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Technology Solutions to Simplify Alternative Investing, Part 2: Straight Through Processing

Post on: November 15, 2019 | Ryan Gunn | 0

In part 2 of this multi-part podcast, WealthForge CEO, Bill Robbins, talks with Damon Elder, Publisher at The DI Wire, and Louis Rogers, Founder & CEO at Capital Square 1031 about a technology tool called straight through processing, that has the potential to transform the alternative investment market by overcoming many of the challenges discussed in part 1 of the podcast.

Listen to Part 1 here.

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DAMON ELDER: One of the things we’ve heard that could really benefit the industry is straight through processing. I think that is more on the operational side. Bill can you walk us through what straight through processing means and where do we stand as an industry in adopting it,? What are the benefits? What can it do to help this process?

BILL ROBBINS: Straight through processing really starts with getting out of a paper-based subscription process. When you do that, you can start to capture the data in a user-friendly front-end, where you can apply business rules and data validation to make sure that when that data is finally mapped to a subscription agreement that it is in good order the first time. But more importantly, we can then pass that data along to each of the parties along the line that need it. So the broker-dealer firm can receive it, their custodian could receive it if applicable, the sponsor and their record keeper, like a transfer agent, can receive the data without having to rely on a physical piece of paper that each of those parties today are keying into their systems with all the manual processing and errors that result.

DAMON ELDER: So, essentially we are talking about automation of the process.

BILL ROBBINS: It is straight through processing and subscription automation.

LOUIS ROGERS: Technology is the solution.

DAMON ELDER: So how big of an impact, how beneficial would it be to a sponsor, for instance, to incorporate broadly a straight through processes like this?

LOUIS ROGERS: Extremely valuable. Time is money. Money has a cost and the quicker we can turn things around the better. It’s also better for the investor. The paperwork can be streamlined. It’s much more efficient, much less irritating, much more automated. We’ve used DocuSign for years to sign the documents. The forms of documents are exhibits in the private placement memorandum and all we do is fill in the blanks and the investor can sign electronically on their phone, on their laptop, on their tablet, and save days or weeks. So it is really beneficial to the investor in terms of speeding things up.

As an aside, the funds are held by the qualified intermediaries. Some pay interest, some don’t. It isn’t much interest. the sooner the investor can close, the sooner they can start their distributions. From the sponsor’s standpoint, it expedites the process. We’re in the business of finding the best properties, putting them into the DST, selling them, and doing it again, over and over again. And from the broker-dealer advisor standpoint, a quicker process is more profitable, less overhead, fewer people to fill out paperwork and forms. And lastly compliance. An inadvertent error can cause you to get a little red flag and next time you’re under audit.

DAMON ELDER: So, Bill, obviously sponsors are incentivized to make the process as efficient as possible, as Louis was talking about. They need to get the capital in as quickly as possible. They are in the process of constantly sourcing new opportunities for investors, and they want to close out old opportunities and move them to the management phase and go on to sourcing new acquisitions. From a distribution perspective, for reps, RIAs, wealth advisors, and their firms, what are the direct benefits to them of automating this process and making it much more efficient.

BILL ROBBINS: There are a lot of benefits for the broker-dealer, RIA firms and their advisors. Let’s just start with the investor. We’re doing all of this for the benefit of the investor. and so with straight through processing and this type of subscription automation, really for the first time, an advisor can interact with his client when they are transacting in alternative investments in a way that is consistent with what that investor expects in terms of their digital experience. We often ask sponsors and broker-dealers and advisors, when you think about your client and the last time they were involved in an alternative investment, from their perspective, did that feel more like checking out on Amazon.com or standing in line at the DMV. And for most of us, it’s still an old-school, paper-based process — sign here, initial there, “is this done in triplicate?” type process.

LOUIS ROGERS: We have investors say, “I can buy a million dollars in stocks and bonds, I can buy a mutual fund, I can do anything in my account on my own by checking a box and I’m done. But if I have a wealth manager or broker-dealer and I go through this Reg D process, it bogs down and takes sometimes days or weeks.” They say, “Why is it so complicated?”

DAMON ELDER: Do we have any idea of what the costs, whether they be opportunity costs or actual costs to the industry as a whole, of having to go through this onerous, archaic process? Or, what are we losing by not adopting this more efficient straight through processing?

LOUIS ROGERS: It’s a good question. We are irritating our investors. We can increase our pool of investors by making our process more efficient. We have millennials coming down the line and they will insist on a more streamlined, more technologically advanced process. In the meantime, how can we make it better?

BILL ROBBINS: I think at a high level the biggest opportunity cost of having this paper-based, manual process is it is holding back the alternative investment industry as a whole. I would say, for the Typical independent broker-dealer firm, alternative investments make up maybe 5-10% of their book. And I wonder how much of that is because it’s just such a pain to get the business done when you have multiple week cycle-times for an alternative investment.

LOUIS ROGERS: The whole process using “snail mail” instead of email, using old fashioned documents where you physically have to fill in the blanks. Think about a 20-page subscription agreement. You miss a check here or an initial here and it if it get’s through the process, then you have a compliance problem.

DAMON ELDER: It seems very strange and archaic. We’re in the 21st century and this process still seems to be embracing 20th century forms and technology. Traditional investments — stocks, bonds, and mutual funds — with keystrokes and a few mouse clicks you can invest millions of dollars, no problem.


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Ryan Gunn

Ryan leads content creation at WealthForge. He earned his bachelors from Virginia Tech and MBA from the College of William & Mary. His writings on fintech, alternative investments, and advisory best practices have been featured in Real Assets Advisor, Alternative Investments Quarterly, Equities, and other industry publications.
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