovering services. This can disrupt operations for weeks or even months.
• Creates long-term reputational damage: Not only do third-party breaches harm immediate client trust, they can also cause long-term damage. As news of the breach spreads, your RIA may have a challenging time reassuring current and prospective clients.  
  
  Related: My Vendor Has Suffered a Data Breach. Now What? 

How RIAs Can Protect Client Data from Third Parties 

Although you can’t fully eliminate third-party risks, your RIA can take meaningful steps to reduce exposure. Implementing these practices to protect client data helps fulfill your firm’s duty to your clients and provides reassurance that the firm takes data security seriously. 

Here are practical steps to protect client data from third-party breaches: 

• Review your third-party inventory: Not all third parties have the same amount of risk. Evaluate your third-party inventory based on risk levels and the type and volume of client data access. This gives an idea of where your RIA should focus due diligence and monitoring efforts.  
• Conduct thorough due diligence: Before onboarding a new third party, review how they handle and protect data. Review their SOC 2 report, verify data encryption standards, assess incident response plans, and research their previous history. This provides insight into the third party’s security practices and their capabilities.  
• Include cybersecurity in third-party contracts: Your third-party contracts should include clear data protection clauses. This includes:  
  • Language that aligns with the SEC’s expectations for RIAs and data protection
  • Use right to audit clauses to verify security compliance and practices
  • Define breach notification timelines (remember the SEC requires your RIA to notify them of a breach impacting your firm)
  • Data ownership and access controls
  • Return/destruction of data in the event of contract termination or expiration
• Continuously monitor cybersecurity threats: This is a challenging task that requires collaboration across your RIA. However, the number of third-party cyberattacks and vulnerability exploitation continues to rise. Continuously monitor higher-risk vendors for changes in security posture and emerging threats. Risk intelligence services are a wise investment to stay ahead of potential issues.
• Have a third-party incident response plan: Include third-party incident scenarios in your firm’s incident response plans. If a third party is breached, how and when will your RIA firm be notified? What steps will you take to inform clients and regulators? Will your firm reevaluate the third-party relationship or temporarily shut off data access? 

Although you can't completely prevent third-party data breaches, your RIA can strengthen its security posture and remain compliant. Using proactive and intentional third-party risk management strategies keeps your firm one step ahead.  

Learn more about the SEC’s requirements and regulatory priorities for RIAs.