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The independent securities industry is abuzz with excitement, and rightfully so, about direct-to-manufacturer straight-through-processing (or “STP”) of business that has been historically processed in a manual, paper-based manner. There are great expectations for lower operating costs and more timely execution, but do the currently proposed methods address all the requirements around direct-to-manufacturer business?

STP isn’t just about the automation of the order execution. It is about the automation of each step leading up to that process. As I see it, the steps include:

  • Step 1: Acquisition of customer data
  • Step 2: Selection of current versions of appropriate paperwork
  • Step 3: Completion and bundling of forms in account opening
  • Step 4: Customer signatures (e-signatures or wet)
  • Step 5: Principal review
  • Step 6: Suitability review
  • Step 7: Retention of records; both document and useable data
  • Step 8: Execution of the transaction
  • Step 9: Ongoing reporting and maintenance of the account

For STP to truly be in place, each of these steps must be automated and flow into one another starting from the acquisition of customer data and ending with execution of the transaction and maintenance of the account, though not being limited to it.

There is no question that today’s paper processes will eventually be fully automated; however, with firms offering more and more product types, it is a safe bet that straight-through systems will need to support both automated and largely manual products. Right now it is the earlier stages of the process that are causing real headaches and need more focus. Without addressing these fundamentals, firms will not achieve STP and will open the firm up to unwanted risk.

Broker-dealers must evaluate direct-to-manufacturer STP in the context of the entire investor account onboarding workflow. This workflow embodies customer suitability and investment information data capture; principal review and approval; books and records retention; and ultimately processing the purchase by the mutual fund company. STP addresses this last leg only, but it should evaluate the other ones.

Here are the top five risks related to bypassing these early fundamental steps of straight-through-processing:

Risk #1: The customer experience and cost of inefficiency

Delays in account opening due to NIGO (not in good order) documentation will negatively affect the client relationship and the firm’s operating costs

Customers rely on advisors to take them through the account onboarding process quickly and painlessly. When the process does not run smoothly, advisors run the risk of customer dissatisfaction from the onset. Further, resolving NIGO conditions dramatically increases the expense of processing business.

The industry’s straight-through-processing initiative is focused on the mutual fund companies’ data requirements. However, broker-dealers must gather substantially more information from their investor clients than required by the fund companies. Accordingly, advisors must efficiently and accurately gather all information required by the fund company and the broker-dealer. Failure to gather all information will lead to delays. In addition to not collecting all required information, a small typo or illegible handwriting on a new account application can considerably prolong the opening of the account by redirecting the business back to the front office. The data collected must also seamlessly feed into other systems, which can cause additional delays.

To mitigate the risk of delays due to NIGO leading to customer dissatisfaction and increased expense, an automated approach that integrates systems including CRM, forms management, e-signature and STP fund company account opening with a unified data warehouse that feeds automated supervisory systems will minimize delays in account opening.

Risk #2: Data integrity

Inaccurate data collected during account opening can impede middle office efficiency

The account opening process provides the opportunity to collect information about the client that will then guide the investment strategy and trading decisions made for that account. Firms must ensure all required data is obtained early in the process, since that information will be an integral foundation for all decisions related to that account. Protecting data integrity during account opening allows that same data to work efficiently in the middle office that maintains oversight of the risk profile and investment strategy for each account. If incorrect information is collected, entered and housed in the firm’s systems, it could affect the advisor’s ability to make proper investment recommendations for that client. Inaccurate and incomplete data will also affect the ability to trigger appropriate flags identifying risk conditions.

To mitigate the risk of inaccurate data and maintain data integrity, firms should develop controls during account opening that allow them to edit and verify the accuracy of information as part of the workflow and foundation of their operational practices.

Risk #3: Principal review and approval

Manual supervisory reviews are cumbersome, expensive and delay business processing

Direct-to-manufacturer business must still be reviewed and approved prior to submission. This continuing requirement will impede the utilization of non-automated STP services provided by the fund company.

Many supervisory systems still rely on manual review of check-and-app business that is slow and cumbersome. Automating the approval process for the new account, for example, can reduce the review time from 15 minutes down to five minutes, creating a more agile account opening process and better overall client experience with more timely approvals. More importantly in a STP context, automation is crucial to processing direct business and firms must address this requirement as a cornerstone component of their STP initiative. Automated supervision is dependent upon capturing information in a database that is usable for this purpose.

Risk #4 Books and records compliance

Account opening paperwork can cause non-compliance with books and records requirements

SEC Rule 17a-3 and Rule 17a-4 specify that broker-dealers must keep books and records connected with purchases and sales separate from customer accounts. Firms must also send confirmation notices to investors with their suitability profile information. The information collected during account opening is a key component of what will later become the firm’s books and records, thereby creating the baseline profile from which compliance with regulations will be measured. These documents will be inspected during a regulatory audit to demonstrate compliance. When a firm’s books and records are not compliant, firms run the risk of expensive fines and legal fees.

To mitigate the risk of non-compliant books and records, firms should ensure that the information collected during account opening that feeds into the firm’s books and records is correct, useable across different systems and conducive to an audit. When collecting that data, they should do so with the mindset that the data input is later going to become the baseline profile from which regulators will determine compliance. 

Risk #5 Know your customer and suitability compliance

Non-compliance with know your customer and suitability requirements

The advisor and broker-dealer must know and protect their investor clients. For investment advisors, the fiduciary standard specifies the agent has a fiduciary duty to the client to serve his or her best interests when managing their investments. Broker-dealers will be bound by heightened standards for “know-your-customer” and suitability requirements (FINRA Rule 2090 and FINRA Rule 2111) that went into effect this month, moving them closer to a fiduciary standard. The broker-dealer requirements specify the firm must collect certain data from the customer and prepare a comprehensive suitability and risk profile. The suitability requirement goes on to say that the broker-dealer must be able to prove that a recommended investment is suitable for the client. Recommendations must stand up to elevated standards that will be asserted during client scrutiny and regulatory challenges. The bar has been raised and firms must maintain expanded records on a point-in-time basis to meet the much higher standard.

To mitigate the risk of non-compliance with these requirements, broker-dealers must collect the data required to appropriately manage investments for the client. And the broker-dealer must also use that data to address Rules 2090 and 2111. Firms should review their data during their internal compliance reviews with these requirements in mind so they are not found to be in violation of these regulations during an audit or exposed to litigation.

A holistic account onboarding workflow with comprehensive data collection and retention is a crucial phase in the investor relationship lifecycle, and risks and heightened expenses related to account opening are not isolated to the front office. Account onboarding, if not done correctly, presents risks that feed from the front to the middle and even to the back office, and can affect data management and operational processes across the firm. But by being aware of the potential risks and costs associated with account opening, firms can alter mindsets, develop processes and implement technologies that will mitigate those risks and improve the business. Account openingit’s not just for the front office anymore.

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