The wealth industry appears to be crossing the chasm from early to mass adoption of compliance technology. Key drivers of this shift are regulatory enforcement, the recognition of an opportunity to massively improve productivity and the rapid commercialization of artificial intelligence (AI) technology.
The regulatory environment of the industry has been robust, forcing firms to revise policies and procedures, re-train their advisor teams and evaluate technology tools to ensure that they remain both compliant and productive. The primary challenge presented by new regulations is the shift from post-trade to pre-trade compliance, forcing our industry to revise existing workflows from sales through trading and client reporting. In 2015, Canadian regulators introduced National Instrument 81-101, requiring the disclosure of a Fund Facts document to investors, pre-trade.
More recently, client-focused reforms (CFRs) in Canada and Regulation Best Interest (Reg BI) in the U.S. require advisors to complete pre-trade know-your-product (KYP) analyses and provide new disclosures to investors. (At the time of writing, the U.S. Department of Labor is finalizing its fiduciary rule governing the rollover of 401(k) assets to IRAs for American investors — another pre-trade regulatory requirement.)
While most firms comply with regulatory deadlines, examinations and enforcement create further impetus for compliance. This year is shaping up to be one of enhanced enforcement. The Canadian Investment Regulatory Organization has confirmed it will examine know-your-client, KYP and suitability compliance related to CFRs, indicating many firms are not meeting their obligations. In the U.S., the Securities and Exchange Commission (SEC) has quadrupled enforcement actions in the past six months. Officials at both the SEC and the Financial Industry Regulatory Authority, the U.S. self-regulatory organization, have forecast an expansion in both the number and scope of Reg BI cases in 2024 and 2025. With increasing regulatory pressure, leveraging compliance technology is a top priority for chief compliance officers in 2024.
Advisor productivity is another key driver for technology adoption. In a recent survey by Nitrogen Wealth Inc., 40% of advisors consider increasing regulations and compliance to be their biggest growth challenge for the next five years. Remarkably, “a mere 17% of advisors are using compliance technology daily, uncovering a startling gap in the integration of technological solutions designed to streamline and enhance regulatory practices,” the report said.
A recent survey of advisors using InvestorCOM Inc. technology indicates they are saving 2.4 hours per trade compared with manual KYP analysis. Considering that advisors complete an average of 250 trades annually, this savings represents 25% of an advisor’s time. This scale of productivity savings drives enormous return on investment for compliance technology.
Conversations about technology in all industries focus on the application of AI. Ninety-nine per cent of Fortune 500 companies are already using AI tools. The AI opportunity within our data-intensive industry is enormous. Sixty per cent of advisors are using either generative pre-trained transformer (GPT) models or are interested in the application. The efficiency opportunity within the labour-intensive operations and compliance functions is transformational, and many wealth firms are experimenting with or implementing the technology.
The combination of increasing regulatory pressure, the urgency to drive higher advisor productivity and the emergence of the most significant technology opportunity in decades is creating new levels of technology adoption. One expert claims that the year of compliance technology will always be “next year,” as adoption rates continue to grow year over year for the foreseeable future. Regardless of where we are on the adoption curve, we are clearly crossing the chasm.
David Reeve is CEO of InvestorCOM Inc., a compliance technology provider to the wealth management industry.