On February 21, 2019, WealthForge CEO, Bill Robbins, joined a group of leaders in the alternative investment space to discuss “the long and winding road to straight through processing.”
Also featured in the webinar, hosted by the Institute for Portfolio Alternatives, were Zayn Doyle, Vice President and Chief Strategy Officer and Business Development for Phoenix American Financial Services, and Brad West, Chief Information Officer at FS Investments, along with moderator, Kevin McCormack-Lane of LPL Financial.
Below is a summary of some of the main points that the panel discussed, with some quotes directly from Bill. Visit IPA’s website for the full audio recording.
What is straight through processing?
The group discusses the need for infrastructure that not only facilitates subscriptions, but connects advisors to sponsors, as well as other influencers and participants in the investment process. There is a flow of data that needs to be maintained, and a break in any part of that process has a significant impact on the efficiency of the whole. The ideal that the industry seems to be striving toward is an experience on-par with how mutual funds are sourced, subscribed to, and reported upon.
What is the opportunity for straight through processing compared to where we are today?
In establishing how far along in the process the alternatives industry is, Bill uses the example of FundServ and how it transformed the mutual fund industry. However, at the start in 1986, Bill points out, there were only about 6 participants submitting less than 20 orders a day. The opportunity lies in the potential for explosive growth.
“The creation of a standardized processing infrastructure was an important part of laying the groundwork for the growth in the entire mutual fund industry. Today you have over 1 million trades per day going through FundServ, and I think it is a decent analogy for where we are today in the alt space.”
What are the headwinds for straight through processing?
The panel identified three factors that are currently hindering progress on developing a straight through processing standard for the industry. The first is regulation. E-signature regulation is either approved for use or in the approval process in all 50 states thanks to the Federal E-Sign Act, Uniform Electronic Transaction Act, SEC and FINRA approvals, and the NASAA Statement Policy. While changes in regulation take time, the panel feels confident that the barrier will be removed.
Another barrier is the discussion of who will bear the cost of implementing straight through processing. With many players involved, all with various incentives and deterrents, it is a complicated problem to find a way to split the costs between them in a way that works with everyone’s budgets and pain points. Bill noted that WealthForge’s first sponsor client has taken the approach of making the investment themselves and then providing the tools to their distribution partners for free. This helps mitigate the challenges that come with implementing changes in current processes.
The final problem is a lack of data. Because straight through processing is still in its early stages for alternatives, there is not a lot of information regarding the benefits. Such data would be beneficial in convincing firms to move forward with adoption. Instead, firms have to rely on data from other industries, such as insurance, and presume that similar benefits will carry over into alternatives.
What is the next phase and how can both sponsors and broker-dealers prepare?
Bill stresses that the first step for sponsors and broker-dealers is to get involved in the process. Learn about straight through processing, talk to partners about their needs and plans, and peruse the market for possible solutions.
While the technology grows from minimum viable products to full-fledged solutions, firms should not let partial solutions dissuade them from gaining the benefits of adoption. Even without e-signature or other features needed for complete straight through processing, broker-dealers and sponsors can reap the benefits of efficiency.
“If you are putting pen to paper or filling out a PDF, you are not getting the benefits of the cycle time reduction, the data validations, business rules, for example, ‘Did someone forget to initial page 3?’ or ‘Did the advisor forget to sign on page 12?’ and all those types of things. You can still get most of those benefits, even if you don't have the ability to provide electronic signatures.”
Lastly, Bill suggests three paths broker-dealers have toward achieving straight through processing: Building the technology yourself, partnering with a sponsor to help you build it yourself, or outsourcing to the numerous solutions in the market.
“Collectively as an industry, we've spent millions solving this problem and there is a group of folks out there that want to help you create a better advisor experience, help your advisors spend more time working with their clients rather than working on paperwork and chasing down NIGOs.”
How technology can bring accuracy, security, and speed to alternative investments.