Technology is the Only Way to Meet Compliance Challenges Head On

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Interesting industry press this week based on the premise that boutique investment managers could potentially “lose out” against their larger rivals due to the escalation of compliance costs.  The main culprit cited for increased compliance costs is Dodd-Frank, but other regulations, such the Alternative Investment Fund Managers Directive, anti-money laundering regulations, as well as local regulations, are also cause for concern. The article noted that many boutique managers are currently operating on a manual basis with regards to the technology used for compliance, the primary tech tools consisting of Excel spreadsheets.

Even for many boutique managers with traditional investments (i.e. those that do not manage derivatives or alternative investments) compliance is also a large area of concern; however, it is not the actual regulations promulgated thus far by Dodd-Frank that are creating obstacles, it is really more of a matter of the ongoing uncertainty of regulations yet to be released and the looming industry trend towards more, rather than less, regulation.

In such an environment, the only way for boutique managers to protect against this uncertainty is to invest in compliance technology that has an integrated approach capable of documenting (i.e. creating a complete audit trail) all aspects of the investment process – from research and investment decision-making, to trade execution and settlement, to back office reconciliation and client reporting.

While investing in technology to protect against an aggressive regulatory environment may not be particularly appealing from a philosophical standpoint, firms should keep in mind that technology investments have been demonstrated to provide gains in other areas including greater operational efficiency and organizational effectiveness, both of which can favorably impact the bottom line.

The age old business adage that every problem is an opportunity should be on the minds of decision-makers contemplating technology investments in their investment systems, since firms who invest now will position themselves for future asset growth and profitability (the opportunity) and not just regulatory preparedness (the immediate problem).