[PODCAST] Alternatives and the Need to Automate the Investing Process

On March 20th, 2019, WealthForge CEO, Bill Robbins, joined Mike Consol, editor of Real Assets Adviser magazine, to discuss the need to automate the alternative investing experience.

Below is a summary of some of the main points they discussed. Visit Real Assets Advisor’s website to hear the full audio recording.

What is the cost of manually processing alternative investments?

Alternative investments that mainly use paper-based processes include Regulation D, 1031 exchanges, private funds, non-traded REITs, BDCs, GP and LP funds like private equity, hedge funds, and venture capital funds. It is a large industry with a common problem that affects nearly all stakeholders throughout the process

Bill describes the basic costs as time, efficiency, transparency, and physical costs like paper and postage. He discussed the resources that have to be used to overnight mail documents to multiple parties, sequentially, and, on average, one-third of the time that document is rejected because of a NIGO (not-in-good-order) error and has to go through that process again.

But the more substantial cost is the opportunity cost. The poor experience related to investing in alternative assets is a limiting factor in the ability for these products to gain traction among advisors and their high net worth clients.

How voluminous is the paperwork involved in an alternative investment?

While it differs by product, a subscription agreement plus a disclosure for a Reg D investment could certainly be hundreds of pages. Bill brings up the familiar image of an enormous stack of papers with multiple “sign here” stickies that are attached throughout.

“Someone has to go through all of that and figure out, depending on what kind of investor I am, what sections are relevant, and which can be ignored. Hopefully, you fill it out right the first time.”

Why hasn’t the process been automated before now?

As with any innovation, there have been fits and starts with alternative investment automation. However, as Bill sees it, this is a large problem shared by the industry, larger than any one firm can solve on its own.

Helping catalyze the process are recent changes on the regulatory front and broader acceptance and explicit adoption of electronic signatures by states, by FINRA, and by the SEC.

What kind of automation is possible with current technology?

For advisors, subscription automation is possible and happening today. You can go through an electronic order entry process that will guide you through an intelligent interview that captures all relevant investor information and maps it to the subscription document.

Bill posits that soon it will be possible to automate ongoing maintenance transactions such as change of address, transfers, and redemptions, as well as ongoing reporting through a dashboard that updates with current information from sponsors. Even offering discovery and diligence can be partially automated.

What would that mean in terms of alternatives and real assets in portfolios?

Automation represents a big opportunity for alternatives. Bill believes it will level the playing field. Advisors won’t have to choose between a painful and slow process for allocating to an alternative and an easier process for another asset class. Taking the mutual fund industry as an example, Bill recounts the history of DTCC rolling out FundServe and the enormous growth that followed.

“If straight through processing provides a stable foundation for alternative investments, as it has for other asset classes, then we can expect it to expand the pie for everyone involved.”