When ‘Know Your Client’ Becomes High Maintenance Work

If investing were a romance, Know Your Client rules would require a first date. Fund managers need to confirm the basics about their clients — name, birthday, employment status and financial situation — to make sure they are who they claim to be.

That may be enough to pass regulatory muster, but investors are now demanding a more high-maintenance relationship where their desires are constantly considered and reflected in the performance of their investments.

Take impact investing, which is approaching $800 billion worldwide, with 70 percent coming from asset managers. This shift is compelling funds to pursue their clients’ financial and non-financial aspirations. Other motivations are leading investors to eye opportunity zones, the EB-5 program and other places for financial returns, social uplift and similar performance-based incentives.

As fund administrators confront an increasing regulatory burden around threats like money laundering, they are also under pressure to personalize investment portfolios, speed up reporting cycles and track performance on multiple fronts — from job creation and tax revenue generation to progress on issues like climate change and social justice.

The challenge is collecting, processing and analyzing more data and documents to satisfy these demands without significantly increasing costs. Some fund administrators are looking offshore to expand their workforce. They then face difficulties around quality control, responsiveness and timeliness. Others are clinging to their existing clients and old ways of doing business.

The future of the fund administration, however, depends on technological innovation, reflected in the exponential increases expected in fund managers’ spending on machine learning and artificial intelligence systems in the years ahead.

Companies simply will not be able to achieve the scale and speed to remain competitive without major upgrades to their data operations. The resources required to manage truly personalized investment portfolios that allow clients to track various indicators in real time are too high without integrating these innovative systems into the process.

Sophisticated data operations for fund administrators, as with digital disruption in other industries, will soon shift from a competitive advantage to an imperative. Firms that don’t figure out how to use smart technology to support their human workforce will become overwhelmed or irrelevant.

Additionally, when the economy inevitably cools off in the years ahead, investors won’t be wooed by funds that turned a healthy profit during boom times. They will want to work with firms that can provide real-time forecasting and instant market insights configured to their portfolios as they prepare for turbulence.

Fund administrators that take a “wait and see” approach to digital innovation simply won’t be able to deliver when disruption comes knocking. Like singles using a 10-year-old photo on a dating website, it’s only a matter of time before the truth is revealed to their clients.

In the months ahead, we can expect to see “Know Your Client” rules tighten amid increased efforts to combat global money laundering. But some funds will take the relationship a step further, using new data systems to understand their clients better, communicate more effectively and maintain relationships through real-time insight that validates investment decisions.

These are the relationships — and the companies — that will last.