FINcastle’s CEO Bevin Crodian Shares Thoughts in a blog contribution titled
Fiduciary Rule Highlights
Data Deficiencies

Bevin Crodian, CEO, FINcastle Consulting

The US Department of Labor (DOL) Fiduciary Rule, likely out in a few weeks, will impose new restrictions on a large number of financial professionals who handle IRAs and 401(k) accounts. This will pose another issue for asset managers: the absence of data transparency. In targeting private wealth managers, the regulators have put in their cross-hairs a segment of the financial services community that potentially has neither the existing infrastructure nor the IT resources to meet the data management demands of heightened oversight. As such, it’s not out of the realm of possibility that the DOL Fiduciary Rule will translate into a need for increased transparency and thus more work on the part of the fund managers, service providers and institutions that sell into the private wealth market and count these firms as valued clients.

Traditionally, data issues for private wealth companies center on the challenge of delivering comprehensive and meaningful client reports. But the larger demands of overarching data accessibility often get much less attention. Such neglect may not be an option in the future. Calls for improved business command and control as well as regulatory requirements will force the retrieval of increasingly complex reports to satisfy client, business and regulatory demands.

The purpose of the DOL Rule, currently under review by the Office of Management and Budget, will require advisors to prove that they are putting their clients’ interests first by eliminating, or at least disclosing, payments and hidden fees in retirement investment advice. It also has the less visible intent of lowering or eliminating fees across all investment vehicles while raising the bar for the fiduciary standard of care. These are laudable goals, but they threaten to upend the structure and delivery of investment product and advice while increasing the demand in the detailed reporting of investment fees and compensation, both direct and indirect.

From the perspective of demands placed on data architecture, governance and reporting, the DOL Rule follows other regulations stemming from the credit crisis in 2008 that sought to provide transparency and oversight around risk and exposures as well as potential conflicts of interest. For instance, Basel Committee on Banking Supervision (BCBS) 239—which has the goal of enhancing banks’ ability to identify and manage bank-wide risks—continues to be a focus area for global banking institutions, and the European Union (EU) Solvency II Directive—which has the purpose of monitoring the capital required for insurance company solvency—has global insurers re-evaluating their approach to data governance. Many financial service firms lack the data structures required for these reporting demands, however, this deficiency may be most extreme in segments of wealth management.

Consider, for instance, the evolution that occurs among most independent investment advisors. A firm selling directly to private investors, be it an independent RIA, broker dealer, wealth manager or private bank, likely began with a core mission of sourcing, investing, and servicing client assets. Overtime, this channel has evolved to provide a much broader range of services, including complex investment solutions and customizable, flexible reports that are delivered and serviced online. But this evolution to the current state requires much more functionality than was initially needed. Unfortunately, these solutions are often added to the firm’s operating “platform” on an as-needed basis without much thought given to overall coherence and interoperability. Often CRM systems and report creation take precedence over the maintenance of data quality and transparency.

The DOL Rule could create extraordinary reporting demands for both structured and unstructured data, some of which are not recorded systematically at present. Examples include internal fund administration expenses, transaction costs, and 12b-1 fees as well as indirect compensation that is captured at the firm level but not fully disclosed to either the advisor or investor.

In the end, wealth management firms will have to address these data issues to be compliant—regardless of whether or not data management projects are seen to deliver business value. Furthermore, the DOL Rule is likely a precursor of an expanding regulatory reach that will only serve to increase reporting demands for the investment management industry as a whole, and the wealth channel in particular. Worse, some firms may lack both the financial and intellectual capital required to build for these requirements and may have to outsource these solutions to service providers who are better positioned to solve for these problems.

For instance, some wealth management firms lack any kind of a database for parts of their business—a hard problem to work around in a timely manner. However, let’s assume that this is the extreme case, and that the bulk of these businesses are supported by various, possibly unlinked, databases. In this case, technologies or services will combine the various databases into one common data warehouse—possibly treating each disparate database as a data mart of sorts.

Even if these disparate data marts can be combined into a format that can be queried, process efficiency may still demand a conversion into one overarching data warehouse. For example, an elegant, functional data model should deliver cost savings through lower processing times and reduced support personnel. Clearly, this a lot to think about, and this is all before addressing important top line issues —such as big data queries against both structured and unstructured data that provide transparency into the correlation between investor profiles and investing behavior, and the resulting portfolio construction.

Anecdotally you may hear that solutions to the investment industry’s data problems are in the second inning of a ballgame—meaning that there is plenty of time to react. But, you may also hear that these considerable data challenges could force under-capitalized firms into an unwanted merger. Obviously, it is going to take a lot of thought to solve these issues, and the glide path may be long. Functional, flexible reporting platforms can be assembled to address whatever regulatory, business and product demands that are coming. Solving for their cost-efficient deployment in a timely manner is another issue.

About The Author
Bevin Crodian, FINcastle Consulting CEO, was the founder and CEO of Market Street Advisors, now Archer, and has over thirty years’ experience in asset management product, systems and operations for the private wealth, institutional, independent and wrap/UMA channels. Focusing on the total cost of ownership for investment product, processing, client service and reporting, FINcastle helps clients find transformative, cost-efficient solutions for systems and operations for the front, middle and back office.

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