Emerging solutions in AML technology

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May 18th, 2015

Numerous forces of change, not least economic and regulatory changes, are having profound effects on anti-money laundering (AML) culture and technology practices at banks and other financial institutions. Faced with pressures from growing compliance requirements and cutting costs, they are seeking to use technology to increase efficiency and free up resources. Furthermore, the need to ensure enterprise wide compliance is giving rise to centralization and standardization of AML operations, as well as integration of AML and anti-fraud programs.

To capitalize on this trend providers are developing solutions that address complete client lifecycle management functions across different lines of business. In particular the Know Your Customer (KYC) function is receiving a lot of attention both from banks and solution providers as that is the first step in the client lifecycle process and successful due diligence and risk profiling of clients during the KYC stage can go a long way in ensuring compliance with AML rules and regulations.

Banks typically use a combination of best of breed solutions to cover all of their AML compliance needs; but there is an increasing trend to rationalize number of vendor relationships and source technology from fewer vendors to standardize and centralize operations. Use of technology in AML related activities have traditionally lagged behind other areas of financial services. It was dominated by manual processes and in-house systems for a long time before banks started using third party end to end solutions. Outsourcing of AML operations is still rare.

Since the crisis of 2008 banks are having to work under severe cost pressure and are looking to cut cost wherever possible through a combination of new models such as outsourcing, managed services and utilities – these are primarily seen in areas that are non-core, non-differentiating for banks, such as mid and back office functions (e.g., post trade operations).  AML operations are not necessarily a differentiator for financial institutions, but due to high sensitivity of AML activities banks have traditionally looked to manage them in-house to have more control and oversight.  To strike a balance between these two somewhat opposing needs – cost cutting yet not losing control – some supply side providers have developed outsourced AML offerings  whereby the vendor takes charge of the complete or bulk of the AML process freeing up resources of the financial institution and lowering cost of ownership of their AML solutions.

We are also seeing new and innovative solutions emerge that support parsing large volumes of data from different sources. Analyzing these data involve unstructured data analysis that is not usually supported by rule based methods followed by traditional AML software. These new solutions employ innovative tools and technology such as machine learning, Fuzzy logic, semantic analysis to not only analyze large volumes of unstructured data, but also carry out traditional tasks of name matching in original languages and scripts without requiring traditional means of translation or transliteration.

We discuss a number of such new and emerging solutions in the AML space that address some of these issues in a recently released Celent report. One issue that is still at an idea generation stage is the case of cybersecurity. With growing instances of cyber fraud it is likely that a few solutions will eventually emerge enabling financial institutions to better manage their cyber security.

It is interesting to note that some of these emerging issues (e.g., unstructured data analysis, cyber security) do not solely pertain to AML operations, but can be applied to a variety of businesses in a number of industries. Therefore we are already seeing vendors traditionally focused in other industries are entering the financial services space. If these tools and technologies become more popular in the AML space, it is likely that some of the incumbent solution providers would like to add such capabilities to their repertoire, and we may see strategic partnerships or even acquisitions among some of the players in the future.


Thoughts from IBM’s “World of Watson”

May 13th, 2015

Last week was at the IBM’s World of Watson in NYC – IBM has opened up Watson through the Cloud forming an eco-system where application developers and partners utilizing open APIs can tap into Watson’s cognitive thinking algorithms.  IBM has decided to open the Watson platform to partners and developers for more rapid discoveries of real-applications and perhaps marketable applications.

Of course many of the impressive applications targeted health care, mapping genomes, cancer research, synthetic drug pre-trials – some amazing stuff.

In the area of finance I’m always a touch skeptical, investors have been trying to find the golden algorithms investment portfolios for centuries and not really convinced that Watson will do much better.

However I was very impressed with some Private Equity software firm, Vantage Software in Boston, that was using Watson coupled with an accelerator big data analytics module application, AlchemyAPI out of Denver, to comb through social media for smoke signals about firms that were being tracked. For example a small firm is looking for 3 new analytical PhDs in polymer catalysts – a small signal that something might be popping with the young company. If an analyst is tracking say 250-500 start-ups, no way to track this manually.

Of course stay tuned for Watson to show-up more in Wealth Management.

Here’s some links to the main tent sessions:

Using automation to ignite delivery of de-accumulation services

Will Trout

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May 12th, 2015

In my latest report, Gold at the End of the Rainbow: Using Automation to Profitably Serve the De-Accumulating Investor, I explore the degree and form to which automated forms of delivery can be used to profitably serve the de accumulation needs of retirement investors.

De accumulation, which encompasses downside protection and wealth transfer as well as the drawdown of assets, represents the leeward side of the retirement investments process. It is an area advisors have tended to avoid, in part due to challenges in getting paid. Increasingly, however, the considerations of advisors accustomed to selling annuities and IRAs are shifting under the weight of demographic trends and economic and regulatory imperatives.

de acc pic

These advisors and the brokerage, advisory and insurance firms that employ them are starting to explore the automated delivery of advice as a way to rationalize their high cost sales structures. Automated delivery appeals in that it allows firms to touch the client directly and across the entire lifecycle, from prospecting to long term relationship management. It also enables outreach to a vast population of underserved customers, including mass affluent investors and high potential Millennials who would otherwise be uneconomical to service.

The challenge, of course, lies in reconciling automated delivery with existing distribution channels and organizational structures. I’ll talk about strategies for deployment—and how these strategies can be tailored to meet the needs of an evolving client base—in a subsequent post on this blog.


Big game hunting, or the logic of buying Finance Logix

Will Trout

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May 8th, 2015

It’s hunting season on financial planning tech vendors, who at current valuations, are all too happy to get bagged. First, eMoney Advisor, now Finance Logix. While future buyers may not be willing to pay a premium, it won’t be long till we are talking trifecta.

What’s behind the interest in these financial planning vendors? Well, as a class, they enjoy an important point of distinction from other vendors in the wealth management ecosystem, in that the tools they offer enable real proximity to the end customer (e.g. think client portals and the ability to tweak data for visualization). Closeness to the consumer helps a firm to exercise market power.

In this context, the more than $30 million Envestnet paid for Finance Logix is almost immaterial. Envestnet is jockeying for position in the bigger wealth management ecosystem, and they really wanted this kind of client touch point. This deal was about strategic considerations, not price.

Lack of liquidity in corporate bonds – (un)intended consequence of low rate policy

Brad Baliey

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May 7th, 2015

I was at the Fixed Income Trading & Investing Summit conference earlier this week listening to many perspectives on the fixed income market, particularly corporates. The themes of market structure, liquidity (or lack thereof), regulation, electronification, and new entrants in the space pervaded all conversations, formal and informal.

Reflecting on the state of the US corporate bond market, it is difficult to reconcile record new issuance, and record levels of bonds outstanding, with the drop in major dealer inventory by 80% from pre-crisis levels to present. This lack of dealer inventory was recently discussed by SEC Commissioner Daniel Gallagher. In March, Gallagher said that the drop in dealer liquidity could cause “systemic risk”.  The SEC is bringing to attention the possibility of a liquidity crisis, perhaps sparked by an eventual rate rise.

However, one of the main reasons that dealer inventory is so low, is the evolving regulatory and capital regime make it much more expensive to maintain risk assets on balance sheet. In a sense, an unintended consequence of the low rate policy is potential dysfunction in secondary bond liquidity. Arguably, certain policy makers might have intended to move secondary trading of corporates away from major dealers, as part of general strategy of de-risking the financial system, or at least, as a means of transferring assets from dealers to the buyside.

The SEC is now looking carefully at how to deal with the liquidity issue; they seem to desire that the industry offer innovative solutions for providing secondary trading. This liquidity can come from traditional dealers and alternative liquidity sources such as the buyside, or other types of dealers and expanded electronic resources.  We are at a juncture in the evolving market structure of corporate bonds. The goal should be for the industry to find the right level of incentives for the dealers to make markets, engage the buyside and their needs, and leverage innovative technology to fill the gaps.


Finance meets fashion: #wearables in wealth management

May 7th, 2015

In my upcoming report, due out in the next several days, I take a look at wearable technology and the wealth management industry.

What is wearable technology?

Who are the possible users of wearable technology in the wealth management industry?

What is the future for wearables in wealth management?

Wearable technology is quickly gaining interest and momentum among consumers and enterprises. Wearables are digital devices that can be worn on the body (i.e., glasses, watches, cameras, clips), can be controlled with minimal manual input, and offer real time access to and the collection of data.

This data can ultimately be used to influence real world decisions and behavior; wearables have the potential to alter the way we go about our daily lives. Wearables span multiple categories, including, but not limited to health, finance, and lifestyle. Achieving the “quantitative self” has never been easier.

In this report, Celent will explore the role of wearables in wealth management and assess if wearables have the potential to move beyond the mass affluent and serve the HNW by, for example, integrating with an advisor’s CRM system.  Celent will provide an overview of the wearables market, examine the drivers for adoption, study the potential impact of wearables on the retail investor and wealth managers, and conclude with a prospective look on wearables in the wealth management industry.


Corporate bonds: developing the secondary market through electronification

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May 1st, 2015

Corporate bonds have become a popular vehicle of investment in recent years.

  • In the developed world a key driver of growth has been the low interest rate regime persisting in some markets which has made many companies issue new bonds at a relatively low cost of borrowing. Potential for higher returns from these bonds makes them a lucrative proposition for many investors, particularly institutional investors like pension funds and insurance companies.
  • In the emerging markets, buoyed by long term growth opportunities companies have been issuing bonds to raise funds from global and local investors for over a decade now.
    While the activity in the primary market – where sales of new bonds by issuers to investors take place – has been growing steadily, the secondary market – where trading of such bonds take place among different types of investors (and market makers) – has been an issue of concern.
  • Buyers of corporate bonds, particularly those in the emerging markets, typically hold on to them till maturity. This means the pool of securities available for sell in the secondary market is not very deep. The resulting illiquidity means the cost of trading (bid-ask spread) in the secondary market can be substantially high, especially compared to other asset classes like equities or FX.
  • The problem is exacerbated by the lack of standardization among issued bonds. Different corporates issue bonds at different points of time with varying tenors and coupon rates purely based on its specific requirements. Even the bonds issued by the same company at different points of time can have different terms, unlike that seen in case of equities.

These issues limit the choice of investors in the secondary bond market. This gap is typically filled by dealer banks who act as market makers by taking their own positions and buying bonds from sellers or selling them to buyers. However, recent regulations brought in since the crisis of 2008 have made this task of market making very expensive for the dealers banks because of which many of them have significantly reduced their inventories. According to Mark Carney, the governor of the Bank of England, it now takes seven times as long to liquidate bond portfolios compared to what it took in 2008. As some of the central banks consider raising interest rates again, many investors are expected to sell their bonds. If there are too many sellers with only a handful buyers and market makers, that can have serious impact on the already distressed market and the asset class as a whole.

In last few years efforts have been made to develop a viable secondary market by connecting investors and dealers to other investors and dealers through (all-to-all) exchange type electronic trading venues. Here, dealers will not be the central agents; even two investors can connect to each other through the venue to complete a trade. Following other asset classes like equities and FX where electronic trading has already become popular, entry of such platforms in the bond space would be a logical extension. Further electronification of trading is also on the regulators’ agenda as they seek to improve transparency in trading in all asset classes. Trading in bond is still dominated by voice (over the phone) execution method and extent of adoption of electronic trading is relatively limited so far. The structural shifts taking place in this market may finally expedite this process. A number of players have developed or are developing trading platforms; even some of the leading exchanges like the Swiss SIX exchange and the Singapore Exchange are looking to add bond trading platforms. Such trading platforms have the potential to improve price discovery in bond markets and reduce trading costs, boosting investment returns in the sector.

A key challenge in this regard would be to first change not only the mind-set but also the technology and operational practices of the participants in this market. Moving away from a phone based trading desk to electronic tools will require adequate investments and know-how of running the operations. What will ultimately change the nature of the markets substantially are not just electronic trading tools, but a robust best execution rule which requires an interconnected market. As orders start to migrate to electronic platforms and an increasingly interconnected market appears, aggregation and distribution technology will be required to support this evolution. These issues can be handled at the level of trading venues and trading members, and if dealt with adequately should contribute to growing electronification of the market. However, lack of standardisation of issued bonds will still be a challenge and is something that can only be addressed by the issuers, and therefore may take time.

Pushing beyond apps

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Apr 30th, 2015

It struck me while I was driving this morning: First-gen mobile apps are fine, but virtually everyone is missing high-volume opportunities to engage with their customers.

Allow me to back up a step. I was stuck in traffic. Not surprisingly, that gave me some time to ponder my driving experience. I found myself thinking: Why can’t I give my car’s navigation system deep personalizations to help it think the way I do? And how do I get around its singular focus on getting from Point A to Point B?

I explored the system while at a red light. It had jammed me onto yet another “Fastest Route,” disguised as a parking lot. My tweaks to the system didn’t seem to help.

I decided what I’d really like is a Creativity slider so I could tell my nav how far out there to be in determining my route. Suburban side streets, public transportation, going north to eventually head south, and even well-connected parking lots are all nominally on the table when I’m at the helm. So why can’t I tell my nav to think like me?

I’d also like a more personal, periodic verbal update on my likely arrival time, which over the course of my trip this morning went from 38 minutes to almost twice that due to traffic.

The time element is important, of course. But maybe my nav system should sense when I’m agitated (a combination of wearables and telematics would be a strong indicator) and do something to keep me from going off the deep end. Jokes? Soothing music? Directions to highly-rated nearby bakeries? Words of serenity? More configurability is required, obviously, or some really clever automated customization.

Then an even more radical thought struck. Why couldn’t my nav help me navigate not only my trip but my morning as well? “Mr. Weber, you will be in heavy traffic for the next 20 minutes. Shall I read through your unopened emails for you while you wait?” Or, “Your calendar indicates that you have an appointment before your anticipated arrival time. Shall I email the participants to let them know you’re running late?” Or (perhaps if I’m not that agitated), “While you have a few minutes would you like to check your bank balances, or talk to someone about your auto insurance renewal which is due in 10 days?”

What I’m describing here is a level of engagement between me and my mobile devices which is difficult to foster, for both technical and psychological reasons. And it doesn’t work if a nav system is simply a nav system that doesn’t have contextual information about the user. But imagine the benefits if the navigation company, a financial institution, and other consumer-focused firms thought through the consumer experience more holistically. By sensibly injecting themselves into consumers’ daily routines—even when those routines are stressful—companies will have a powerful connection to their customers that will be almost impossible to dislodge. Firms like Google have started down this path, but financial institutions need to push their way into the conversation as well.

Newfound financial freedom: pension reform update – what about the mass affluent?

Apr 30th, 2015

Today I had the pleasure of attending the Wealth Briefing Summit held at the prestigious Guildhall Art Gallery in London.   The event consisted of 3 sessions and was led by a panel of industry experts who conversed about some of the most pertinent topics facing the UK wealth management industry today: pension reform,  digital solutions, and personalized portfolio construction.

While each of these sessions were of interest to me, I found the pension reform “debate” (in quotes as this was much more civilized than the recent PM election debates have been) particularly intriguing. Clearly, one of the solutions to navigating through the new pension rules will be advice from a wealth manager. But, as we know, not everyone wants this advice or can afford this advice. So what are the mass affluent going to do? This was a question raised by an audience member (and a fair one at that). After all, everyone is entitled to a pension and will presumably need some form of guidance in light of the reforms.  I was surprised that not one of the panel members mentioned the idea of automated investment advisors; Nutmeg and insurers (who have created their own automated investment platform) have entered into the pension space.

It’s a good thing we’re here (see our wealth management reports) …anyway, I digress. Perhaps this is an indication that automated investment advisors have barely tapped into the UK wealth management market, or could it be that the panelists’ firms are building their own robo advisor solutions, but are keeping this under wraps for the time being? Or, maybe traditional wealth managers are so out of touch with the mass affluent (we know this to be slightly true), that this question hadn’t occurred to them previously? This is a thought-provoking topic in my opinion, and one that I look to explore further in an upcoming report about the UK retirement market.



Important WM Trends Affecting the Advisor Business

Apr 30th, 2015

We get asked many times what are some of the main trends in the wealth management market, in particular those that disrupt the advisor business. While we can come up with a number of them, here are some of the major ones to consider:

  1. Digitization: Firms need to manage physical and digital channels and integration of disparate channels
  2. Increased investment in advisor tools to increase operational efficiency: Improvement of wealth management platforms and advisor dashboards, collaboration tools, as well as self-directed tools for investors
  3. Simplicity is key to maintaining customer relationships: user experience, content in everyday tools used by advisors, etc.
  4. Integration – What does it mean for advisors to have an integrated experience? What are firms doing today to address this?
  5. Customer segmentation – different strategies employed to retain/cross-sell/up-sell the various customer segments.
  6. Challenges encompassing technology adoption

    These trends are seen across the board in the wealth management industry, although each firm has a different perspective and is engaging them at a different level, in particular because the pain points will be distinct depending on the type of firm and the customer segments targeted. Celent is currently doing a study to identify the differences in these main themes across multiple wealth management firms. If you are a firm with an advisor business and is interested in participating, here is the link:


    Data will be used on an aggregate basis. Participating firms will receive a copy of the study when completed.