Historically, nearly all alternative investments have been processed manually, with paper documents mailed or faxed between parties. This manual process is expensive, slow, and poses some serious security risks.
But there is a better way.
Thanks to a technology known as Straight Through Processing, advisors, sponsors, and third-party participants can enjoy an automated transaction experience, similar to the current day process for mutual funds. This tool provides a better user experience, decreases error rates, provides transparency into the process, improves security, and connects all parties to streamline the investment process from beginning to end.
This page provides an in-depth look at straight through processing technology. For an even deeper dive, download our complimentary e-guide.
Straight through processing originated in the 1970s as a way to enable public stock trading through computer networks. This technology dramatically shortened the processing cycle and led to a significant increase in public trading. Though straight through processing technology has existed for a long time, alternative investment industry participants have not been able to take advantage of it due to strict regulations and varied, complex subscription documents. However, recent changes in regulation and innovations in technology have paved the way for alternatives to benefit from straight through processing automation.
Straight through processing enables sponsors and advisors to collect investor information, verify their identity, deliver signature-ready subscription documents, and transfer funds. Even back-office compliance, typically a highly manual process, can be partially automated. While the technology is still in the process of being introduced to the industry, subscription automation solutions can already be used to reduce administrative costs, mitigate cybersecurity risks, and increase transparency, while providing investors with an improved user experience designed to change the way they look at investing in alternatives.
Even without NIGO errors, completing the subscription process for an alternative investment can take six weeks or more, and the entire process is opaque, with advisors and sponsors having little visibility into the status of a subscription until it lands on their desk.
The introduction of straight through processing technology helps provide a window into investments in progress. Where previously, a phone call or email to another stakeholder would have been one of the only ways to check on the status of a subscription document, trackable electronic signature documents let stakeholders view who has received, opened, and signed. Some tools provide a dashboard that aggregates data from all outstanding e-signature and manual signature documents, allowing both advisors and sponsors to view a list of investments in progress, as well as how many are in each stage of the process.
High net worth investors allocate more to alternatives in an effort to diversify their portfolios and seek attractive risk-adjusted returns.* And interest in alternatives is only expected to rise, and Baby Boomers begin to transfer their wealth to their Millennial children, who have an even higher interest in alternatives than their parents.
Millennial investors also demand sleek technology solutions from their financial service providers. If firms wish to attract wealthy millennial investors, they should be able to provide a tech-enabled alternative investment experience.
*Alternative investments are subject to risks, including illiquidity, general economic conditions, competition, potential adverse tax consequences, and the potential loss of invested capital. Diversification does not guarantee profits or protect against losses.
Creating subscription documents involves handling a lot of sensitive information, from social security numbers to bank account and routing numbers, and more. Using mail, fax, and even standard email to send these documents back and forth subjects all parties involved to risks of information loss or exposure. The loss, destruction, or disclosure of such sensitive information, even if by accident, can lead to severe consequences, including regulatory penalties, fines, and litigation from investors.
Straight through processing solutions transfer information between parties via secure workflows and encrypted document sharing. Including cloud storage can also reduce or eliminate the need for expensive and potentially vulnerable physical storage solutions.
Information Collection Workflow – Rather than investors visually scanning documents for the applicable blanks to fill out, opt for a user-friendly workflow that collects information and automatically populates subscription documents with the necessary data.
Electronic Signatures – Once investor information is mapped to the subscription documents, electronic signature technology allows the document to be automatically sent to the investor’s inbox where it can be reviewed and signed without ever needing to be printed.
Secure Cloud Storage – Standard email is not secure enough for the exchange of financial information. Cloud-based file sharing software allows users to securely and compliantly store and share sensitive documents. Advisors and potential investors can be invited to access files through a secure folder with restricted access.
API and Integration – Technology solutions must be able to integrate with your existing tools, external services, and vendors. Look for an open architecture platform that can connect with fund administrators, transfer agents, custodians, or other service providers.
A fundamental concern when using financial service technology tools is whether or not they comply with federal and state regulations. Primarily, industry participants are concerned with whether electronic signatures can serve to form a valid contract for the sale of securities.
Laws such as ESIGN, UETA, and the NASAA Statement of Policy help govern the use of electronic signatures on a federal and state level. However, every state has adopted some sort of law that recognizes electronic signature in some capacity. Regulators are accepting that automation is coming and that electronic transactions are allowed if the technology and processes meet basic legal requirements.
In practice, sponsors and advisors should be able to safely utilize electronic signatures nationwide as long as they continue to monitor and implement federal and state law in states where NASAA’s Statement of Policy does not apply, as well as SEC and FINRA regulations and guidance.