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The wealth tech evolution of the alternative asset industry resulting from regulatory change

Charles Owen, founder and director of CoInvestor, weighs in on the impact of GDPR and other key pieces of legislation.

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The alternative asset industry is experiencing a wealth tech evolution. This change is dramatically gaining pace this year due to some stiff compliance with new EU regulation. For example, this month has seen both the PRIIPs and MiFID II come into force… Both of which require alternate asset fund managers to disclose additional information on products. This information will enable investors to better understand risk, performance and costs when comparing investment products for the benefit of advisers and their clients. Later this spring, in May, the GDPR will increase competitive data mobility within the EU Digital Single Market, reduce the administrative burden and strengthen data protection rights of individuals. Together these three regulatory drivers will impact the industry in ways that are still to play out.

Of course one thing is clear, all these regulations have been created with the end investor’s interests and protection in mind, and to bring more transparency to the financial services industry. And many say it is about time. When it comes to the alternative assets sector, historically it has been notoriously opaque. This has been far from ideal for finding great investments and alpha, or for ensuring the best investments are made for the end investor.

In my view change can only be a good thing. And although change has begun, the regulatory reforms will only speed up the process, and mean that alternative asset firms will have to introduce much more stringent compliance strategies than they have hitherto recognised. 

These three sets of regulations represent the first time all parts of the funds industry, including the smaller players in the alternative assets sector, will have to step up with better data management. Better means that it will be insufficient for adviser firms to continue to hold their clients’ alternative asset performance data on error-prone spreadsheets, or to provide reports derived from infrequent, paper-based valuations from product providers. All firms will need to increase transparency and will have to establish a culture of monitoring, reviewing and assessing data processing procedures. Overall, this is expected to translate into a pronounced shift towards the institutionalisation of the alternative asset investment sector.

Moving to a digital age

One trend has been the move to digitise the investment and reporting process, which in certain sectors of the financial services industry has clearly been a long time coming, especially compared to other many other business sectors outside financial services. One thing is clear, financial advisers cannot continue to track client information simply by using paper-based trails, neither will it be sustainable to continue reporting assets back to clients via simple spreadsheets. The regulatory compliance developments from MiFID II, PRIIPs and GDPR ultimately mean that financial advisers will have to digitise their processes if they have not done so already. Such a move towards digitisation would effectively bring about the institutionalisation of the entire funds processing system, incorporating even the traditionally niche area of alternative assets and bringing it into the mainstream.

Key to compliance for alternative assets – wealth tech digitisation

The key for advisers and smaller managers to staying on top of these compliance challenges is digitisation, and the use of innovative wealth tech.  For example:

  • PRIIPs: 

    Packaged retail investment and insurance products (PRIIPs) remain the core of the retail investment market, but are often considered complex and lacking in transparency.  In order to tackle these shortcomings, the new regulation obliges those who produce or sell investment products to provide investors with key information documents (KIDs).  A “live” document, KIDS will need to be updated by the fund manager as and when necessary, and communicated to the investors.  For smaller alternative asset fund managers, these new data management processes will start to mirror the behaviour that the larger asset managers have been having to comply with for quite a while now.  Advisers will also gain major benefits, however, in terms of easier identification and recommendation of products most appropriate for each client.

  • MiFID II:

     In a bid for a more transparent marketplace, fund managers will be required to disclose the required costs and charges by using a European MiFID Template (EMT), jointly designed by asset managers and distributors.  The EMT includes the target market definition, distribution strategy and costs and charges for ex-ante and ex-post.  The EMT data, whilst ensuring that advisers can fulfil their own obligations for client reporting under MiFID II, will additionally assist advisers who can use it for more effective product comparison and ongoing disclosure requirements. All this will require a move from paper trails to the use of technology to trade wealth investments. Likewise, fund managers will need to identify target markets for the fund with regards to the new categorisation of investor (basic; informed and advanced investors). An audit trail will need to be provided in order to evidence the fact that distributors are only 'selling' the relevant product to the defined target market and that their financial promotion has only reached the intended audience. By definition, this will require advisers to ensure their clients are correctly classified. Data files will need to be managed which are compatible with regulatory requirements, inevitably leading fund managers to adopt the best Wealth Tech innovations in the digital sector.

  • GDPR: 

    Designed to harmonise data privacy laws across Europe, protect and empower all EU citizens’ data privacy, and reshape the way organisations approach data privacy, firms are expected to be impacted by GDPR on four levels: legal framework (compliance with data privacy requirements), business model, technology (selection of the right tools) and embedment of data privacy in the company from the start (at all levels). The key changes proposed by the new provisions include fines of up to 4% of annual worldwide turnover, affecting any data controller and processor targeting any EEA residents, and the appointment of a data protection officer when an organisation conducts large scale systematic monitoring or processing of sensitive personal data.  Alternative asset advisers will need to focus on data protection compliance with laser-like precision given the stringent requirements of the GDPR and potential fines.

Not just compliance, improving client services

As the alternative assets industry matures we can look forward to digitisation not only being the answer to compliance.  The added benefits will be the ability to deliver enhanced, timely, useful data leading to better client services and improved customer relationships. Putting investors interests first will be core to the wealth tech evolution.

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