Streamlining and automating the investment process
- November 1, 2023: Vol. 10, Number 10

Streamlining and automating the investment process

by Mike Consol with Bill Robbins and Eric Satz

Ask financial advisers about what they deplore about their jobs and “paperwork” will inevitably be near the top of that list. It’s time consuming. It’s inefficient. It’s error prone. It’s limiting in a host of ways.

And yet, there are paperless systems available to eradicate those issues and facilitate the adoption of alternative asset classes in client portfolios, though they have yet to be widely adopted by RIAs and other financial service organizations.

We asked Eric Satz, founder and CEO of Alto, and Bill Robbins, CEO of Altigo and WealthForge, to address the capabilities available and the impediments to their adoption.

What are the advantages of streamlining the investment process through adoption of digital tools and automation, and how does that connect to the broader utilization of alternative investments in client portfolios?

Eric Satz: In the past, if you wanted to invest in startups or other private investments in an IRA, you were on your own. Then you had to pay a custodian to file paperwork you likely spent weeks completing — if you could find a custodian willing to consider it. The reality of modernizing the investment process, particularly as it relates to alternatives, is that we’re taking a process that has been traditionally very paper heavy and reserved for the ultra-wealthy, and we’re streamlining it. We’re solving for an administrative burden that makes it extremely difficult for investors and advisers alike to gain access to high-quality alternative assets. This is especially true when enabling individuals to invest in alternative assets using their retirement funds. Today’s technology enables individuals to remain invested for the long term while also providing tax advantages. Where investing in alternatives may have historically been intricate and confusing for some, adding in the complexity of a self-directed IRA includes a whole other element. This is no longer the case. By automating some of these manual-heavy tasks, we’re able to enhance overall efficiency, improve decision making, and strengthen client experiences.

What are the overall advantages of straight-through processing (STP)?

Bill Robbins: Funds and firms are adopting STP platforms to make it easier for their clients to do business with them. For example, the adviser and client experience are significantly improved through an intuitive workflow that replaces manual check and app subscription paperwork. STP processing also enables operational efficiency that reduces costs and cycle times by dramatically reducing or eliminating costly rework resulting from not-in-good-order (NIGO) errors.Additionally, STP technology allows funds and firms to increase their operational control and improve compliance oversight with automated data validation, risk intelligence, and business rules that can be configured to consistently enforce suitability and other compliance controls.

Give me a couple of brief scenarios of clients adopting STP and the difference it made.

Robbins: Scenario one: A fund manager client adopted an STP solution and saw rapid adoption across their distribution partner client base. That manager has reported significant increases in operational efficiency that have allowed them to scale fundraising to more than $1 billion without having to make proportional increases in their closing team staff. They also have received compliments from their RIA and BD distribution partners for making it easier to do business with them. Additionally, that manager has seen a significant reduction in NIGO rates that have reduced the average time to close new investments, thereby reducing their bridge financing costs for the fund.

Scenario two: An independent broker/dealer adopted an STP processing platform for alternative investments. That firm, with the help of its vendor, configured enterprise integrations including single sign-on, configurable approval workflows, risk intelligence on their alts suitability questionnaire, and data integration with their customer relationship management (CRM) and books and records systems. After a successful pilot program, that firm has rolled out the STP platform to its network of more than 200 financial representatives.

How widely adopted are streamlined processes, particularly for alternative assets?

Satz: We’re at the forefront of a process that is quickly gaining traction. The advantages of streamlining processes for alternative investments are clear; however, the adoption is in a relatively early stage. We’ve seen numerous challenges due to illiquidity, making it difficult to implement a digital solution to fit the needs of all alternative asset classes, such as private equity and real estate. However, the advantages are clear among many investor groups, and the increased demand we’re seeing will ultimately lead to more widely adopted digital tools and platforms. We’re also seeing a shift in the regulatory landscape regarding digital assets, which will ultimately move the modernization process forward.

How widely adopted is STP thus far?

Robbins: STP technology has gained significant traction among advisers and funds. For example, hundreds of RIAs and broker/dealers and close to 1,000 funds have together completed $3.5 billion in transactions. Much of the industry adoption to date has come from the technology enthusiasts and early adopters, and there remains a significant opportunity for growth and acceleration as more of the mainstream wealth management market adopts STP technology for alternative investments.

What are the chief impediments to wider adoption?

Robbins: Change is hard. While the advantages to STP automation are clear, it does require wealth managers and asset managers to be intentional about the use of technology to improve their business. One challenge is there are a number of platforms available in the market, and nobody wants to pick the “wrong” one. Another is that it requires a fair amount of coordination among each of the participants in the alts ecosystem, including funds, firms, custodians and fund admin/transfer agents. Not all of these businesses have the same appetite for technology investment at the same time.

What are the potential disadvantages or challenges associated with eliminating paperwork in investment processes?

Satz: Regulatory compliance and security will always be a major concern where digitization is involved. The alternative investment landscape often involves complex regulatory requirements and, unfortunately, this makes it difficult for everyday investors to gain access to private investment opportunities. And with most advancing technologies, relying on digital platforms always increases your exposure to cybersecurity threats. Robust cybersecurity measures have to be implemented to safeguard assets and maintain trust during the process. Stringent anti-money laundering and information security policies must be maintained, as well as compliance training for all employees. That said, when you look at the pros and cons for streamlining the alternatives process, the pros heavily outweigh the cons.

Connect the dots between the use of STP and the broader utilization of alternatives in client portfolios.

Robbins: There are two primary obstacles holding the industry back from broader utilization of alternatives and real assets in client portfolios: one, access to high-quality products, and two, alts are too difficult to own. STP technology provides the infrastructure that will solve both of these problems. Much like the automation of the mutual fund industry in the 1980s that resulted from the introduction of NSCC FundServ, alts broadly will benefit from the broad adoption of STP processing. When we can make owning an alternative investment as easy as a mutual fund, we will see high-quality institutional asset managers enter the space. That competition will continue raising the bar for alignment with investor outcomes and attract a broader cross-section of wealth managers who are seeking to help their clients achieve financial success.

Aside from modernizing the alternative investment process, what are some other ways that service vendors deliver efficient solutions for RIAs looking for ways to provide clients with access to alternative assets?

Satz: Service providers looking to offer clients access to alts can focus on a few areas. In general, a few of these solutions include but are not limited to educational resources, integrating seamless technologies, offering institutional-grade reporting, and ensuring high-quality investments are vetted and offered. The primary focus should be simplifying the investment due-diligence process by curating high-quality investments for advisers to choose from. It is also important to offer different strategies that allow RIAs to navigate the alternative investing process, including a digital platform that simplifies workflow, automates paperwork, and can pre-vet investment opportunities, to name a few. Aside from modernizing the process, service providers can deliver multiple, efficient solutions that ultimately help democratize the alternative investing space.

What else do RIAs and broker/dealers need to know about STP?

Robbins: Multiple business models are available in the market depending on what problems you want to solve, including access and ease of ownership.

What else should RIAs and other financial industry players know about this space?

Satz: The movement toward streamlining alternative investing is about making alternatives accessible to all. In addition, part of our goal of democratizing alternatives is recognizing the 60/40 rule isn’t going to cut it for everyone. Portfolio diversification tools are going to be integral in helping RIAs construct well-diversified portfolios for clients. That said, alternative assets may not be suitable for all clients. While looking to make the process as seamless as possible, RIAs should also conduct thorough research on each client’s financial situation, risk tolerance and investing objectives to determine whether alternatives are aligned with their goals.

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