Software makers eye adviser compliance market

WASHINGTON — Registered investment advisers are likely to outspend other financial intermediaries for compliance software, according to a recent report by Celent LLC, a Boston-based research and consulting firm. The market for compliance software for financial professionals — including those at hedge funds, broker-dealers, institutional asset managers, retail financial advisers and trust companies — is expected to grow more than 75% to $318 million by 2011, from $178 million this year, according to the report. “We’re seeing a lot of demand for these types of solutions,” said the report’s author, senior analyst Isabella Fonseca, who is based in New York. Responding to greater regulatory scrutiny of adviser practices, software vendors are starting to offer solutions that pull different compliance functions into a single, integrated system. The Celent report reviewed 50 software products and concluded that eight companies offered complete compliance solutions for financial professionals. Examined in the report are solutions by New York-based Actimize Inc., Brighton, Mass.-based Automated Compliance Solutions LLC, Lincolnshire, Ill.-based Compliance11 Inc., London-based Iconium Ltd., NorthStar Systems International Inc. of San Francisco, SunGard Data Systems Inc. of Wayne, Pa., TerraNua, which is an arm of Boston-based Fidelity Investments, and TurboCompliance Inc. of New York. The programs address issues such as the monitoring of trade compliance to ensure that individuals don’t violate regulations or ethical guidelines. Systems also look at operational risk compliance, such as those required by the Sarbanes-Oxley Act of 2002. NorthStar’s system allows financial advisers to look at the suitability of a new client and to set up investment guidelines that are monitored for compliance, said Vicki Morris, vice president of product marketing. “In the past, advisers may have written down investment requests, such as that 30% of investments be environmentally friendly investments, but implementing them into the portfolio didn’t always happen,” she said. Compliance with investment policies is something that increasingly is needed, because of the boost in interest in alternative investments, Ms. Morris said. It is especially important for RIAs to document client investment constraints upon turning investment decisions over to a portfolio manager. The NorthStar solution attempts to put the compliance function at the front end of the adviser system to give advisers tools “so they can focus on growing assets under management,” Ms. Morris said. NorthStar’s cost depends on the number of advisers who use it. For example, for a system used by 50 people, the cost would be about $250,000, she said. The cost of a software solution isn’t likely to stop a firm that is interested in meeting new compliance regulations, Ms. Fonseca said. The bigger challenge is to get advisers to use the tools once they are in place, she said. A survey of 100 financial professionals released in May (InvestmentNews, May 29) suggested that advisers often purposely evade compliance procedures. The survey by Vestment Advisors Inc., a Shorewood, Minn.-based consulting and training firm for the financial services industry, found that about 20% of responding financial professionals said they knew of someone who knowingly violated compliance rules and regulations. Typically, advisory firms aren’t quick to decide which compliance system is best for its advisers. Fred Greene of Greene Wealth Management in Carlsbad, Calif., said that thanks to increasing regulations, he has had compliance issues come up more and more frequently. He has been considering different solutions, including buying software that simply helps with e-mail retention, though he doesn’t expect to buy a new system in the near future. Greene Wealth Management, which has about $4 million in assets under management, has procedures in place to handle e-mail correspondence. “But if we had to generate information in the format that regulators wanted, then I would probably have to call a consultant,’’ Mr. Greene said.