Straight Through Processing — the same kind of technology used to process investments into stocks and mutual funds over the internet — is currently available in various forms for some alternative investments, such as 1031 Exchange DSTs. And forward-looking sponsors are starting to take notice of the advantages.
Capital Square 1031, a leading sponsor of tax-advantaged real estate investments, has been an early adopter of straight through processing technology. “Time is money, and the quicker we can turn things around the better. Not to mention it is better for investors,” says Louis Rogers, founder and CEO of Capital Square. “The alternative investment process used to be frustrating for our investors. But we’ve now seen that, not only does it not have to be a poor experience, it can actually be a positive one. That experience benefits our investors, their advisors, and our reputation as an industry mover.”
1031 Exchanges are a $3.5 billion market, but most of that volume is still being transacted through pen and paper, rather than online. New technology platforms allow sponsors to offer a streamlined onboarding process for advisors to enter a client’s information via an online workflow that only presents fields that are relevant to the specific investor and offering type. This information can be fed into a pre-filled subscription package that can then be sent for electronic signature. Compared to a paper-process, this method dramatically reduces NIGOs from 30-40 percent to low-to-mid single digits, saving time and money as more subscriptions are submitted correctly the first time.*
Even with a tech-enabled process, there is still room for human error. Any time an advisor has to manually key-in information, it presents an opportunity for mistakes to be made. Some straight through processing platforms seek to further reduce NIGO rates by validating some information — like ensuring the investment dollar amount matches the number of shares purchased — and enabling advisors to copy investor information from one subscription to another, pre-filling the forms and making multiple subscriptions easier.
And there doesn’t have to be an error involved for sponsors to benefit. With subscriptions that are submitted correctly the first time, sponsors can see a significant reduction in cycle-time. For example, a DST investment process can take around 3 weeks on average, barring any errors. But with automated processing, the subscription can be processed in less than a week.
These process improvements not only benefit the sponsor operationally, but can increase efficiency in capital raising. As the process of investing in alternatives gets easier, attracting advisors and investors to alternatives may also get easier. Sponsors can provide a frictionless subscription process to advisors that have previously experienced an arduous manual process.
“When I had an investment opportunity for one of my clients come down to the wire, I was able to use Altigo, our newly adopted straight through processing tool, to take an investment from the start of the subscription to principal approval in less than an hour,” says Kim Martelli, Senior Vice President, Investor Relations at Capital Square.
Despite recent strides in the sponsor community, the onus to automate is not solely on alternative investment sponsors. True straight through processing requires that all industry stakeholders — from sponsors to brokers and advisors, and even third-party participants like custodians, transfer agents, and fund administrators — do their part in adopting and integrating their technology platforms. Only then will alternative investments be able to flow smoothly from beginning to end, easing the process for current investors and opening up the gates to new ones.
SUBMIT A DST SUBSCRIPTION IN GOOD ORDER THE FIRST TIME
Alternative investments don't have to be confusing and frustrating. Altigo allows advisors to submit subscriptions in as little as 5 minutes with a 5% NIGO error rate.*
DSTs are subject to substantial risks, including illiquidity, vacancies, general economic conditions, competition, potential adverse tax consequences, and the potential loss of invested capital. Diversification does not guarantee profits or protect against losses.
Disclaimer: WealthForge provides this information for educational purposes only. It should not be construed or relied upon as legal or tax advice.