February 22, 2024

KYC Automation: Benefits and Implementation

Know Your Customer (KYC) is an essential process for the wealth management industry. Not only does it ensure compliance with various regulations, but it also mitigates risk, establishes trust between your business and your customers, and can refine the first impression you provide.

Despite that, KYC has always been approached reluctantly because of its high cost both in time and labour, as well as numerous inefficiencies and a lengthy verification process. Thankfully, technological advancements in KYC automation have greatly reduced or outright eliminated all these issues.

This article will go over the KYC steps that can be automated, their benefits and provide useful implementation tips.

Understanding KYC Process Automation

KYC process automation refers to the use of technology to expedite and streamline the client data-gathering process and regulatory verifications. The automation of this process can apply to several stages like information gathering, distribution, form filling, e-signature and data storage.

Benefits of KYC Process Automation

Automating your KYC process can provide a wide array of operational improvements and cost savings. As with any software solution, the initial investment and training can seem daunting, but KYC automation always ends up paying for itself.

Here are the main reasons why:

Cost Reduction

Traditional KYC processes involve a lot of manpower to process costly paper forms that must then be replicated over and over. Automating KYC allows you to run an overall leaner operation while reducing potential fine risks by improving data quality and transmission.

Improved Accuracy

When executed by human workers, KYC is extremely prone to error. When it comes to the data involved in wealth management, those mistakes are particularly damaging. Improper KYC data can not only result in regulatory sanctions, but it can also have deeper consequences by hurting the trust and relationship you’ve nurtured with your clients.

Enhanced Compliance

KYC regulations are in a state of constant evolution to keep up with ever-changing financial environments and money laundering attempts. Digitization of forms and automation allows you to edit your processes to conform with new regulations in a few clicks instead of having to manually change your entire library of physical forms. An automated KYC process also allows you to have a more auditable process and pull any kind of client information at a moment’s notice.

Faster Onboarding

When digital onboarding is lengthy, clients get frustrated and often abandon the account opening process altogether. Automating KYC speeds up the onboarding process and makes it convenient for all parties involved. This smoother experience is a clear operational benefit, but it also makes your organization look structured and methodical.

Implementation of KYC Process Automation

As with any technology implementation process, your organization must have a robust plan to guide your employees and clients through every step. A business task like KYC ends up transmitting a lot of sensitive information and should be taken very seriously.

Assess Current Processes

The crucial first step in any automation process is to survey your current way of doing things to identify the steps you’d like to handle using technology. While KYC automation is often used to improve the efficiency of your employees, it also has a notable effect on your customer experience. For this reason, it’s important to map out your customer journey to see which actions would benefit from automation.

Choose the Right Technology

Selecting the software you will end up using to handle your KYC is a decision that can make or break your implementation. While it can be tempting to select a variety of tools to handle all the issues you might encounter, it’s often best to select a solution like Mako that provides an all-in-one KYC experience while still integrating with all the tools you may currently rely on.

Data Integration and Migration

It’s one thing to automate your data gathering, but it’s even more important to have a good plan to store it and integrate it with your existing client records. For example, Mako integrates with the most popular CRMs in wealth management and offers simple and convenient data export options.

Employee Training and Change Management

With technology joining wealth management workflows, employee buy-in is almost more pertinent than executive buy-in. Even with a perfect implementation, if your employees can’t integrate the chosen software into their day-to-day lives, it’s destined for failure. Make sure you collaborate with your software service provider to build a strong training plan and ongoing checkups to ensure the KYC automation is having the desired effect on your organization.

Continuous Monitoring and Optimization

KYC automation should not be seen as a set-it-and-forget-it software. Workflows and the gathered data should be regularly monitored to detect any potential issues. It’s also a good idea to interview your employees and clients every quarter to see their satisfaction level with your KYC automation solution and how it could be improved.

Transforming KYC Through Automation

Paper forms are hard to refer to once filled and are extremely prone to human error during the transcription process. With ever-changing financial regulations, having an antiquated KYC process will quickly become a liability.

KYC automation is a versatile and efficient technological innovation that provides incredible efficiency boosts to wealth management offices. Impacting both employee performance and client experience, it accelerates client onboarding and provides you with clean, auditable data you can rely on.

If you’re ready to take on your KYC automation journey, don’t hesitate to reach out for a demo of Mako’s platform.

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Photo by Kelly Sikkema on Unsplash

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So in my view an appropriately diversified portfolio should have enough exposure to different asset classes, that its able to withstand a wide range of market disruptions. Usually, it’s some kind of negative or positive event… they’ll affect different asset classes differently. So by having your eggs in different baskets you’ll be well insulated from major risk. For example, there’s some kind of change in the housing market… both by having some exposure to it, you won’t miss out on the opportunity to make money. But if it’s something negative, you’re also not going to lose all your money if all of it were in the housing market for example. So at a high level, a properly diversified portfolio should grow in a growing market and yet not be at risk of major losses in a declining market.
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You asked also about an efficiently diversified portfolio, and I would say that that’s a portfolio that achieves those goals with a minimum of different positions. There’s a lot of good reasons to have fewer positions in your portfolio. Being less complex means a portfolio is easier to rebalance and administer. Every time part of your portfolio goes up or down, you're going to need to rebalance it a little to make sure that it stays with the right allocations and the fewer positions you have, the easier it is to do that..the less trading fees you incur doing that.
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There is a tradeoff between being completely diversified and being efficiently diversified. If you were completely diversified then you’d have a proportional segment of absolutely everything you could invest in under the sun, like shares of palm oil futures or something like that. I don’t think everyone should have palm oil futures in their portfolio but I’m not a wealth manager. I think it comes down to your portfolio and how large it is (probably the Canada Pension Plan has a proportion of palm oil futures in it). You’re going to have to talk to your advisor and choose a degree of complexity that’s right for your portfolio.
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CN: Let’s just take a step back - what does a typical portfolio look like and has that changed over time?
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RB: Yeah, so I'm not entirely sure what a typical portfolio looks like these days because it's actually changed quite a lot over time. I think common wisdom used to be that the classic balanced portfolio was 60% public stocks and 40% bonds. These days that's ancient history. Most would say that the bond allocation should be a lot lower these days in this age of unprecedented low-interest rates. These days it’s the stock portfolio that’s been driving a lot of the growth. I think a well-diversified portfolio in the modern era should absolutely include exposure to all kinds of alternative assets (that aren't even really that alternative but still kind of fall out of that traditional bucket). So you know I mentioned real estate, private companies, maybe for example commodities or other types of investments. So I think that there are a lot of things that you can invest in and your advisor can guide you on what’s appropriate for you.
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CN: Yeah that makes a lot of sense. Talking about alternative investments, we’ve heard a lot this year about ESGs, impact investing, alternative investments… do you think there’s more of an appetite today for these types of investments than in the last ten years?
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RB: Yeah that’s a topic that’s close to my heart having previously started an impact investment company. It’s definitely been a gigantic increase in interest. I think when I started my previous company we were speaking to large wealth managers and having them say “we’re barely getting a grip on early ideas.” Like not including gun manufacturers or tobacco companies, and now these same companies are launching impact portfolios and marketing this aggressively. So there’s definitely been a seat change, it’s a real industry, and there’s a lot of studies out there and data showing that ESG or impact investing can equal or outperform non-impact investments. So I think it’s a huge part of the market these days. That said, one of the things that’s driving it is people’s interest in it. I think that one of the stories of the investment industry has been the personalization of it. People’s portfolios are being tailored to their own needs and circumstances. Impact investing is definitely a piece of that. People are environmentalists, but an institution is not an environmentalist. It doesn’t live and breathe the impact on the environment the way an individual does. The person who is active in the David Suzuki Foundation for example is going to be active as an impact investor and it’s appropriate for them to be.

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That’s a great question. I think there's a lot of advantages and you gain a lot with an automated platform. For me, it's a lot easier to manage. I have some of my money in one of these platforms and I barely think about it. It's being rebalanced all the time. The costs are much lower in terms of expense ratio for the same kind of rebalancing. Again you're missing a lot with that, but on just the mechanical portfolio rebalancing you're getting a great deal there. I would say that two other advantages are up-to-the-minute reporting, so you always have that login where you can see your position, see how your portfolio is doing historically. And finally, this is an advantage for me and anyone who doesn't love doing taxes, but typically they’ll take care of your tax forms for you, and end up with much simpler tax forms, so it kind of works out what your cost basis was and how much you have to report.
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CN: So let's talk about the other side of the coin then...what are the risks of not having a seasoned professional managing your money?
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RB: I wouldn’t exactly phrase the question that way. You know it's more what’s the benefits of having a real wealth manager? Some of the clients of robo advisory firms may not even be aware that they're missing out. A wealth manager isn't just balancing your stocks and bonds, that's kind of the very lowest mechanical level of what you get out of the wealth manager. Really they're your advisor on your life. Intimately intertwined with you because you're thinking about retirement planning, on planning for college for your kids, when is the right time to buy a house, and when should you get life insurance, for example. An advisor can help you with all of those decisions and they can connect you with service providers like a mortgage broker when you may be in need of one. So I think that you get a lot of value out of having one of these advisers, particularly when you get to a stage in life when these kinds of services are more about the long-term and your life circumstances are far more critical.
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CN: There are clearly pros and cons and two sides of the story depending on who you're asking. Like you said, what stage of their life they’re in ...but do you think the platforms that we’re seeing emerging like to Qtrade, Wealthsimple, and all the rest will ever become status quo?
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RB: Yeah, I do actually. I think that similarly to how you know we’re using online platforms to automate everything for us (I can’t think of the last time I used to travel for example), everything you’re going to be trying to do with your money is going to be automated, and it’s going to be appropriate to be handled by one of these one of these platforms. In particular, for most people at an early stage in their lives that have few assets to manage, not a lot of complexity, not a very extended personal family circumstance, it’s gonna make a lot of sense to have a low fee robo worry about it. But at some point their life circumstances are going to get more complex and you’re gonna get married, or maybe you’re not, or you may have other objectives that you may want some advice on and at that point it may make sense to either supplement the robo advisory portion of your portfolio, or graduate to a more holistic wealth management view.
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CN: Thank you so much Raph, these answers were great. It’s always insightful chatting with you so thanks for sharing those answers with us today.
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RB: It’s my pleasure.

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