Integrating Emerging Technology: How Technology Makes Managing Risk Easier

Its a brave new world for Broker Dealer (BD) and Registered Investment Advisory (RIA) firms. With the continuous evolution of emerging technology, firms that deal with securities and investments will either keep up with the latest trends or get left behind. However, managing risk in an emerging technology environment is like trying to predict the future. While staying ahead of the curve is essential for success in todays market, staying out of trouble with the SEC, FINRA and investors is also a concern for firms developing new strategies.

Whats new in financial industry technology?

RegTech (regulatory technology) helps firms stay on top of regulatory compliance, risk management, and governance. An improvement from using spreadsheets, templates and other low-tech methods, many firms find that subscription based Software-as-a-Service models provide all the features they need in a regulatory management tool. Programs are data-driven and audit-ready. Teams can communicate and complete tasks in real-time with feedback and transparency. Progressive subscription based services are priced by module and customized to flow with the firms product, trade strategy, or investor focus.

Another developing phenomenon comes from robo-advisors, which provides a self-service platform for new generation of clients who might want 24/7 access to investment advice from anywhere in the world. Robo-advisor technology provides an economy of scale solution for firms and are often marketed using the lure of lower fees, easy-to-use software, plus mobility. Hybrid BD and RIA firms can achieve easy entry to robo-advisory services through affiliate relationships with technology firms that provide integrated platforms. By partnering with a robo-advisory solution provider, firms escape the high overhead costs of IT development and cybersecurity challenges.

Algorithms came under the microscope by regulatory authorities like FINRA in 2016. High-frequency trade systems based on algorithms and designed by humans are a concern for regulators who understand that algorithms may not always work right. Major concerns about supervision and control practices and the potential for strategy that adversely impacts market or firm stability are being addressed. As a result of these concerns, there is new regulatory oversight for algorithms and the people who write them. Series 57 registration, launched in June 2016, requires individuals responsible for day-to-day activities of HFT systems, or who design and develop HFT algorithms, to be registered with a series 57, ensuring they possess requisite expertise of regulatory guidelines.

The upside to using robo-advisors and algorithms is reduced personnel. Firms can benefit from efficient systems that automate tasks that humans previously performed. Automated systems improve accuracy, provide quick access to an audit trail and employ bandwidth that can be scaled up or down depending on usage requirements.

Another new technology that is coming of age is blockchain technology and smart contracts. Blockchains provide a continuous record for everyone who participates in a transaction while delivering a permanent, traceable record for that transaction. Blockchain transactions are more transparent to a wider group of people and easier to trace by regulatory authorities. Additionally, money laundering and fraud are nearly non-existent due to the traceability and permanence of the blockchain record, where more records can be added but never removed or altered. This feature of blockchains also gives firms a leg up on regulatory audit trails and greater opportunity to automate processes, including adding smart contracts. A smart contract, more recently adapted to use with blockchains, is a computer programmed contract that executes automatically based on required conditions being met. The conditions are built in to the smart contract along with instructions to execute a specific step upon meeting a specific condition. As steps are completed (i.e. signature, bank deposit, ) the contract automatically generates the next series of instructions. Smart contracts are more efficient and intuitive than traditional contracts. And, smart contracts are more secure because the contract elements cannot be changed mid-stream, reducing potential for human error or unethical practices such as changing the terms of a transaction.

Strategies to implement new technology

One option to implement new technology is off-the-shelf software packages that include limited customizable options. A second choice is subscription-based software where users have log in access 24/7. Customization and back-end cybersecurity are handled by the vendor, making this an ideal way for firms to stay on top of the latest technology. Another solution is to build an in-house, customized system. This option is often a very expensive undertaking and may not be viable for smaller BD/RIA firms. Firms investing in developing their own technology solution should beware that technology is moving at record speed, and the system they develop today may be outdated within a few years. This risk makes using a subscription SaaS model ideal for most firms.

Bottom line, technology improves efficiency for BD/RIA firms. Todays solutions are scalable. As the client base grows, additional bandwidth is added. Newer technologies also mean convenience for end-user clients, many of whom want information about their account immediately. This new generation of clients tends to favor cutting edge technology offered at lower-cost than traditional brokerage or advisor firm fees. Additionally, regulatory authorities are focused on technology that provides data-driven, transparent, audit-ready records which makes oversight and detection easier.

Three steps for implementing emerging technology

  1. Measure expected benefits. Added technology, even with reduced staff, can result in more convenience for clients, compliance managers, representatives, and executives, who log in and mange business 24/7. Technology solutions also deliver faster turn-around on processes and real-time information through automation and scalable growth.
  2. Perform all due diligence. Budget for a return on investment, and commit sufficient resources to launch new technology/software effectively and efficiently. Change is hard for any firm, so getting the buy in from all employees-top to bottom-is a prerequisite for an successful transition.
  3. Plan the integration. There is a learning curve for firms and investors who use the new system. Keep additions and modifications user-friendly and cyber-secure. Be sure to research the market and client base. It is important that changes arent intimidating. Remember to simplify where necessary when introducing staff and clients to this rapidly changing environment.

Stay ahead of the curve

Adopting emerging technology also includes staying ahead of ever-evolving cybersecurity attacks that frequently dominate todays headlines. A NetDiligence 2016 Cyber Claims Study found that humans are the weak link in many instances. Insider involvement was uncovered in 30 percent of cybersecurity issues, followed by outside hacking at 23 percent. SEC requirements are continually upgraded to address effective cybersecurity firewalls and company policy.

Regulatory compliance rules may loosen somewhat under the new administration, which may be good news but cautionary too. BD and RIA firms may need to do more in-house self-policing than ever to stay out of hot water with investors and regulators. Employing the latest technology to stay on top of compliance, while offering better service, is a wise business choice for everyone.

About the Author:

Dave Banerjee CPA is Co-Founder for RND Resources Inc., a consulting and audit firm focused on compliance requirements for the securities brokerage industry. Headquartered in Woodland Hills, CA, it was founded in 1984. See for more information about RND Resources Inc.