AIX Is Transforming the Alternative Investment Process by Changing the Game

October 12, 2020

AIX Is Transforming the Alternative Investment Process by Changing the Game

October 12, 2020 | James Sprow | Blue Vault

Blue Vault recently discussed with Brad West, COO at AIX Alternative Investment Exchange (“AIX”), how AIX is taking on the challenges that have been long-standing barriers to growth for the alternative investment industry. Since the industry began, it has been handicapped by the tedious paperwork and compliance issues that have plagued financial advisors who have wanted to utilize alternatives in their client portfolios. Not only has the advisor had to clear regulatory hurdles to sell investments in alternatives, but their broker dealers have also had to assure that all transactions have met business policies and state suitability rules. Paper-based transactions have taken up to eight weeks to complete with very high “not in good order” or “NIGO” rates requiring time-consuming reviews and reworking of paperwork.

Recognizing the potential for utilizing technology to create a solution that enables the operational, legal, and regulatory dimensions for all industry stakeholders, AIX’s data-driven, network-effect strategy is paying off.

Moving the Needle Requires Solving the Right Problems

Everyone knows that 100+ page PDFs and high error rates are a problem. There have been many attempts to address these issues with form filling tools and e-signature solutions that create marginal gains but don’t seem to really move the needle. So, we have to ask ourselves, why?

AIX believes the answer lies in how you choose to define the problem. Yes, lengthy documents layered with business rules so complex it would take a tax accountant to decipher them, let alone your every-day investor, are a problem. But according to West, these are just symptoms of a deeper issue.

“You hear a lot about the pain and friction associated with alternative investments being tied to ‘NIGO’ rates and long cycle times. But to address these surface-level issues you have to really dig deep to identify the root cause.” 

That is exactly where AIX started. Brad continues, “Over four years ago, before AIX was launched, we set out with a simple objective. We knew first-hand how hard it is to do business in alts and so we wanted to make it easy. Not only easy to buy alternatives, but also to own and to sell.” This meant taking an inside-out approach and spending countless hours with distribution firms and intermediaries to understand how the work gets done and what would need to change. West credits this process and the knowledge shared by industry stakeholders as foundational to the way the team approached building the technology.

Where Do You Start When You Want to Change the Way an Industry Works?

The obvious answer, according to West, is the advisor-facing subscription experience. As a whole, the industry wants to see growth, and that is achieved through new business. The subscription process as we’ve known it has quite literally been “death by a thousand papercuts,” thanks to endless amounts of paper and manual processing. While AIX has embraced the advisor experience as a cornerstone of their solution strategy, that can’t be the end of the story. “If all we did was make it easier to pre-fill a PDF, sign electronically, and called it a day, we haven’t helped anyone in a meaningful way. In fact, one could argue that it actually exposes firms to greater risk by flooding operations and compliance teams with more paperwork.”

To truly address the pain points and friction tied to subscriptions, you have to solve for the entire processing lifecycle. And accomplishing front-to-back automation can only be done through the transmission of clean data. Not paper or PDFs.

Knowing that data was imperative from the very outset, AIX engaged each industry stakeholder to understand and shape a solution together that could facilitate the movement of data from advisor to client to broker dealer to custodian to sponsor or fund administrator.

Not All Connectivity Is the Same. AIX Changed That.

Brad West continues, “The alternative investment industry is not a ‘straight line’ with a single ‘happy path’ for doing business. AIX has been highly intentional in creating the most robust network of connected transfer agents and supported clearing and custodian firms. Each Transfer Agent, Custodian, Wealth Manager, and Sponsor is different.  We embrace the differences and allow each party to do business their way.  When you look beyond PDF form filling and electronic signature – the way alternative investment business is done has not materially changed in the past several years because the core issues have not been addressed.  That is why we are here – to do the hard work of connecting through data, enabling workflow, and committing ourselves to growing the industry and meeting the needs of each stakeholder.”

To fully leverage the benefit of these data connections, AIX has developed a configurable workflow that allows each party to use their own operational and compliance policies.  The AIX platform conforms to the way each party does business and enforces compliance – not requiring partner firms to change the way they do business because of technology limitations, or requiring AIX’s network partners to pay exorbitant custom development fees to accommodate their policies.  Tailored workflow coupled with true data connectivity is creating a transformational impact and authentically removing the friction.

Setting a New Standard with Industry Support

According to West, “We invite the challenges and are happy to improve them because we know it is the only way a meaningful business outcome can be provided. AIX, as the technology player, knows that investing in the right technology solution reduces expenses associated with paper processes, NIGOs, compliance de-risking, and other costs of reconciling transactions at the home office. Besides cost reductions in all these areas, there is significant risk reduction. In addition to new business and subscriptions, we are managing the full lifecycle of the investment – overcoming each challenge that has limited growth for the industry.”  The result will be more wealth advisors allocating to alternatives because the process will be much less tedious.

West foresees a higher level of adoption and allocation to alternative investments for wealth managers.  By fundamentally removing the friction and delivering a higher quality experience, lower cost, and reduced risk, we aim to remove each obstacle that has limited the growth of the industry.  Ultimately, success is about “growing the pie.”

In today’s very unique market conditions, many wealth managers have been unable to transact in the alternatives sector. As we come to the other side of these conditions, AIX expects to see an uptick in capital raise. As it becomes easier to do business, the home office will want more sponsors to onboard. AIX is working through a change management exercise where habits have been formed over decades due to the absence of technology.  To unlock the potential of technology, there needs to be an investment in the process of showing people how the AIX system streamlines the investment experience for people to understand the benefits. As a result, they are seeing increasing adoption and the excitement that comes with it.

Built to Help Business Pivot During a Pandemic

The pandemic has no doubt accelerated the priority for firms to implement digital solutions. As a result, AIX works very closely with the broker dealers to be very hands-on and deeply involved with the home office. For the BD this is a huge competitive advantage that differentiates them from the market, which becomes an attractive tool for the BD to get more advisors and improve advisor retention.

AIX puts a lot of energy into the home office experience.  Effectively in the BD world, there are multiple steps of approval in the home office, and then the PDF documents have to get out to transfer agents and custodians. AIX is getting a huge lift from the home office people, getting rid of the paperwork, opening up their workflows. In the COVID environment, there is a major health risk in the paper processes, and the AIX system can be used anywhere with internet access. The pandemic has made the paper process more cumbersome and almost impossible to do remotely, accelerating the trend toward digital solutions. AIX has always known that the manual processes of the alternatives investments industry had to change, but they never could have imagined a benefit would be for this reason, at this scale for their clients.

One way that AIX has reduced the risk in the compliance process is through their strategic relationship with AI Insight.  Through this connection, an advisor’s firm can immediately see if the required training and certification have been completed for any type of alternative investment on a ticket. The time required for compliance monitoring can be reduced from hours to seconds. 

Conclusions and Future Possibilities

Blue Vault concluded our conversation with Brad West by discussing what’s next. For AIX this means rolling out solutions that their industry partners are strongly advocating for. This includes the commercial launch of account servicing and maintenance capabilities later this year, to be followed shortly thereafter by repurchasing workflows.

It appears that the technology solutions that AIX has built have tremendous potential to literally revolutionize the alternative investment industry, from sale to holding, to reporting, to liquidations, and therefore, change the game.  For a company that has only been around for less than two years, AIX has already created an inter-connected network among all the players that has huge potential for improved efficiency, cost reductions, and de-risking the alternative investment process.

When all industry players move to a foundation built on data, not paper or PDFs, everything becomes possible.


Source:  Interview with Brad West, COO at AIX

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