Amid broader digital transformation trends, many service providers have re-imagined their value proposition to take advantage of new technologies. The compliance consulting space is no different. The prevailing question, however, is at what point does the
focus on technology begin to crowd out the human elements in the value chain and, more importantly, at what cost to clients navigating an evolving regulatory landscape?
The transformation across the consulting universe is not occurring in a vacuum. Business leaders, for instance, are well aware that valuations for SaaS companies trade at a compelling premium over traditional providers of business services. Moreover, a bifurcation
is already reshaping the compliance consulting market between those who have invested in technology – and can leverage economies of scale – and those who can’t make these investments and are at a disadvantage. But as the pendulum swings and digital “solutions”
encroach on core consulting services, advisors may perceive the tail is wagging the dog.
Make no mistake, investments in technology are imperative for any consulting firm. This is particularly true in financial services as data volumes increase, reporting demands become more pronounced, and regulatory complexity creates new barriers to entry.
Still, when the SEC comes knocking, comment letter in hand, they won’t be turning to Siri or Alexa for answers.
Living in the Gray
To be sure, technology tends to be quite effective in black-and-white scenarios. Compliance, though, is a nuanced specialization that usually resides “in the gray.”
Consider the processes that inform fair value reporting in private equity. Technology provides an effective tool to collect data and streamline informational needs around underlying assets. Interim valuations in PE, though, can be more of an art than a science.
And the most significant risks from a compliance perspective relate to the adequacy of a process, whether it’s deployed consistently, and any conflicts of interest, real or perceived, that could influence valuations. Make no mistake, regulators are watching.
As reported by Ignites in July, a global asset manager was forced to adjust the NAV on multiple funds when previous estimates were affected by changes in fair value methodologies.
Still, many advisors in choosing a consultant want to know at what point do new advances in technology cross the threshold from adding value to compromising quality? For most, it requires a “Goldilocks” assessment. Too little tech creates blind spots and
bottlenecks, whereas too much instills complacency and fails to equip advisors for anything but best-case scenarios. As such, the human element remains as important as ever, and advisors should keep in mind three core considerations when choosing a compliance
1: Don’t Underestimate the Value of Experience
At Foreside, we’ll often highlight the ways regulation can be a catalyst for innovation. We’re not exclusively referring to “RegTech” solutions as new rules change daily workflows. Perhaps more important is the ability of advisors, who know where the regulatory
boundaries lie, to create new investment products that can meet evolving investor needs. Through embracing a culture of compliance, advisors can proceed with conviction on new strategies and distribution channels.
Foreside, for instance, was among the consultants advising on the first conversions of actively managed
mutual funds into ETFs, a milestone that has triggered budding interest from other active managers. Technology, of course, can automate certain facets of ETF fund accounting, performance reporting,
or rote administrative tasks. But it falls down in the gray spaces that characterize everything else. Evaluating the alternatives available to advisors, considering the impact of new regulatory precedents on current operations and future plans, or analyzing
how new fund structures can meet specific objectives, for instance, are the types of challenges in which technology offers little if any help.
2: Don’t Overestimate Assumed Cost Savings
The conventional wisdom among most advisors is that tech-driven offerings produce cost savings and efficiencies that then get passed along to the end client. In many cases, this can be true.
For instance, tech-enabled solutions are critical for consultants to keep up with regulatory demands and scale their business over time. When the SEC launched Form CRS in June 2020, the time and administrative resources to manually collect and input
the required information created acute capacity constraints among smaller, mom-and-pop consultancies. Those who could automate these tasks, however, didn’t have to bill the hours back to their clients and could better use their time to engage in constructive
dialogue on more pressing topics.
That being said, tech-driven solutions aren’t always the most cost-effective alternative. Proprietary software is not cheap. And SaaS-oriented firms aren’t exactly shy in finding ways to pay for it. It’s not uncommon to see high registration or implementation
fees, variable pricing models that escalate as advisor AUM grows, or other surprise fees for essential features not included in basic packages. When it comes to the true value of proprietary technology, advisors should also consider the risk of vendor lock-in,
which can dramatically increase switching costs and make it difficult to integrate new capabilities from other third-party vendors.
3: Seeing Through the Innovation Fallacy
Ironically, tech-driven solutions don’t necessarily represent the most cutting-edge alternatives either. The pace of innovation is only accelerating, and the costs to replace legacy solutions and manage technology debt are not insignificant. So rather than
invest in new capabilities, R&D budgets over time can get redirected toward maintaining and updating existing solutions. This has been a factor, for instance, in the fund administration space, where mounting technology debt and integration issues have handicapped
first movers in certain segments.
Alternatively, tech-enabled consultants – with experts on the ground and in constant communication with regulators and clients -- benefit from a continual feedback loop. As such, they can identify areas in which automation makes sense and also where
it doesn’t. And they can couple their own technology with best-in-class solutions that may better meet a given need as it arises. This allows tech-enabled platforms to be nimble and move with the times.
No hard and fast rule exists that outlines precisely at which point technology can be effective and where it will fail. This, again, is where on-the-ground experience and expertise make a difference. Consider the work that goes into Form PF filings, a Dodd-Frank-era
requirement designed to measure systemic risks. Even “basic” questions can be too complex for automated programs.
NAV calculations provide just one example, as it may not be entirely clear in which scenarios advisors should deduct deferred compensation or what additional disclosures might be necessary
when they don’t. A seasoned consultant will not only be able to answer these questions with conviction, but they will also avoid deficiencies that would otherwise raise red flags or trigger an SEC examination.
If there is a hard-and-fast rule that should guide all consultants, it’s that there can never be “too much” personal engagement to better understand the ethos and business objectives of their clients. In this sense, technology that enables or enhances personal
attention tends to be the most effective in fostering a culture of compliance and growth.