TECHNOLOGY TRAPS WEALTH MANAGERS MUST AVOID
Alternative Investments
Michelle Wilson is Head of Product at Canoe Intelligence, a financial technology company powering alternative investment intelligence for institutional investors, capital allocators, wealth managers, and asset servicing firms. In this article, Wilson explains the operational challenges investors face in this industry and highlights the benefits of choosing the right technology solution to manage the operational burden. INVESTING IN ALTS: HOW PURPOSE-BUILT TECHNOLOGY ALLEVIATES THE OPERATIONAL BURDEN As investors seek out higher yields in the current low interest rate market, they are allocating more capital to private market asset classes. Investments in alternative asset classes have grown from $4.6 trillion to $13.3 trillion in the past decade. By 2026, these investments are expected to nearly double. While the benefits of alternative investing are clear, wealth managers are often surprised by the operational burden of managing these assets. Most alternative investment managers exclusively offer reports and notices in PDF or hard-copy formats, meaning that, to consume the data in their downstream systems, investors must either manually transcribe these data points or figure out ways to extract and digitize the relevant information. Furthermore, the content and structure of these statements vary widely across the different asset managers, as there is no unified reporting standard for the private markets. Documents are also made available to investors via disparate channels like online investor portals, or via email as attachments.
NAVIGATING UNFAMILIAR TERRITORY Unlike traditional investments, the esoteric nature of alternatives makes the associated reporting very complex. According to Michelle Wilson, Head of Product at Canoe Intelligence: “As a wealth manager increases their allocation to alternative asset classes, they quickly become inundated with a high volume of likely unfamiliar documentation. To cope, firms may end up allocating more time and resources towards supporting the post-investment process, rather than to higher-value functions like investment research or client engagement.” To deal with these challenges, investors who lack a sufficient understanding of the nuances of these asset classes may encounter some common pitfalls. Wilson notes: “A lot of firms resort to
14
building resource-intensive manual teams to manage this process, which is not only expensive but also increases the risk of client service-level agreements (SLAs) being missed and other human error. It becomes extremely difficult to scale.”
EXPLORING SOLUTIONS: TRIAL AND ERROR Alternatively, some firms opt to outsource these workflows to administrators or managed service providers to free their team’s time for more value-adding activities. However, rather than eliminate the work, this approach simply transforms it into oversight of the third party, introducing a level of opacity that weakens control and could cause unintended risk. It is no surprise then, that some investors turn to technology to solve the challenge of digitizing the data to alleviate the burden on their teams. However, even with this approach, a common mistake is to select generic solutions which may seem initially attractive based on a lower price point.
“Whereas generic solutions are typically optical character recognition (OCR) based, technology like Canoe’s is purpose-built and incorporates a deep knowledge of the alternatives industry. Generic extraction solutions are better suited to highlystructured documents.” As Wilson notes: “Whereas generic solutions are typically optical character recognition (OCR) based, technology like Canoe’s is purpose-built and incorporates a deep knowledge of the alternatives industry. Generic extraction solutions are better suited to highly-structured documents. In the alternatives space, documents are largely unstructured and the vocabulary is specialized, so the generic technologies do not perform well.” For example, “Our field library is very tailored to the kinds of terms you would see used in the alts space, down to the different ways firms refer to the same data point across the industry.