One of the most significant ongoing challenges advisory firms face centers on compliance. As the regulatory landscape continues to evolve, advisors must be adept at monitoring and anticipating compliance trends. RegTech or regulatory technology aims to meet the needs of growing firms by offering innovative, digital-driven compliance and risk management solutions.
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What Is RegTech?
RegTech refers to technology solutions designed to simplify compliance for organizations that are subject to government regulation, including financial services firms. Those solutions increasingly rely on AI and machine learning, cloud computing and blockchain technology to assist advisors in three broad need areas.
- Compliance. As new compliance regulations are introduced and older ones are modified or retired, it’s easy to find yourself scrambling to keep up. Managing technology, specifically as it relates to compliance, is a challenge for 73% of advisors, according to research from Cerulli Associates. RegTech attempts to shift some of the burden of meeting compliance requirements off advisors’ shoulders so they can focus on what matters most—meeting the needs of their clients.
- Risk assessment and management. Advisors manage risk in their clients’ portfolios, but they must also identify and manage risk threats to their firms. Cybersecurity, for example, is receiving more attention in the compliance sphere as regulators seek to protect client data from theft, fraud and misuse. AI-driven RegTech solutions can assist with identifying and monitoring for risk threats, while automation software can make it easier to implement your firm’s risk management policies.
- Data compliance and security Financial services firms collect substantial amounts of data which must be processed and securely stored to meet compliance requirements. RegTech can help organize the data you collect, ensure proper record keeping, implement cybersecurity measures and control access to client data internally.
It’s worth pointing out that RegTech is not a new concept. Companies began adopting regulatory technology solutions in the late 90s and early 2000s to monitor risk management and compliance trends. RegTech received renewed attention following the 2008 financial crisis and its role in financial services continues to become more prominent.
Examples of RegTech Applications for Advisors
How can advisory firms use regulatory technology to meet compliance, risk management and data management needs? Here are a few examples of how RegTech benefits advisors.
1. Know Your Client (KYC) Compliance
Know Your Client rules require advisors and other financial institutions to complete certain tasks when onboarding new clients. Those tasks include:
- Verifying the client’s identity, including their residency and citizenship status
- Confirming their income, assets and liabilities
- Determining their risk tolerance and their overall suitability as a client
- Monitoring their financial transactions for any suspicious activity that could indicate fraudulent or criminal activity
AI-powered RegTech tools can assist with each step of the process. For example, digital identity verification can help you confirm client identities without lengthy manual checks. AI monitoring can flag potentially suspicious transactions that may hint at money laundering or other financial crimes.
2. Cybersecurity and Data Security
Data security is a top-of-mind concern for regulators as cybersecurity threats grow. The SEC’s cybersecurity rule places new compliance pressure on advisory firms to develop cybersecurity policies, adequately secure client data, and report data breaches promptly when they occur.
RegTech’s application for cybersecurity compliance can include:
- Continuous, real-time data monitoring for potential cybersecurity threats
- Assessment of client data and transaction history to identify accounts that are more likely to be targeted for fraud or theft
- Evaluation of third-party governance to assess the potential risk threat posed by vendors, suppliers, and other organizations connected to your firm
- Streamlined reporting of data breach incidents
A robust cybersecurity policy is critical for protecting your client’s data and your firm’s reputation. Regulatory technology can allow you to feel more confident about your initiatives to secure data and maintain compliance.
3. Scaling and Growth
Growth is a top goal for many advisors and regulatory technology can pave the way for a smoother path from where you are now to where you want to go.
For example, you may want to develop a new service offering, branch into a previously unexplored niche, or expand your firm’s geographic footprint. RegTech can help with:
- Running a cost analysis for new offerings to develop a projected ROI
- Analyzing prospect data to identify potential clients who are most likely to be receptive to the services your firm offers
- Reviewing compliance requirements for expanding operations into states outside of the one you currently operate in
Most importantly, regulatory technology frees up valuable time in your schedule that you can devote to other growth activities. And it can do that in a cost-efficient way, allowing your firm to retain more resources that you can invest in growth.
Comparing RegTech Platforms for Advisors
Numerous companies offer regulatory technology solutions for advisors. Some of the most notable options include Comply Advantage, Ascent RLM and Hummingbird. SmartAsset AMP, a tech-driven marketing tool for RIAs, is also SEC-compliant.
Finding the right solution for your firm starts with a needs evaluation. Once you understand what you need RegTech to do for you, you can compare the specifics of individual platforms, including:
- Features and functionality
- AI and machine learning
- Integrations with other tools in your tech stack
- Initial setup
- Ongoing support
- Cost
You may find it helpful to take a platform for a test drive if a demo is available. That allows an opportunity to review its usability, features, and alignment with your needs.
Frequently Asked Questions (FAQs)
Is KYC RegTech?
Regulatory technology solutions can extend to Know Your Client rules (KYC), enabling advisors to verify client identities and monitor for risk more efficiently. RegTech can also assist advisors and other financial institutions with meeting compliance with anti-money laundering (AML) rules.
What Is the Difference Between FinTech and RegTech?
FinTech or financial technology is a set of tech solutions that are designed to help financial institutions operate more efficiently. RegTech can be considered a subset of FinTech, since it’s also tech-driven but rather than taking a broad approach, focuses on compliance and risk management.
Who Uses RegTech?
RegTech has applications in a variety of industries, but it’s commonly used by financial services institutions for compliance and risk management. Financial advisors, banks, cryptocurrency platforms and mortgage lenders are some of the institutions embracing RegTech adoption.
Bottom Line
Regulatory technology can yield numerous benefits for financial advisors who want to operate their firms compliantly while saving time and preserving resources. Reviewing your current tech stack and compliance policies can help you pinpoint gaps that RegTech solutions could help to fill.
Tips for Growing Your Advisory Business
- Compliance extends to virtually every aspect of your business, including your marketing and how you attract new clients to your firm. If you’d like to streamline your efforts to reach prospects while remaining compliant, you might consider partnering with an expert marketing platform. SmartAsset AMP can offer compliant solutions for growth-focused advisors who are ready to connect with leads. Schedule a demo to learn how you can leverage it to grow your business.
- RegTech can help you stay up to date on the latest compliance trends so that nothing falls through the cracks. Monitoring these trends can help you get ahead of the curve so that once a new regulation or rule change takes effect, you’re fully prepared to implement it.
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