At the most recent ADISA annual conference, The DI Wire sat down with Bill Robbins, chief executive officer of WealthForge, a financial technology firm specializing in alternative investments, to discuss current inefficiencies in the alternative investment space and what the company is doing to address them.
Robbins’ vision includes making the space more accessible and efficient for investors and advisors via streamlined automation and straight-through processing, which can potentially reduce errors while increasing productivity and saving time and money.
DIRECTORY SPOTLIGHT
Video Transcript
Damon Elder  00:08
Welcome to another edition of Focus on Alternatives sponsored by ADISA. I’m Damon Elder the publisher of The DI Wire.com and I’m joined today by Bill Robbins CEO of WealthForge, a fintech firm seeking to bring efficiencies to the alternative investment industry. So, Bill what are some of these systemic inefficiencies in the space and what is being done from a technological perspective to help solve them?
Bill Robbins  00:29
Well Damon, our vision is to make owning an alternative investment as easy as a mutual fund. so when you compare it to that standard, you can see we have a lot of work to do. Let’s get started with just the subscription process so we’re still doing checking out the way we did mutual funds in the 80s and then once we own the investment and the security there’s no automation or standardization or infrastructure that supports simple corporate actions you know transfers tenders account changes address changes these are all forms-based paper-based processes. So fintech firms in the industry are bringing automation to the market, and we’re making progress towards our goal of making alternative and direct investment securities as easy to own as mutual fund.
Damon Elder  01:10
Well so let’s drill down just a bit then, so for instance obviously a lot of the folks in the alternative space are sponsors or issuers or distributors of private placements you know billions of dollars worth per year So what is the current process typical process to place a subscription for a private placement?
Bill Robbins  01:27
So today it’s a completely paper-based subscription process and starting with the advisor… advisor might request the document package from a sponsor believe it or not some sponsors are still overnighting you know subscription packages to advisors. Advisors or their assistants then fill out the paperwork manually sometimes literally with pen and paper filling in a fillable form PDF and it still involves placing the documents in front of investors, a stack of paper with sign here notes on it. Once the investor has signed all the documentation the advisor can sign it. It’s often an overnighted to the home office who does a broker dealer principal review. It can then be overnighted in some cases to a custodian, and then finally overnight it to the sponsor or to their or to their record keeper like they like a transfer agent. So, it’s a very laborious paper intensive manual process and the problem is it can take a very long time and quite a few of those manual subscriptions are… are incorrect the first time around.
Damon Elder  02:25
So, you say it can take a very long time. What’s a give me a worst-case scenario, it’s kind of a typical scenario. I mean if I go online TD Ameritrade, I can play stock order in seconds really. This sounds like it can take days weeks sometimes maybe even months.
Bill Robbins  02:38
That’s exactly right, yeah it can take weeks certainly. The average cycle time for for many of these private placements the right example is a good one, can be three weeks and that’s if everything goes right the first time. So, you know our vision is to help make alternative investments as easy to own as a mutual fund and as you say you can go online as an advisor today and you can enter a mutual fund order in seconds. And so, we have a ways to go to get there but we are working towards straight through processing for alternative investments.
Damon Elder  03:07
Well let’s talk about straight through processing in a second. But first, so it sounds to me with all these laborious steps and all the paperwork and all the fillings and whatnot. I think really that leads to what we in the industry knows NIGO’s, not in good order documentation which can add a whole other layer to the process. Can you kind of talk about that a little bit and… and how big of an error or an issue are NIGO’s in the space and getting an order efficiently processed.
Bill Robbins  03:31
Oh yeah, the dreaded NIGO, it’s a huge problem in the industry. We have spoken to a number of sponsors and typically what we’re hearing from sponsors is anywhere between 40 and 60% of their initial subscriptions for new business are not in good order or NIGO the first time they come through. We’ve spoken to one sponsor, who told us that they’re not go rate sometimes approaches 75%. And so, it’s a massive problem for the entire industry, it’s not limited to one sponsor or to one broker dealer or to one firm. And just imagine the amount of investor frustration that we create when we have to put this stack of paper in front of him for the second or third time with the initial year and the sign here. And that entire process is just a very inefficient process. Creates a really terrible experience for our investors, who happen to be typically our our best clients our most high net worth accredited investor clients. It makes a very inefficient use of our advisors time so it impacts productivity and it’s a it’s a major industry problem. The good news is that it’s on the way out, we are already seeing across the industry as firms adopt subscription automation technology, you can drive those NIGO rates down from 40 50% on average to low single digits 5% and below.
Damon Elder  04:42
Well, that would probably be tremendous cost savings. I mean you probably have to on multiple levels of the process sponsors issuers firms whatever they probably have to hire special people just to deal with NIGO’s.
Bill Robbins  04:54
For sure, there are there are massive cost savings involved in just efficient processing. Only having to process a document once is a is a major step forward. There are also other benefits, there are sales lifts benefits. If you’re a sponsor raising capital you are raising capital more efficiently when you make that process easier for the advisor, and more delightful for the investor. And then if we zoom all the way out and just take an industry view, part of the vision of making alternative investments is easy to own as a mutual fund starting with the subscription but then going on post trade is that we can create a rising tide we as an industry and create a rising tide that really can lift all boats. Alternative investment should be much more broadly available every time they’re suitable to investors than they are today. And the biggest limitation that’s in front of us is it’s just so hard to do this business today.
Damon Elder  05:41
Right, and so you’d mentioned earlier straight through processing and that’s certainly something we’re going to hear more and more throughout the industry. So why don’t you just kind of give us an explanation of what is straight through processing, and what kind of benefit can it bring to the industry?
Bill Robbins  05:53
Sure, so straight through processing really let’s start with the investor. So, with the investor is going to experience is a online process that involves and includes digital electronic signatures, and so instead of getting a stack of forms with sign here stickies the investor can go through those documents efficiently. For the advisor it’s an order entry process that allows them to move away from a paper-based form centric process. We go through an intelligent interview make sure that the advisors providing the required information for the sponsor sub doc and for their broker dealer suitability and and sales practice review.
It allows for routing to all the participants in the process, so for example to the broker dealers home office where a principal can review, we have a dashboard so that all the participants in the process can review the status of an investment at all times. For sponsors its capital raising efficiency making it easier to do business is is a major benefit and of course the operational efficiency comes from reducing NIGO’s.
Damon Elder  06:50
So, but I know a lot of firms are bringing new technological tools into the space to provide these kinds of benefits to the entire process. But with so many competing options out there, how will the industry really coalesce and begin to adopt these. Does there need to be standardization? Can broker dealers and sponsors and whomever utilize multiple options? Are we going to have to come around one, I mean what’s that process going to look like to really have a significant impact on the way alternative investments are ordered and distributed?
Bill Robbins  07:20
Yeah so, I think the good news is that there are multiple options that are available in the market today. So, broker dealer firms, registered investment advisor firms, sponsor firms and all of their service providers which include custodians and Admin’s and other record keepers. There are multiple options that are in the market, they come in several flavors. Some of the solutions that are in the fintech space are being brought forward by asset managers and so they’re providing feeder funds and access to asset classes that traditionally have not been made available to retail investors. Some are approaching the market as pure fintech providers, licensing technology. Others are bringing a marketplace where they’re looking to enable marketplace connections between sponsors and advisors.
I’m aware of one sponsor that has launched a product offering that is made available to try to help address these issues. So, the good news is that there are multiple solutions that are in the market today and help is on the way. I do think that it’s going to require some level of standardization for the industry ultimately to achieve its potential. Our vision and our view is that that that the fundamental infrastructure that the entire securities industry runs on is the DTCC. And the DTCC has AIP, and AIP has not yet gained widespread adoption. We believe one of the reasons is that there’s not an easy and convenient on ramp into AIP. So, when you’re still stuck in a paper based process really to get your order into AIP it still requires someone doing manual entry in front of the screen. And we believe that the AIP from DTCC will ultimately be the common infrastructure. And then this laboratory of capitalism we’ll end up deciding you know which of the platforms ultimately you know are successful. We’ve seen this play out in other industries and other asset classes. I think the variable annuity securities market is a great example. 15 years ago there were ten fintech providers, today they’re really two that do almost all of the business, there may be three that matter. and I think we’ll end up seeing the same thing in the fintech space.
Damon Elder  09:16
Do you think it will take 15 years?
Bill Robbins  09:19
No, I think it’s going to go much more quickly. I think our space is primed I think we’ve seen this movie before as an industry and we know how it ends. and so, I think that the network effect is going to kick in and very quickly I believe we will see broker dealer firms start to adopt the technology. When those firms start realizing the sales lift and the productivity benefits for their advisors the improved investor experience, they are going to request that all of the sponsors that they’re partnered with join the platform that they have selected.
Damon Elder  09:47
Like most things in this space, it’s going to be driven really by the distribution partners, broker dealers the RIA’s who want this efficient process. It’s their lives easier is that clients easier if they want something the sponsors will provide it.
Bill Robbins  09:58
That is correct. So, I think the distribution partners ultimately will will drive that market. But it’s important to acknowledge that it is a partnership between those broker dealer firms and their sponsors. So, the sponsors have to be engaged in the process and have to feel good about the partner that the property or firm is selecting. So, you know the good news is there are multiple options that are approaching this market in different ways. And I’m confident that the network effect will kick in quickly and as broker dealers start selecting platforms the sponsors will quickly adopt. Those sponsors will then see how much these how much easier it is for to raise capital and they will encourage the other property or partners to adopt the technology. So, I don’t think it will take us 15 years.
Damon Elder  10:36
Like you said the power of capitalism seems to see things along right. We’re all trying to make money efficiently and these products these tools are certainly going to help facilitate that. So, Bill’s final question, we’ve talked so much about the efficiencies that these tools can bring to the to the marketplace on every layer. But what is the cost of not adopting what what exactly do we have a way to measure just what it costs the industry as a whole by having this inefficient process that we’re currently still laboring under?
Bill Robbins  11:05
Yes, well I think we can measure the inefficiency and the operational cost. But I think the bigger deal and the and really the cost of not adopting the technology is going to be more so felt on the sales side of the business. So, imagine if you’re a financial advisor and your clients are working with another adviser perhaps who has automated experience that makes it so much easier to own one of these alternative investments. But you or your firm for some reason has not adopted the technology, how does that impact your relationship with with your client based on the investor experience? Imagine you’re a broker dealer firm and your competitors have implemented this straight through processing technology from one of those one of the providers. it’s going to be easier for those firms to recruit advisors high quality advisers with high net worth clients who do this type of business. And if you are slow to adopt or last in line the opportunity cost there for missing out on providing the best platform available for your advisors is going to be expensive.
Imagine that you’re a sponsor and you were still requiring your distribution partners to do subscription documents with paper and pen and checks and FedEx. And your competitors make it easy to do business in fact they can they can raise capital on a subscription can be done in minutes and it’s right the first time and there’s a dashboard that provides transparency. You are going to lose out on the ability to raise capital if you’re a transfer agent or custodian who’s still manually keying information into their system and your competitors offer a more efficient process. So, I think the opportunity cost is really going to be the big deal. And we will gain from the operational efficiencies that technology provides. But the big picture opportunity really for everybody in the market is if we can make these investments easier to own starting with the subscription and then moving into the the post trade you know maintenance and support, we can create a rising tide that will we’ll lift all the boats and expand the pie really for the entire industry.
Damon Elder  12:55
I’d have to imagine that’s particularly true given the fact that we’re seeing this massive demographic shift and intergenerational transfer of massive wealth from the baby boomers who are obviously rapidly going into retirement, to their children and their grandchildren even the people who grown up in the digital age. I can’t imagine they’re going to stand for having to fill out all this paper.
Bill Robbins  13:15
I totally agree. So, we often ask broker dealers and sponsors. Think about the last subscription that you received and for that property or for the investor was the experience more like checking out on Amazon.com or was it more like standing in line at the DMV. And for most of them it still feels you know like the old school you know very painful process. So, the fact is expectations change people have adopted technology and you wake up one day and you can’t imagine doing it the old fashion way. And I think we’re really close to that moment for alternative investments and our legacy paper-based subscription processing.
Damon Elder  13:52
Bill, thank you so much for joining us and for sharing your insights. Very helpful, I learned a lot I’m sure our viewers did. And thank you for joining us.
For more information on technology impacting the alternative investment space and for all things regarding alternative investment, please visit adisa.org. Thanks again
For more ADISA news, please visit their directory page.
