What Your Bank Needs to Know About Data


board-9-12-18.pngBanks executives and directors of all sizes are or should be continually discussing and crafting strategic initiatives for the future of the institution. Today’s competitive ecosystem that’s rooted in continually evolving technological developments and uses of data has made it essential for bank leaders to continually adapt.

From the top of the company to the most basic product and talent level, banks are building strategies to maintain competitive positions using these different kinds of data assets. But with any new or developing strategy, there is a potential for added cost and risk that could negatively affect the bank.


efficiency-7-18-18-tb.pngThinking Beyond The Efficiency Ratio
The ratio of operating expenses to operating revenue has long been a metric by which banks track performance. But there’s much more to accurately and effectively evaluating the performance of your bank and improving efficiency, and management should be exploring further to truly assess opportunities to improve.

agenda-9-12-18-tb.pngWhy Data Should Be On Your Board’s Agenda
More and more executives have come to realize that data management needs to be a priority and not a back-office function for a select group within the organization. Almost everything in the company can be tracked or monitored with data, and it can lead to long term efficiencies.

strategy-9-12-18-tb.pngFive Steps to a Data-Driven Competitive Strategy
There’s no mistaking that leveraging the right data the right way should be a key component of any bank’s strategic planning. Assessing and evaluating your bank’s practices with data can enable you to deliver improvements and advantages for both the bank and its customers.

survey-9-12-18-tb.png2018 Branch Benchmarking Survey
As traffic in branches continues to decrease and as possible changes to the Community Reinvestment Act are discussed by regulators, bankers are continually trying to craft optimal branch strategies. In Crowe’s latest research, we review data from 457 branches around the country to find trends in branch operations and performance.

consumer-9-12-18-tb.pngFive Ways to Measure Success in Consumer Channels
Amazon is able to not only monitor consumer preferences, but deliver aligned products to deepen and extend the relationship with those consumers. If retailers like Amazon can achieve that with its data, banks should be able to deliver a similar experience for consumers as well. Banks must take an objective look at performance across their consumer channels to prepare to compete.

How U.S. Bank Helps Distressed Borrowers


mortgage-7-4-18.pngLike many lenders during the Great Recession, U.S. Bank found itself with a large number of mortgage loan borrowers who couldn’t keep up with their payments, and it had little help to offer. This was bad for the bank and borrowers alike because mortgage loans that went into default often ended up in foreclosure, which drove up the bank’s costs while putting the borrower at risk of losing their home.

Scott Rodeman, a senior vice president for consumer loan servicing who joined the Minneapolis-based bank in 2014, knew there were resources available to distressed borrowers from his experience at a previous bank employer, and he reached out to SpringFour, a 13-year-old company headquartered in Chicago. SpringFour acts as a conduit to agencies and organizations that work directly with borrowers having trouble making their loan payments because of other financial issues, like the loss of a job or mounting medical bills from a serious illness.

“Coming out of the mortgage crisis, mortgage servicers were somewhat limited in how they could help their homeowners…stay in their homes,” says Rodeman, who is responsible or U.S. Bank’s mortgage, auto and consumer loan collections, repossession, recovery and loss mitigation operations. The bank could offer solutions to homeowners who still had some cash flow, but it had little advice for those who couldn’t even make a partial payment. “Really, our loan counselors had very few options to help them improve their financial cash flow to pay for home-related expenses, housing and things like that,” Rodeman says.

That’s where SpringFour comes in. The company provides a cloud-based technology solution called the S4 Desktop that allows lenders like U.S. Bank to refer distressed borrowers to nonprofit organizations and government agencies that can help them get their financial affairs in order. “When people get behind and can’t pay their bills, it’s really because of something that’s happening in their financial lives,” says SpringFour CEO and co-founder Rochelle Nawrocki Gorey. “There’s a lot of shame attached to financial challenges, so they don’t reach out and get help. We believe that when people are living paycheck to paycheck, they need and deserve to be connected to local resources that can help.”

U.S. Bank and SpringFour were co-finalists in Bank Director’s 2018 Best of FinXTech Innovative Solution of the Year award.

The S4 Desktop solution can be accessed by U.S. Bank service representatives by logging into the service via the web. From there, they can direct the borrower to agencies and organizations that can help that individual work through their financial crisis. A link to SpringFour can also be found on the U.S. Bank website. The SpringFour database contains over 10,000 resources in all 50 states, and Gorey says her firm is constantly vetting and curating the data to keep it up to date. “We have a professional data team that is assessing the nonprofits for track record, reputation, funding and capacity to assist,” she says. “We’ve built a strong track record of trust with our financial institution clients. They know when they make a referral through SpringFour, it’s going to be accurate.”

Because the S4 solution is cloud-based, there were no implementation issues to speak of, according to Rodeman. “There was no technical work or development work really,” he says. “It was all customer-facing edits to our existing processes. Then, of course, training our employees to offer the service and manage that just like any other call center function.”

U.S. Bank has been working with SpringFour for about two years, and Rodeman says the program has shown tangible results. “Consumers that receive these referrals are twice as likely to engage in some kind of loan workout strategy with us rather than just allow the house to go into foreclosure,” he says. “That’s a significant number.” Mortgage borrowers that receive referrals are also 10 percent more likely to remain current with their mortgage. An equally important if less tangible benefit is that the program has enabled the bank to build a deeper relationship with its customers. “Coming out of the crisis, consumers were afraid of their mortgage servicers,” says Rodeman. “For us to see that kind of engagement rate increase shows that we’re building rapport and trust with our customers.”

If U.S. Bank had access to the SpringFour program during the mortgage crisis, Rodeman believes it would have helped reduce the number of foreclosures. The economy is much healthier today, of course. But even now there are borrowers who need help making their loan payments, “Based on our numbers in an improving economy, I don’t see why it wouldn’t have [helped] back then.”

Now Is The Time to Use Data The Right Way


data-6-29-18.pngMost bankers are aware of the changes that are forthcoming in accounting standards and financial reporting for institutions of all sizes, but few are fully prepared for the complete implementation of all of the details in the new current expected credit loss (CECL) models that will take effect over the next few years.

Banks that act now to effectively and strategically collect, manage and utilize data for the benefit of the institution will be better positioned to handle the new accounting requirements under CECL and evolving regulations with state and federal agencies.

Here are three articles that cover key areas where your board should focus its attention before the rules take effect.


credit-data-6-29-18.pngCredit Data Management
Under Dodd-Frank, the law passed in the wake of the financial crisis, banks of all sizes and those especially in the midsize range of $10 billion to $50 billion in assets were required to do additional reporting and stress testing. Those laws have recently been changed, but many institutions in that asset category are opting to continue some form of stress testing as a measure of sound governance. Managing credit data is a key component of those processes.

management-6-29-18.pngCentralizing Your Data
Bank operations are known to be siloed in many cases as a matter of habit, but your data management can be done in a much more centralized manner. Doing so can benefit your institution, and ease its compliance with regulations.

CECL-6-29-18.pngGet Ready for CECL Now
The upcoming implementation of new CECL standards has many banks in a flurry to determine how those calculations will be developed and reported. Few are fully ready, but it is understood that current and historical loan level data attributes will be integral to those calculations.

Realign Your Bank’s Operating Model Before It’s Too Late


core-6-19-18.pngThe banking industry and its underlying operating model is facing pressure from multiple angles. The advent of new technologies including blockchain and artificial intelligence have started and will continue to impact the business models of banks.

Meanwhile, new market entrants with disruptive business models including fintech startups and large tech companies have put pressure on incumbent banks and their strategies. A loss of trust from customers has also left traditional banks vulnerable, creating an environment focused on the retention and acquisition of new clients.

In response to looming industry challenges, banks have begun to review and adapt their business models. Many banks have already adjusted to the influence of technology, or are in the process of doing so. Unfortunately, corresponding changes to the underlying operating models often lag behind technology changes, creating a strong need to re-align this part of the bank’s core functions.

So what does “re-align” mean from an IT architecture point of view?

Impact on System
In order to keep up with the fast-paced digital innovation, investments have largely focused on end-user applications. This helped banks to be seen as innovative and more digital friendly. However, in many cases these actions led to operational inefficiencies and there are several reasons why we see this.

One is a lack of integration between applications, resulting in siloed data flow. More often, though, the reason is the legacy core, which does not allow seamless integration of tools from front to back of an organization. Further, M&A activity has led many banks to have several core legacy systems, and often these systems don’t integrate well or exist with multiple back-end systems that cater to a specific set of products. This complicates the creation of a holistic view of information for both the client and financial advisor.

There are two ways of addressing the above-mentioned challenges to remain successful in the long-run:

  1. Microservice driven architecture
  2. Core Banking System modernization

Microservice-driven architecture
Establishing an ecosystem of software partners is important to be able to excel amid rapid innovation. Banks can’t do all the application development in house as in the past. Therefore, a microservice-driven architecture or a set of independent, yet cohesive applications that perform singular business functions for the bank.

The innovation cycles of core banking systems are less frequent than innovation cycles for client- and advisor-facing applications. To guarantee seamless integration of the two, build up your architecture so it fully supports APIs, or application programming interfaces. The API concept is nothing new; however, to fully support APIs, the use of standardized interfaces will enable seamless integration and save both time and money. This can be done through a layer that accommodates new solutions and complies with recent market directives such as PSD2 in Europe.

core-banking-graphic.png

Core Banking System Modernization
Banks are spending a significant amount of their IT budget on running the existing IT systems, and this allows only specific parts go into modernization.

A simple upgrade of your core banking system version most likely won’t have the desired impact in truly digitizing processes from front to back. Thus, banks should consider replacing their legacy core banking system(s) to build the base layer of future innovation. This can offer new opportunities to consolidate multiple legacy systems, which can reduce operational expenditures while mitigating operational risks. In addition, a core banking replacement allows for the business to scale much easier as it grows.

A modern core banking system is designed and built in a modular way, allowing flexiblity to decide whether a specific module will be part of the existing core or if external solutions will be interfaced instead, resulting in a hybrid model with best-of-breed applications in an all-in-one core banking system.

Investing In Your Core Can Save You
Core banking system modernization and adoption of the microservice-driven architecture are major investments in re-aligning a bank’s operating model. However, given the rapid technological innovation cycles, investments will pay off in improved operational efficiency and lower costs.

Most importantly, re-aligning the operating model will increase the innovation capabilities, ultimately resulting in a positive influence on the top line through better client experiences.

Enhancing the Lending Process Through Data



Customers today expect quicker decisions, and data can empower banks to improve the customer experience. Data can also enable growth as banks gain more and better information about their customers. In this video, Steve Brennan of Validis outlines how banks can confront the challenges they face in making the most of their data.

  • How Data Has Transformed Lending
  • The Benefits of Leveraging Data
  • The Challenges Banks Face
  • Addressing Data Deficiencies

Cybersecurity Should Keep Bank Leaders Up at Night


cybersecurity-6-11-18.pngTwo years in a row, Mike Morris and his team at the consulting firm Porter Keadle Moore dinged a client bank for what the firm saw as a potential security threat by allowing access to personal email accounts while using company equipment.

Then about a month ago, on a Friday afternoon, Morris, a partner and cybersecurity expert at PKM, got a call. The bank they had written up two straight years for the same potential security lapse had, in fact, been breached by someone using personal email on company equipment, exactly what they had identified as the possible threat.

Such cybersecurity threats are among the most serious for any institution for a multitude of reasons, from fiduciary responsibilities to reputation and beyond. Cybersecurity will be a common topic at the Bank Director’s 2018 Bank Audit & Risk Committees Conference, held June 12-13 in Chicago.

Morris has multiple stories about hacks and phishing scams that have in some way compromised personal data or a customer’s own money.

Another recent case: A customer fell victim to a phishing scam, and the source in China managed to wire $150,000 through another bank before they “got lazy” and tried to draw another $150,000 directly from the customer’s bank. The second transaction, thankfully, was caught by the bank’s compliance team in review.

“That’s happening on a regular basis, and it’s not a new trend, but yeah, it’s happening all the time,” Morris says.

Some of the financial services industry’s most experienced experts paint a dark picture about how prepared—or not—banks generally are for cyberattacks, or perhaps more generally, just threats to customer information that could ultimately pose a risk to the bank.

It’s not a new challenge for the industry. Banks have had training along with regulator attention and oversight for at least a decade on this topic, but with an increasingly vast digital footprint, troves of data and relationships outside the walls of the bank with vendors, the potential threats grow in parity.

“Firms that successfully introduce cutting-edge technologies need to infuse cybersecurity risk management practices throughout the entire development life cycle to identify and mitigate new risks as they emerge,” said Bob Sydow, a principal at Ernst & Young, in testifying before the Senate Banking Committee in late May. “This shift in mindset from thinking about cybersecurity as a cost of doing business to seeing it as a growth enabler is not easy, but it is the only viable path forward.”

The data about cyber threats—not to mention what seems like weekly headlines about data breaches—doesn’t help dissuade any worry that bank leaders or risk officers might have. The 2017-18 Global Information Security Survey by Ernst & Young found nearly 90 percent of some 1,200 bankers around the world said their cybersecurity function doesn’t fully meet their organization’s need. More than a third said their data protection policies were ad hoc or nonexistent, Sydow told senators, just weeks after Facebook CEO Mark Zuckerberg was on Capitol Hill testifying about Cambridge Analytica’s use of the social network’s user data.

“As banks and other financial services firms define their digital strategies, their operations are becoming ever more integrated into an evolving and, at times, poorly understood cyber ecosystem,” Sydow said.

That integration Sydow talked about is an area where there’s considerable risk, Morris says, that should be reviewed and understood by audit committees, risk committees, boards and other bank leaders. Financial institutions are working with an increasing number of third-party vendors for specific services or products, some of which require that vendor to access the data of the bank’s customers. That itself presents a risk, and boards should be especially careful when negotiating contracts that in early draft stages tend to favor the interests of the vendor but are often revised through the negotiation process.

Morris says it should be a top priority for banks to have a right-to-audit clause or confidentiality clause in those agreements, which gives the bank some authority to ensure the data to which they are allowing access is treated properly and kept secure. Boards should also take the opportunity to update or revise long-standing contractual agreements, like those with core system providers, when they come up for renewal.

Many institutions have lengthy contracts with their core technology providers, and with data security a preeminent concern, those renewals should be taken seriously.

“You have that moment of power when you haven’t signed an updated agreement that you can get some of these clauses put in there,” Morris says.

Cybersecurity & Regtech: Defending The Bank



How can financial institutions proactively combat the risks facing the industry today? The 2018 Risk Survey—presented by Bank Director and Moss Adams LLP—compiled the insights of directors, chief executive officers and senior executives of U.S. banks with more than $250 million in assets. According to the survey, the worries keeping top executives awake at night align with the key priorities that banks commonly hear from banking regulators: cybersecurity, compliance and strategic risk.

Cybersecurity
Cybersecurity was the biggest concern by far, reported by 84 percent of respondents.

The survey addressed the confidence that executive and directors have in their institutions’ cybersecurity programs, with an emphasis on staffing and overall effectiveness. Access to the proper talent—in the form of a chief information security officer (CISO) or a strategic partner with the necessary skill set—and associated costs are key to a successful program, and 71 percent of respondents revealed their bank employs a full-time CISO.

While technical skills are valuable in today’s business environment, financial institutions must overcome their dependence on skilled technicians who don’t necessarily have the ability to strategically look at the changing technological landscape. The CISO should build an appropriate plan by taking a full view of the bank’s technology and strategy. Without this perspective, a bank could provide hackers with an opening to breach the institution, regardless of size or location.

Institutions building the foundation of a robust cybersecurity program should also focus on three key areas:

  • Assessment tools: Is the institution leveraging the proper technologies to help maximize the detection and containment of potential issues?
  • Risk assessments: Has management identified current risks to the organization and implemented proper mitigation strategies?
  • Data classification: Has management identified all critical data and its forms, and addressed the protection of this data in the risk-assessment process?

Compliance
Compliance was the second biggest area of concern, identified by 49 percent of respondents. It’s an area that continues to evolve as new regulators have been appointed to head the agencies that regulate the industry, and technological tools—dubbed regtech—have entered the marketplace.

More than half of survey respondents indicated that the introduction of regtech has increased their banks’ compliance budgets, demonstrating that the cost of solutions and staff to evaluate, deploy and support these efforts in an effective manner is a growing challenge.

Because the volume of available data and the ability to analyze that data continues to grow, respondents may have felt this technology should have effectively decreased the cost of operating a robust compliance program.

Executives looking to decrease costs may want to consider the staffing required to operate a compliance program and whether deploying technology would allow for fewer personnel. When technology is properly used and standards are developed to help guarantee efficient use of it, the dilemma of acquiring technology versus adding staff can often be more easily solved.

Strategic Risk
Strategic risk was the third largest area for concern, identified by 38 percent of respondents. Many directors and executives are wrestling with what the future holds for their institutions. The debate often boils down to one question: Should they continue to build branches or invest more in technology—either on their own or by partnering with fintech companies?

Fintech companies are a growing player in lending and payments segments, areas that were historically handled exclusively by traditional institutions. That, coupled with clients who no longer value personal relationships and instead prioritize being able to immediately access services via their devices, increases the pressure to deliver services via technology channels.

Financial institutions have entered what many would call a perfect storm. Every institution will need to make hard decisions about how to address these issues in a way that facilitates growth.

Assurance, tax, and consulting offered through Moss Adams LLP. Wealth management offered through Moss Adams Wealth Advisors LLC. Investment banking offered through Moss Adams Capital LLC.

Unlocking Data Through Digitization


digitization-5-7-18.pngIt’s no secret that no matter the business, access to the right data at the right time can provide valuable insights into the current state of that business and potentially an entire industry and its future.

Accurate, real-time data serves as benchmark against past performance while also providing a roadmap for future trends. Access to the right information could be the key to preventing small issues from becoming multi-billion or even trillion-dollar problems.

During the global financial crisis, the International Monetary Fund estimated that banks and other financial institutions faced aggregate losses of $4.05 trillion, $2.7 trillion of which came from loans and assets originating in the United States, according to The New York Times. Additional news outlets, including the Wall Street Journal, have reported total global losses as large as $15 trillion from the crisis. Imagine if just a fraction of these losses could have been avoided with timely access to critical data insights.

Within an industry that has remained confined to spreadsheets and paper files, the real value in digitization is the data modern technology can unlock. Too many decisions in the construction lending industry are being made with outdated information and in some cases, purely by instinct. With so much data available to us, why isn’t every decision data-driven?

Software Can Help Streamline Processes
The traditional construction lending administration process requires loan administrators to manually gather data from various spreadsheets and paper files when assembling reports. 

This manual and time consuming process costs credit departments days, and sometimes weeks of valuable time, and as a result, many financial institutions only review comprehensive portfolio data when it is deemed absolutely necessary. Put aside for a moment the high percentage of human errors found in everyday spreadsheet reporting, this lack of oversight leaves lenders vulnerable to compliance issues and unexpected risk, which can easily be avoided with proper reporting and analytics platforms.

Mitigate Risk with Data
Despite the earning potential of construction portfolios, lenders and credit management departments typically avoid construction loans because they are often considered the riskiest loans within a bank’s portfolio, garnering significant attention from regulatory agencies to ensure risk is being managed properly. Construction lending software allows financial institutions to leverage the growing construction market without absorbing the additional risk. Digitization provides financial institutions complete reporting capabilities and unprecedented portfolio insights, giving lenders the ability to readily access complete reports about an array of issues including rate and fee variances, inactive or stale loan accounts, matured loans, liens and insurance lapses, among others.

Up to date and readily available reporting and portfolio insights allow lenders to quickly identify potential issues, significantly reducing the inherent risks associated with the complex nature of construction lending.

Satisfy Auditors and Examiners
Limited inventory, especially in entry-level housing, and increased demands within the housing market have resulted in a continuation of the national housing shortage in 2018. With an influx in first-time homebuyers expected this year, experts have predicted significant growth in the construction industry, including a 9-percent increase in single-family housing starts. 

As a result, examiners will be paying closer attention to swiftly growing construction portfolios in order to ensure regulatory compliance. Construction loan automation software allows lenders to better prepare for compliance exams with easily accessible reports that provide examiners the information they require with little interruption to a credit management department’s daily workflow.

Drive Your Decisions with Data
Through digitization, financial institutions have the ability to quickly and easily pull both global and granular reports from their entire construction portfolio, allowing lenders to use reporting capabilities to create insightful metrics that can be applied to performance tracking, accounting strategies, and strategic planning. In construction lending, reporting of this caliber allows lenders to make data-driven decisions by identifying, measuring, and tracking effective solutions, while eliminating or improving failed strategies.

What Facebook’s Data Debacle Could Mean for Banking


regulation-5-2-18.pngThere was a particular moment on the second day of his most recent testimony Facebook CEO Mark Zuckerberg struck a rare smile.

Zuckerberg, on Capitol Hill to answer pointed questions about the scraping of company’s data on 87 million of its users by U.K.-based Cambridge Analytica—was asked if Facebook was a financial institution.

The odd inquiry came during a string of questions from Rep. Greg Walden, the Oregon Republican who chairs the House Energy and Commerce Committee that grilled Zuckerberg about the massive company’s complex web of operations, which includes a mechanism for users to make payments to each other using popular apps familiar to bankers like PayPal and Venmo, as well as debit cards.

Facebook is not a financial institution in the traditional sense, of course, but it does have a clear position in the financial services space, even if just by its role in providing a platform for various payment options. It has not disclosed how much has been transferred between its 2 billion users, and it certainly has raised questions about how tech companies—especially those with a much narrower focus on financial technology, or fintech—collect, aggregate, use and share data of its platform’s users.

This relationship could soon change as Washington lawmakers discuss possible legislation that would place a regulatory framework around how data is collected. Virtually any industry today is dependent on customer data to market itself and personalize the customer experience, which is predominantly on mobile devices, with fewer personal interactions.

“I think it’s likely something is going to happen here, because we’ve kind of been behind the curve as it relates to [regulation], especially Western Europe,” says David Wallace, global financial services marketing manager at SAS, a global consulting and analytics firm.

While banks are somewhat like doctors and hospitals in the level of trust that consumers historically have had with them, that confidence is finite, Wallace says.

Survey data from SAS released in March shows consumers want their banks to use data to protect them from fraud and identity theft, but they aren’t crazy about getting sales pitches.

At the same time, payments services like Paypal’s Venmo and Zelle, a competing service that was developed by a consortium of banks, also collect data, but have a lower “score” with consumers in trust, according to Wallace.

Where’s the Rub?
The question from Walden barely registered on the national news radar, but it also highlights new areas of concern as banks begin to adopt emerging technologies like artificial intelligence, and market new products that are often driven by the same kind of data that Facebook collects.

The recent SAS survey also asked respondents about their interactions with banks, and how AI might influence those. Most of the survey respondents say they are generally comfortable with their bank collecting their personal data, but primarily in the context of fraud and identity theft protections. Sixty-nine percent of the respondents say they don’t want banks looking into their credit history to pitch products like credit cards and home mortgages.

As the Cambridge Analytica situation demonstrates, there is a fine balance that must be observed giving all companies the opportunity and space to succeed in an increasingly digital environment while protecting consumers from the misuse of their personal data.

Congress tends to be a hammer that treats every problem like a nail—so don’t be surprised if the use of customer data is eventually regulated. Thus far, the only regulatory framework in existence that’s been suggested as a model of what might be established in the U.S. is the GDPR, or General Data Protection Regulation, currently rolling out in Europe. It essentially requires users to opt-in to allowing their data to be shared with individual apps or companies, and is being phased in across the EU.

How that approach might be applied to U.S. banks, and what the impact might be, is still unclear. It could boil down to a “creepy or cool” factor, says Lisa Loftis, a customer intelligence consultant with SAS.

“If you provide your (health) info to a provider or pharmacy, and they use that information to determine positive outcomes for you, like treatments or new meds you might want to try, that might factor into the cool stage,” Loftis explains.

If you walk by a bank branch, whether you go in it or not, [and] you get a message popping up on your phone suggesting that you consider a certain product or come in to talk to someone about your investments without signing up for it, that’s creepy,” she adds.

Any regulation would likely affect banks in some way, but it could be again viewed as a hammer, especially for those fintech firms who currently have a generally regulation-free workspace as compared to their bank counterparts.

A Path to Transparency for Alternative Investments


investments-3-7-18.pngCapital has been flowing into the alternative investment industry over the past few years, with some experts predicting that money invested in private funds will reach as much as $20 trillion by 2020. Preqin, which collects data on the alternative investment industry, recently published a study stating that there are as many as 17,000 private funds open for investment.

Strong returns and opportunities for diversification have attracted high net worth and institutional investors, who can invest in exponentially larger quantities than the average investor. Though these investors come with a greater ability to deploy capital, their size and influence translate into greater expectations and hurdles to meet in order to invest.

The word that best sums-up these growing expectations and hurdles is “transparency,” and this word has become a lightning rod when it comes to alternative investments like hedge, private equity and venture funds, along with special purpose vehicles and real estate.

As alternative assets have become a more common avenue for investment, transparency has grown in importance for investors. A 2017 study titled “Alts Transparency: Finding the Right Balance” by the Economist Intelligence Unit highlights this growth. Sixty-three percent of respondents listed “degree of transparency” as “very important” for alternative investments, which was ahead of all other considerations. Another statistic showed that the importance of transparency as a key issue for private fund managers has increased almost six-fold since the 2008 financial crisis.

Breaking this down further, the issue of transparency can be separated into two different types: (1) information about the fund, and (2) information about investors’ holdings within that fund. The first type deals with greater transparency of the overall performance of the fund, which includes the underlying assets in which that fund is invested and how risk is assessed and managed. The second type deals with greater transparency relating to investor-level performance. This includes metrics like investors’ allocation and return, and how fees are calculated.

There are a few reasons why the industry has struggled to deliver this type of information:

Complexity of Private Funds
There are key differences in reporting metrics between the various types of private funds. Performance metrics shown to an investor in a more liquid fund, such as a hedge fund, should be different than those reported for less liquid vehicles, such as private equity funds. Adding to the complexity, investments in alternatives can come in the form of limited partnerships, co-investments and direct holdings.

Outdated Technologies That Trap Data
Many of the widely used technologies for portfolio and investor-level accounting were created several years ago and because they lack Application Programming Interfaces, or APIs, they cannot integrate with each other or with other systems. This effectively traps the data contained within these systems, thereby restricting its usefulness and portability. This in turn has curtailed the ability to provide transparency to investors, as it restricts or prevents the necessary type of analysis, aggregation and modern presentation of data.

Lack of Leadership and Reporting Standardization
There is a lack of uniform reporting standards within the alternative investment industry. Although an increase in regulation along with the presence of organizations like the Institutional Limited Partners Assn. have helped advance standards in private equity, there is no current reporting standard across all types of private funds. Additionally, the party that should be responsible for delivering on transparency is unclear.

Despite these hurdles, the alternative investment industry must evolve and adapt. I would argue there are two key steps the industry must take to be able to deliver on investor demands for transparency and keep new capital flowing into private funds:

Move Towards True Digital Reporting
As it stands today, much of the industry reports performance information via static documents like PDFs, but this method traps data and inhibits interaction. By embracing new technology, the industry can move toward the type of dynamic, digital presentation of data that is experienced in brokerage and personal banking accounts. For example, cloud-based technology offerings can be integrated with accounting systems to liberate the data contained within for purposes of data mining, analysis and presentation.

Fund Administrators Must Take a Stronger Leadership Role
Fund administrators are best positioned to deliver on transparency needs given their role as independent third parties. They typically subscribe to the accounting systems that house this data and therefore have access to or create much of the analysis and reporting that is needed to deliver on transparency demands.

Helping their fund manager clients with transparency is good business for fund administrators, as it improves their overall quality of service to clients. All indications point to another banner year for alternative investments in 2018. However, investor demand for transparency will only continue to grow as alternative assets become more commonplace. The industry must modernize and adapt in order to stay ahead of the curve in the race for assets.