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Investment Firms Struggle With Onboarding Costs; Big Savings Potential If Done Right - Study

Tom Burroughes

29 September 2016

Know-your-client, anti-money laundering rules and other requirements are a necessary fact of life for the world's investment and wealth management sector, but firms' systems struggle to cope.  "Typical" fund managers incur $6 million of "avoidable" costs in onboarding customers, a study says.

The figures come from a survey published yesterday by TABB Group, that was commissioned by Clarient Global, which is a joint venture established to transform client data and document management in the financial services industry. The firm was founded in collaboration with Barclays, BNY Mellon, Credit Suisse, Goldman Sachs, JPMorgan Chase and State Street.

The report said that unlike their broker/peers who have invested in upgraded technology, investment managers are lagging behind in taking action to remedy the problem, according to the report. Its authors argue that the costs of not changing how compliance requirements are handled are becoming unsustaintable.

"The costs of compliance in the current regulatory environment - including sanctions, remediation and lost reputation - dwarf what any single deal or client might bring in," the report said.

Another finding of the survey was that of the $6 million of avoidable direct costs incurred annually by any such investment manager, trading and settlement delays account for $1.5million and $2million of that amount.

Over $11,000 per onboarding case could be cut by improving data and document management processes, the report said.

While not referring explicitly to wealth managers, the report highlights why the sector has been battling to make the onboarding process, and other checks required to foil dirty money, to be as efficient as possible. According to industry figures who have spoken to WealthBriefingAsia in recent months, a private bank takes an average of two months to take on a new client because of the checks needed. There are "horror stories" in the industry of the process taking far longer than this.
With wealth managers trying to pull down their cost/income ratios - which have averaged around 70-80 per cent in recent years - a focus on such onboarding costs is part of any adjustment.

In Hong Kong recently, for example, a survey found that 98 per cent of its respondents thought that companies had difficulty opening bank accounts in Hong Kong. It also showed that 79 per cent of respondents thought there was a serious or somewhat serious problem. This concern about the duration of onboarding processes is a long-standing one. Back in 2011, it was reported that wealth management firms are missing opportunities to deepen client relationships and increase revenue during the account onboarding cycle, according to the July report, Wealth Management Onboarding: Expanding beyond Account Opening, from Boston-based Aite Group. That report found that more than 70 per cent of wealth management firms surveyed view client onboarding as either a back-office function that needs to be cost-contained or a front-office automation tool; only 30 per cent view client onboarding as a competitive differentiator.

AML, KYC are the largest challenges
The Clarient Global report said that anti-money-laundering and know-your-client regulation poses the "greatest challenge to investment managers in terms of client data processing and documentation gathering", and noted that these issues were more of a problem than honouring the US legislation such as the Dodd-Frank measures, the FATCA tax rules, regulations over derivatives trading, or Europe's MiFID II regime.

The cummulative size of compliance fines and penalties is having a significant cost effect, the report said. "While not as headline-grabbing as those that several banks have experienced, multi-million dollar penalties on IMs are becoming increasingly common. Some recent examples include $15 million in penalties for client reporting and documentation violations, $12.5 million in penalties and disgorgement for non-compliant client data infrastructure, and $1.1 million in fines and restitution for failed client data aggregation," it said.

The report claimed that moving to a "shared utility approach" will boost produtivity and for risk/complaince staff by up to 50 per cent and up to 30 per cent of relationship managers' time could be liberated from the chores of compliance requirements, allowing them to focus on their clients and prospects.