Wealth Management Due Diligence: The Tech New Frontier

Tom Burroughes

1 April 2020

There’s a big technological trend going on: a shift in how wealth management professionals and private investors perform due diligence. Whether it is testing a potentially promising start-up, or making sure a business hasn’t broken compliance laws, technology can help slash how much legwork is required.

Family offices, ultra-wealthy individuals and others, as regularly reported and commented upon, are keen to invest directly in business to capture returns. With global interest rates close to vanishing point, the hunt for yield drives much of the hunger for direct investing. But such investment costs time and money, particularly because of the due diligence checks that investors might otherwise have farmed out to fund managers and other intermediaries.

Firms are stepping into this “due diligence gap”, harnessing artificial intelligence technology to sift through reams of data to ensure that investors are protected as thoroughly as possible from any problems. And this also highlights the different ways in which AI is reshaping the wealth management landscape.

At the start of this year ,” he continued.

AI can provide valuable data to investors in the early rounds of financing requests – however, it does not eliminate the need for human interaction and some manual checks and awareness, Cushing said.

The platform uses more than 55 million financial records of UK companies from the last 10-year period. It mixes Bayesian mathematics and Random Forest Modelling to power predictive algorithms that allow users to determine future-based EBITDA and DCF valuations. (According to one definition, a random forest is a data construct applied to machine learning that develops large numbers of random decision trees analysing sets of variables. This type of algorithm helps to enhance the ways in which technologies analyse complex data.) The platform autonomously tracks 37.1 million director, shareholder, officer and PSC supported the Regulation Best Interest rule, and supported other actions to improve disclosures and clarify advisors’ responsibilities. The rules follow a failed attempt by the Department of Labor to enact a fiduciary rule that would have introduced a “best interest” test of how financial advice is provided. However, senior wealth management industry figures criticised the SEC rule as diverging form the existing fiduciary standard required of registered investment advisors.

NICE Actimize’s Ackerman is positive about the new rule, however, and thinks it will generate greater demand for the sort of due diligence tests industry practitioners need to make to ensure that they stay compliant.

The new regulatory regime deals with two phases in an investment story: First, before an advisor makes a recommendation to a client, and secondly, when the idea is executed. Showing that necessary tests have been conducted for both phases requires a lot of work – which is where digital tools come in.

Regulation BI also imposes a duty on how people go about the transaction processes involved, he said. The long-term payoff of this new regime is hopefully to improve the quality of the client/advisor relationship.

“The SEC is pushing Regulation BI as the biggest change to investor protection in 20 years,” he said.

Already, firms employing Big Data analytics and tools to find patterns and flag up problems are reshaping how advisors carry out due diligence when they onboard a client, and after a client has been taken on. Firms offering wealth managers solutions in this space include smartKYC, for example.

“The first-time technology is catching up with how regulation is changing us,” Ackerman added.