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.
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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.