Operational Hurdles for Advisory Solutions – Part 1

How does the regulatory environment look from a technology and operations perspective?  Recently, there was a surprise SEC ruling on uniform fiduciary standards that’s caused a lot of concern on the broker-dealer side about what it means for their reps to be fiduciaries. Also, RIAs will have some of the same requirements for data retention and collection as broker-dealers. What do regulatory standards mean for us as an industry? 

This post is a summary of a session from the MMI 2011 Fall Solutions Conference that was held in NYC.  It is part 1 of a 2 part series.

Heeren Pathak – CTO, Vestmark, Inc. Responsible for continued development and direction for the wealth management platform.

John Ashefski – Senior VP & Managing Director, Investment Management Services, SEI Investments. John is responsible for SEI global outsourcing services.
Cheryl Nash – President, Investment Services, Fiserv. Cheryl is responsible for driving strategic vision and direction for Fiserv’s managed accounts platform solution.
Chandresh Iyer – Managing Director, Head of Global Custody & Investment, Citi Global Transaction Services. Chandresh is responsible for P&L, including product strategy, business management and client franchise development across investor client segments including fund managers, hedge funds, banks, insurance, wealth managers.
Roger Paradiso – President and Chief Investment Officer, Private Portfolio Group, Morgan Stanley Smith Barney. Roger was the originator of the unified managed account and is responsible for the UMA platform at MSSB, driving technology direction, product development and investment policy.

What can firms do now to prepare for upcoming SEC regulation changes, even though theyhaven’t been finalized?

Cheryl was at the Tiburon conference last week and there was lots of discussion around the SEC ruling.  The consensus was that the Uniform Fiduciary Standards won’t be implemented until after the election.  From Fiserv’s perspective, a lot has to do with transparency, understanding what’s in your investment models and how visible it is to the end investor.

Fiserv has invested a lot to ensure transparency in their solutions, Cheryl noted. Starting with important front office functions such as planning and investment policy statements and making sure they translate through to trading and reporting to support execution of an investor’s household plan.

The Planning and Analytics Solutions offering from Fiserv includes:

  • A Web-enabled solution for management reporting and analysis, specifically designed for use with core processing systems and general ledger, profitability, and enterprise risk management applications
  • A true enterprise corporate performance management solution that streamlines budgeting and planning, forecasting, financial consolidation, management reporting and analysis
  • A fully integrated asset/liability, budgeting, performance management and financial reporting solution

Citi’s view is that it’s better to build the necessary capabilities into the system design now rather than waiting for the regulations to be finalized, according to Chandresh. In order to support this, they created the concept of “Continuous Compliance”. This means that at any point in the life cycle of a product or service, enough flexibility should be built in to enable the delivery of data or reporting or analytics to ensure they can be in compliance with new regulations. As long as you understand the key parameters of the issues the the regulations were intended to address, you can start building them in as early as possible in your life cycle, he added.

Heeren pointed out that a lot of firms struggle with how to get their systems to a point where they’re able to be flexible enough to support new regulations. During the Rep as Manager panel, there was a question asked about rep trading and oversight and the risks inherent in all compliance checks being done on T+1. The industry should move to get these checks into the process sooner, Heeren stressed.

You have to look at it from the regulator’s perspective, Roger advised. When a problem occurs, the regulators start with the belief that “we got it wrong”. We need to look through their eyes in the way we build our business and culture within our firms, he advised.

We’re fortunate that the MMI does a great job in communicating the interests of the industry to government to try to encourage regulations that are thoughtful and practical, Roger noted. But once those regulations are in place, it’s up to us to not only understand the law as it is written, but also understand the intent of the law. Let’s not try to extend or expand it to the point where we push it too far, he warned.

How will your investments in workflow technology help you deal with new regulations?

John explained that SEI’s workflow technology is mainly used by asset managers and they divide them into two categories; small managers and large managers. Large ones have their act together regarding compliance with regulatory issues. The smaller managers are looking for help, he said.

A few of the managers that are currently using SEI’s Workflow Technology are Fred Alger Management and MFS Investment Management. According to the press release:

SEI is providing MFS with a fully outsourced, customized SMA solution centering on business processes, account administration, and reconciliation. In addition to streamlining administrative functions through electronic workflow and web-accessed real-time account information, the SEI solution enables SMA managers to meet widely varying requirements of non-standardized sponsor platforms, with an ongoing focus on compliance and documentation.

SEI is creating centralized data warehouses because access to data is paramount to their success, John emphasized. Firms have to realize that the data required to comply with new regulations is not going to come from just one or two systems. It's going to come from dozens of systems, he noted, so a centralized data repository is a key requirement.

SEI calls their regulatory support service “Compliance Advantage” – brand compliance awareness.

How do you balance compliance control against the needs of the product development and customer service teams?

Citi is continuously working to create a balance between product innovation and risk control, Chandresh reported. But there isn’t one answer that fits every firm.

A major dilemma that Chandresh has to address is how much of his $150mm annual technology budget should be spent on compliance versus building out new client capabilities?

To better address this concern, he explained that Citi fundamentally changed the way they develop products and services. They factor risk and control issues very early in the development cycle.

Chandresh identified three key long term trends that are affecting the investment industry: 1) globalization 2) regulation and 3) risk management. It’s a tough balancing act between time to market and regulatory requirements, he said.

What are some of the lessons learned about maintaining support for compliance during large systems integration efforts?

One such integration effort took place at Morgan Stanley and they learned a lot about how to deal with compliance and oversight because you can stretch things much further than you thought when working on simultaneous projects.  Roger recommended that firms should build the right foundation early and skip the bells and whistles.  For large organizations, regulatory support must be built right initially since high volumes make it very difficult to backtrack.  It might be easier for smaller organizations to go back and retrofit systems later, he added.

Heeren agreed that it’s always tough to implement compliance support after the fact. Especially since there is no immediate return on investment.

Part 2 of this article will be coming soon…



The Wealth Tech Today blog is published by Craig Iskowitz, founder and CEO of Ezra Group, a boutique consulting firm that caters to banks, broker-dealers, RIA’s, asset managers and the leading vendors in the surrounding #fintech space. He can be reached at craig@ezragroupllc.com