Becoming a Digital Wealth Firm: Compliance

October 11, 2016


In Part 1 and Part 2 of this blog series “Becoming a Digital Wealth Firm”, we covered the basics of why Wealth Management is becoming digital, and how to build a strong foundation for a digital future.


Ever since the 2008 financial crisis, compliance, KYC, and AML requirements have been becoming more strict, with an ever-increasing bent towards transparency and accountability. In the U.S., this means the roll-out of the DOL Fiduciary Rule. In Canada, CRM2. And the EU is affected as well, with the MiFID II legislation. The Financial Crimes Enforcement Network (FinCEN) has even put forward legislation that would require all U.S. financial institutions lacking a federal regulator to establish AML compliance programs.

The compliance crackdown is almost universal.

In the case of the DOL Fiduciary Rule, advisors must provide documentary evidence that they have placed their clients needs before their own when it comes to retirement accounts, or they could be liable to lawsuits.

This means wealth management firms in the U.S. can no longer afford to have ad-hoc, paper-based systems to keep track of vital compliance records. Wealth firms need to implement scalable digital systems that create automatically compliant data trails of every interaction with clients, so that when the Compliance Officer comes knocking, your firm has proof of every step from client onboarding to your last trade.


Staying Out of Jail

Many compliance and operations executives goal is to stay out of jail. This is a good thing. But you need to do more than that: you need to leave no doubt in the regulator’s mind that you have done all that you can to act in the best interest of the client. The most reliable way to save your firm from legal fees and the regulator spotlight is to have an undeniable trail of proof for every step of the client journey. This is different from what a typical System of Record would provide. A System of Record is an “As At” system that reliably reports “who” your client is, and “what” products or services they signed up for.


But in the new compliance era of transparency and accountability, that will not be enough. Your firm will need a Temporal system that must be able to reliably report three things:


1) When someone became a client

2) How they became a client, and

3) Why you permitted them to become a client


As these types of data records become table stakes in the Compliance and Operations realm, the need for digital onboarding will become overwhelmingly apparent.




Making Compliance Inherent

As we discussed in Part 2 of this Digital Wealth Management series, the foundation for any digitalization effort is to have 100% digital paper, so that all your client data is captured digitally in a central place, where it can used, re-used, and never manually re-entered in another system. If you have captured client information correctly the first time, much of the compliance legwork is already done. Of course, that’s only true if you’re using a onboarding automation platform like Agreement Express, which keeps an inherent record of all compliance activities relating to the collection of client information.


Making compliance processes inherent means taking the onus off advisors and administrative staff, and onto the systems that you use. Paperwork, human memory, and email will not be sufficient evidence of best-interest in the new compliance era. Instead, wealth management firms will need implement truly digital processes that make compliance invisible, inherent, and automatic.


Forging client signatures, making document corrections without client sign-off to expedite trading, foregoing KYC updates for years, the list of everyday compliance failures is unending. These compliance lapses are made possible by the structureless nature of paper-based administration. The advisor is free to modify client information after the client has already signed, is free to forge signatures, and in a less sinister scenario, is too busy to track down the necessary paperwork for a KYC update.


A digital wealth firm has healthier structures to keep compliance within certain boundaries: an advisor can’t make an edit without final client sign-off digitally (the advisor can’t simply guess the clients’ password), and the advisor is automatically prompted in the right month to make a KYC update with a few clicks. And every step of the process is time-stamped in a fully auditable way. That may seem scary to some firms, but it’s the type of proof wealth management firms need to prove they made every effort to act in the best interest of the client.

No system can completely prevent criminal or negligent behavior, but a wealth management firm committed to adopting a digital client onboarding process, will take the onus off the advisors and onto the technology that makes compliance inherent and automatic.


You can read Part 1 and Part 2 of this Digital Wealth Management series here and here.