- 82% of wealth managers saw regulatory compliance as a key challenge to offering private markets solutions to their clients.
- Cross-border promotion, data management and investor profiling are causing the most significant regulatory headaches.
- Wealth managers who use technology to underpin regulatory controls have greater confidence in their compliance processes than firms who don’t.
- 1 in 5 financial executives say that expenditure on regulatory governance is a growing concern.
The implementation of compliant regulatory processes around cross-border promotion, data management and investor profiling are the main reasons that 8 out of 10 wealth managers struggle to offer their clients access to private markets, according to a recent report by fintech Delio.
Almost two-thirds (64%) of wealth managers interviewed for the fintech’s ‘Regulatory Governance in Private Markets’ report said that cross-border promotion of investments to HNW clients remains a key challenge. Many firms do not have suitable tools or internal processes in place to compliantly promote investment opportunities to internationally-based clients, a challenge that is likely to become even more complex as firms adjust their post-Brexit operations.
David Newman, co-founder and chief commercial officer at Delio, said: “In an increasingly globalised sector, the cross-border promotion of investment opportunities is becoming one of the biggest regulatory headaches for wealth managers.
“In our survey, nearly two out of three wealth managers flagged cross-border promotion as a significant regulatory risk to their firm. This number rose to eight out of 10 if you only consider the views of wealth managers who are already active in private markets, making it the biggest governance challenge facing wealth managers.”
The widely discussed ‘democratisation of private markets’ is also likely to create greater investor access to alternative asset classes in the future, exacerbating the complexities of multi-jurisdictional processes.
Newman added: “As private market investments generate increasing interest from HNW individuals, wealth managers need to consider that these clients are likely to operate from several international locations. When combined with the fact that more and more financial institutions are also operating on a global scale, firms need to be acutely aware of where their clients are domiciled at any point in time, how this impacts the promotion of investment opportunities, and any restrictions this may place on their client engagement strategy.”
Other key challenges highlighted in the report include data management, investor profiling and the ability of wealth managers to offer appropriate investment opportunities to clients based on their regulatory profile. As a result, 82% of wealth managers said they see regulatory compliance as a barrier to offering their clients access to private market solutions. Additionally, one out of five senior financial executives reported that expenditure on regulatory governance was the biggest issue facing their firm1.
Newman said: “The cost of compliance is becoming an increasing concern for many financial firms. At Delio, we find that wealth managers tend to respond in three ways. They avoid private markets altogether and devalue their client offering; they add more resources to tackle the problem; which increases their cost base; or they turn to technology to streamline and navigate their regulatory challenges more effectively.
“We have found that the most innovative wealth managers have flipped their approach to regulation. They have embraced the use of technology and are now gathering vital data that not only enables more efficient management of their regulatory processes, but also generates client insights that add huge value to their commercial operation.”
While technology does not remove the need for regulatory controls, digitising compliance processes did make wealth managers feel more confident in offering access to alternative investments. 9 out of 10 wealth managers using digital compliance tools told Delio their private markets offering was governed ‘as well as or better than’ their traditional investment proposition. This number dropped to just 6 out of 10 for firms that were not using technology.
Newman concluded: “It is vital that any wealth manager or adviser looking to offer access to private markets minimises any legal, regulatory or reputational risk to their business. Technology can resolve many of these issues and is a relatively low-cost option compared to traditional, paper-based compliance controls that require high levels of human involvement. The digitisation of governance processes will also generate previously hidden data insights that can be used commercially to offset compliance costs. It’s a win-win for both clients and managers.”