In the turbulent space between wealth technology and the law, change can happen overnight. With digital toolkits and automated processes in their possession, wealth managers can go from compliant to non-compliant at the flick of a switch. As in most industries, the idea behind information technology is to relieve wealth managers of manual tasks while keeping the work efficient and accurate.

Over time, the heavily data-driven wealth industry has become dependent on its IT. However, technology and automation may also expose businesses to huge regulatory risks if they are not watchful. Let us explore the ways in which integrated compliance mechanisms help wealth managers avoid common and costly traps.

Client Relationship Management (CRM)

Research has highlighted 'personalisation' as the main thing that sets wealth managers apart from other financiers. The wealth industry is lagging behind other financial sectors in the services that it performs for customers. When it recommends products to customers, it often does so in a simplistic or ill-fitting way.

A firm that wants to resolve its shortcomings and gain an advantage over its competitors ought to gain a better understanding of its current (and future) client base. Adequate data about clients is vital to it when it sets about developing personalised and viable investment strategies and proposals. When it captures such information in the requisite detail, it encourages itself to put the client first and make its advisory process suitably detailed, supporting these approaches with a solid CRM system.

Good CRM software records information that ranges from customers' profiles, investment-related goals and appetites for risk through to customers' "interaction histories" (i.e. all the accounts of all their encounters with the firm in question) and communication preferences. In turn, it uses all these data-points to evolve appropriate action points. It is vital for a firm to use information about clients to the fullest extent, yet at the same time there it runs many risks when it records data and nurtures its relationships with customers. Many financial firms are now moving their businesses to cloud-based environments, so new rules apply to the storage and handling of personal data. Various changes may appear subtle to people who are not intimately familiar with the software or its implications.

Every investment firm that services an international client base has to obey countless rules that govern its interactions with its customers. These rules vary significantly between countries - even in federated markets such as those of the European Union - and add a complexity to operations with which CRM software and/or portfolio management software cannot cope. These types of software use either automated workflows or individual commands. Every firm in this situation that relies on IT needs to add a smart compliance team to the mixture.

So far, attempts have been made to install compliance rules directly into CRM software. This might seem like a good idea for institutions that are able to spot the relevant rules, but the job of forcing the IT to adhere to these ever-changing rules may become harder with time because the rules are so complex and numerous. When companies try to obey these rules using CRM software, they might follow them in an inconsistent way, resulting in supervisory problems or costly complaints from clients.

By decoupling the compliance function from CRM people and software, legal and compliance officers can install regulatory rules on a separate, dedicated platform without "system downtime" or any interference with client-facing processes. Instead, the two divisions can work together and exchange information with each other through Application Programming Interfaces (APIs). When two such divisions do this, a compliance plug-in blocks or permits actions in accordance with the law and informs the user about risks and rules while still operating inside the CRM system.

Market research and model portfolios

When an investment firm plans to make proposals about investments, it has to know how people are behaving in the market. Dedicated research teams spend hours every day monitoring these activities in an effort to spot trends and "trigger points" for activity. They compile their findings (which they combine with themes and trends in investment) into model portfolios that represent their main groups of customers. Despite being thoroughly market-oriented, many portfolio modelling tools overlook or simplify regulatory requirements – something that makes investment portfolios less viable.

If a firm introduces "digital compliance assurance" when it compiles model portfolios, its analysts receive early warning of key regulatory events directly through their 'tools' and can incorporate them into comprehensive and market-specific "opportunity overviews" (a sales term). Connected to the internal compliance system, legal guidelines and policies appear where relevant.

Portfolio management tools

The planning of a compelling investment-related proposal is a complex and data-intensive process. When a wealth management firm joins regulatory rules and business practices with clients’ needs, it creates countless combinations of criteria and data points that it must take into account. To facilitate this process, it uses digital tools to build up portfolios and strategies that take advantage of this information. Research indicates that almost half of wealth managers now analyse data regularly and add insights that they gain by using artificial intelligence when they want to refine the advice that they give to customers. Even when they are comprehensive and sensitive to market trends, portfolio management tools sometimes struggle to satisfy all regulatory requirements – especially in a cross-border context.

In a sector prone to constant regulatory change, best practices enshrined in wealth management software may become outdated overnight, rendering firms' proposals less profitable, less well suited to investors’ needs and even, in some cases, totally non-compliant.

Tax can be another trap!

Tax deductions are another thing that can make or break any strategy for investment. Inadequate wealth management software sometimes overlooks or fails to take full account of national and international tax standards. As a result, tax-related miscalculations and under-performance can stop customers from trusting an institution and can weaken its relationship with them, perhaps causing broader damage to its reputation.

The software comes with its own pre-installed default settings. If a firm replaces these with company-specific "compliance assurance" (the auditing and monitoring of activities to ensure that risks of failure to comply are within an organisation's risk appetite) it will align its wealth advisory process with its internal compliance. Operating behind the scenes of the firm's internal infrastructure, and maintained by its own compliance experts, the plugged-in "assurance" layer permits or rejects investment strategies, internal policies and risk appetites.

The risks to compliance of wealth management IT

Technology is vital for wealth management firms that want to survive. Their data-intensive advisory processes rely on the careful processing of various criteria while automation makes market research, portfolio planning and CRM as efficient as possible. Wealth technology, however, also brings with it the risk of non-compliance. In particular, digital investment management tools may fail to take complex regulatory standards into account when people are using them to form cross-border strategies for investments.

Over-reliance on default settings and automated workflows in such instances frustrates compliance departments in their efforts to obey regulators. The integration of a digital, stand-alone compliance layer, overseen by regulatory experts, into the wealth advisory environment is an effective way to align various processes with international regulatory standards and internal policies. This will stop compliance from becoming a “black box,” with all the risks that that implies.