Wealth management is a heavily regulated industry, and for good reason. Strong regulations are critical to safeguard the broader financial system, protect the investing public and defend against bad actors. Wealth management firms are enthusiastic supporters of sensible regulations put in place at the federal and state levels to benefit their clients by building trust and ensuring the system works fairly for all participants.
However, satisfying all the rules and regulations placed on their businesses can be costly and time-consuming for firms, especially those lacking significant scale. That’s where regulation technology can help fill a void and strengthen a firm’s regulatory program.
According to a recent report from Deloitte, the wealth management industry continues to face intense regulatory and operational changes. Deloitte pointed to a current SEC rulemaking agenda that has been historic in terms of the volume and significance of regulatory proposals. At the same time, enforcement activity and fines have increased substantially.
To avoid these costly and reputation-crushing repercussions, firms must take a more proactive approach to their compliance programs, especially regarding regulatory areas of focus, and enhance their operational capabilities and processes to comply with new and amended rules. RegTech, including new artificial intelligence-enabled tools, needs to be a significant part of the solution.
The Four Pillars of RegTech
RegTech can be a game-changer for companies struggling with the current regulatory environment. RegTech can provide a firm’s chief compliance officer with a toolbox of software solutions designed to make managing the ever-changing rules and regulations around wealth management easier, faster and cheaper for RIAs, hedge funds, mutual funds, insurance agencies, banks and broker/dealers.
At Surge Ventures, we see four main pillars driving the future of RegTech:
- Regulatory Intelligence
- Data Management
- Data Security
- Smart Workflow
Regulatory Intelligence
Firms need a better way to track the myriad regulations governing their businesses. Generative AI-enabled platforms are coming online that allow compliance professionals to tap into an extensive repository of state and federal regulatory sources, find the regulations that apply to their entity's unique requirements and pinpoint compliance gaps. This will help them ensure rigorous adherence through the mapping of regulatory requirements.
New AI tools can be regulatory co-pilots that beleaguered compliance teams can leverage to simplify intricate regulations while automatically identifying and summarizing pertinent guidelines. This will ensure that firms remain proactive in the face of regulatory changes, automate operations and save time and money.
Data Management
Data management has always been an issue in wealth management. Firms collect copious amounts of data but rarely have the tools and expertise to turn data into actionable business-building intelligence. To empower wealth management professionals with enhanced data-first capabilities, data must be compliantly integrated and migrated to avoid regulatory fines related to bad data, leakage and insufficient guardrails. That’s where RegTech can play an important role.
To address the industry’s demand for secure and unified data integration solutions, AI technologies are being introduced that can break down silos and unify information from diverse sources. This type of data integration empowers organizations to gain comprehensive insights and make informed decisions. It's the key to harnessing the true power of data and staying ahead in today's competitive landscape. As businesses embrace new technologies and transition to the cloud, data migration becomes paramount. Seamless and secure movement of data ensures business continuity, preserves data integrity, and unlocks the benefits of modernization. It's the bridge connecting legacy systems to cutting-edge solutions.
The future belongs to those who embrace the power of data integration and migration, with security and compliance as guiding principles.
Data Security
Data is invaluable, and protecting it during the integration and migration process is non-negotiable. Robust security measures like encryption, access controls and vigilant monitoring are essential to safeguard data against breaches and unauthorized access. Ensuring data privacy and building trust are the foundation of successful digital endeavors and one of the most critical use cases for RegTech.
Data security is something a firm can’t live without. It’s more than just keeping track of all your data assets; it’s monitoring what data goes out of your organization because your defenses are only as strong as your weakest penetration point. In fact, the SEC announced its 2024 exam priorities would focus not only on a firm’s internal data governance and client privacy program but also those of its third-party vendors. So, policies and procedures must be in place to provide visibility into the security and integrity of partner firms.
Smart Workflow
The fourth pillar driving the future of RegTech and connecting the other three is creating smarter workflows.
Engaging in any manual procedure can result in many issues, including human errors, data disparities and regulatory non-compliance. Traditional workflows for monitoring and revising compliance mandates not only consume time but also require significant labor, deplete valuable resources, and heighten the likelihood of breaching regulatory standards.
Compliance professionals’ time and effort in sifting through documents, spreadsheets and various information outlets can detrimentally impact their productivity, diminishing their ability to add value with strategic initiatives and growth-oriented endeavors.
RegTech now offers solutions to streamline and automate these traditionally manual workflow processes. Through automation and AI-enabled tools, compliance procedures can become more efficient, precise and easily manageable.
RegTech is Transformational
Technology innovations, including the still nascent opportunities surrounding AI, will transform compliance and supervision functions throughout the wealth management space. Firms that are early adopters of RegTech will have an advantage, as they can free up resources currently being plowed into these areas and instead invest in business-building and revenue-generating activities, tools and personnel. At the same time, they can reduce their financial and reputational risks by being proactive and staying ahead of the regulators.
Sid Yenamandra, Founder & CEO, Managing Partner of Surge Ventures, a SaaS venture studio targeting the financial services and wealth management industries, Investor, Chairman & Founding CEO of RegVerse and Investor, Chairman & CEO of Kovair Software
