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The Technology Solution: Eliminating Paperwork in Search of Freedom

By Stephen Preston 
“Microsoft Excel is not an optimal solution for the EMD space.” – An Exempt Market Issuer

Over the last four years I have been fortunate to meet exempt market dealers (EMDs), Issuers, and Dealing Representatives from all across Canada. One thing I love about this industry is the passion and constant flow of ideas that are discussed as to what we can do to improve our marketplace and take it to new heights. While there are no shortage of suggestions, an increasingly common theme among these conversations has become the need to improve the technology with which we all work.

Historically, we’ve been at a disadvantage to other wealth management industry participants because we have not had the tools, integrations, and systems at our disposal that banks and large mutual fund/IIROC dealers do. With competition for investor dollars as fierce as ever, and new fintech solutions emerging all the time that allow investors access to more options, we need to commit to technology and continuous innovation - and we need to do it now.

That being said, the adoption of technology is not enough. Emphasis must be put on choosing and committing to the right solutions. Great technology creates efficiencies, automates tasks, reduces human error, enhances communication, and streamlines workflows. On the flipside, a lack of technology - or even worse, the adoption of poor technology - creates headaches, security risks, and a lack of engagement amongst staff, thus turning it into a huge waste of time and money.

What’s the #1 Tech Headache or Problem You Face in the Exempt Market?

Wanting to learn more about the technology headaches and challenges facing our industry, I put together a survey and reached out to over twenty key experts in the exempt market. These professionals came from an assortment of EMDs and Issuers, with their backgrounds varying from executives to dealing representatives to Chief Compliance Officers, etc.

The survey asked only one question:

“What is the #1 Technology headache or challenge you face in the exempt market?”

The participants were asked to select one option from the following list:

1. Software solutions were not built for the exempt industry

2. The large amount of paperwork (lack of online documents and digital signatures)

3. Lack of integration and data sharing between parties (Issuers and EMDs etc.)

4. Too much manual data entry (loss of time, prone to errors etc.)

5. Other

The Results: What Industry Thinks About Technology

 

“Honestly, I want to choose all of these…” – Klint Rodgers, Branch Administrator and Dealing Representative, Pinnacle Wealth Brokers

According to the survey, the two biggest headaches our industry faces from a fintech perspective are that software providers do not understand the nuances of our space, and the large amount of physical paperwork still required due to the lack of online documents and digital signatures.

 “The challenge being the exempt market is so diverse it is hard to build a product that meets all the needs. However nobody seems to have consulted the exempt market to see what those needs are.
- Scott Alanen CFO, KV Capital

When it comes to fintech in the exempt market, options have historically been limited to either:

A – Choose a solution that was built for a different industry and hope it does the things you need it to

or

B – Build your own custom solution

Most Software Solutions Were not Built for the Exempt Industry

As we all know, the exempt market is a unique animal. Out of the box, one size fits all software that works for the mutual fund industry, for example, will not necessarily work for participants of the private capital markets. Trying to fit into other industry’s workflows and processes is like the old adage of trying to fit a round peg into a square hole.

What about building a custom solution?

Building a custom solution is an option for market participants over utilizing a third party provider, allowing a company to have software that is catered to their unique workflow. With this option, however, comes many downsides.

The amount of time and resources both in terms of staff and capital needed to create a system from scratch can be tremendous and take away the focus from core activities. As an EMD or issuer, your core competencies lie in finding great investments for your clients and being a good steward of that capital – not in designing software solutions.

On top of that, software must be routinely updated and maintained to avoid becoming obsolete. Due to the constantly shifting regulatory environment and practices, the updates and changes needed to keep the software current are constant and can be very expensive.

Lastly, the safeguarding of sensitive client data is pivotal. Ensuring the integrity of client data in custom software can be a big challenge and any misstep can have disastrous consequences. In this day and age with hacking and malware being an ever prevalent risk – security cannot be taken lightly. Is your firm willing to take on the responsibility of safeguarding this data?

Weighing the cost-benefit analysis of building and maintaining your own system versus subscribing to an existing one should be the primary factor in deciding the best option for you. Ultimately, you need to ask yourself: Are you in the software business or the investment business?

Luckily, this article is not just about pointing out the myriad of technology issues our industry faces but will also look at a third option for industry participants.

Exempt Edge: The Backstory

As a company, Olympia Financial has been involved in the exempt industry for over twenty years. In the last three years or so, we identified the need for a robust fintech solution. It was our belief that such a technology platform and related software would benefit the entire exempt market and put the industry on a level playing field with other wealth industry participants with bigger budgets. This was not a revelation unique to us – as indicated, everyone in the industry knew we needed a solution, the question was: who was going to build it?

After watching multiple software firms with no previous exempt market experience try and fail to build this much needed all encompassing solution; it became readily apparent that we could no longer sit on the sidelines and hope that a software provider from outside our industry would suddenly ‘get it.’ What the industry needed was a solution built specifically for the exempt market by industry experts that lived and breathed this space.

It was a natural fit for Olympia to undertake this task. As a neutral party that is already known for handling client’s funds and safeguarding their data, Olympia has existing relationships with EMDs and Issuers across the country and the resources to make this solution a reality.

Our mindset from the beginning though was that in order to fundamentally change the technology and advance the industry forward we could not go at it alone; collaborating with the industry to ensure the solutions we created were what the industry wanted was paramount.

While Olympia has been in the private markets for over 2 decades, one thing we’re not is an EMD ourselves. As such, Olympia’s newly launched subsidiary, Exempt Edge got it’s kick-start through the acquisition, further development, and re-purposing of ‘ROOTS,’ the proprietary software built and developed by one of Canada’s largest EMDs, Raintree Financial Solutions Inc. ’

Here are some comments from Raintree founder Adam Derges on why they ultimately decided to sell ROOTS to Exempt Edge Inc:

When we made the decision to invest in our own back office, we did it for a few reasons: We believed that it would be completely necessary to run a company like ours efficiently. We never wanted to be restricted or limited by our back office (or lack of a back office). We knew that it would allow our advisors to operate more effectively.

About two years ago, ROOTS had evolved into something that we felt could actually create a new standard in the exempt market world. EMD’s are all on different systems. Which means the Issuers are all using different systems. It’s incredibly inefficient. We thought that ROOTS had the potential to be the central hub for all EMD’s, Issuers and other interested entities. But we knew we weren’t the right group to make that happen. We are a financial firm. Not a software firm. If we wanted ROOTS to evolve to that next level, we knew we were going to have to give someone else the keys to the bus.

Through this acquisition, Exempt Edge had the base of the fintech solution that we now offer: an important central piece to the puzzle. Built specifically for the exempt market, it can help solve the problems faced by so many EMDs both large and small when it came to regulation risk, compliance, KYP, KYC, administration processes, and all the host of other tasks needed to run a successful EMD. Additionally, it is able to be adapted and built out as industry practices and rules change. Here are the four key aspects of what Exempt Edge offers:

I. Easing the Administrative Burden

This tool allows tracking of all client investments, including cash and registered funds, in one place, on one statement, while being notified of any distributions or return of capital that comes back to your clients. Exempt Edge reduces manual data entry by ninety percent through the use of pre-populated forms.

EMDs and advisors can provide clients with a white-labeled portal that they can access from any device to see updates on the status of projects they have invested in, view all of their transactions in one place, see all of their statements and communicate directly with their advisors. Rather than manually filling out the multitude of paperwork associated with an exempt market purchase, advisors are able to prepopulate all of the necessary forms needed to complete a transaction. This saves an abundance of time for the advisor while reducing errors associated with manual data entry.

II. Concentration Limits

Mutual fund dealers have no product category concentration limits that are subject to suitability. The exempt market, however, is an entirely different story. A Dealing Representative is generally expected to allocate no more than ten percent of their client’s investments into a single exempt market product, and their clients overall portfolio concentration is generally expected to not make up a large part of their portfolio in aggregate. EMDs vary on the total portfolio allocation they allow their clients to hold, with ranges typically between a 25-50 percent maximum.

What this means is that not only must an advisor ensure that their client’s total allocation remains below the maximum threshold, they must also diversify their exempt holdings across an assortment of products. With a busy advisor meeting multiple clients on a regular basis, having a system that calculates this information and displays it prominently is of vital importance. Our fintech system automatically flags a transaction for review anytime a trade is entered that would either:

A – Put their client over the ten percent threshold in any one product or

B – Result in their client surpassing the EMD’s maximum exempt portfolio allocation

All of these decisions can also be integrated with a robust suitability assessment of the client based on their age, risk tolerance, investment horizon, etc.

An out of the box CRM system built for a different industry would not have this functionality and would instead force the advisor to manually do these calculations. The number of hours it takes to do this, as well as the risk of making a mistake, results in a waste of advisor resources. At the end of the day, advisors need a system that provides them with the important data they need at a glance, and should free them from having to do these routine tasks manually.

III. Regional Rules

Exempt Edge allows ease of transactions by accommodating for regional differences. Industry indicated that an ‘out of the box’ solution designed for another industry will simply not work for an EMD.

The mutual fund industry is governed by a self-regulatory organization, the Mutual Fund Dealers Association (MFDA), with one set of rules that apply nationally to all of its members. The exempt market on the other hand is governed provincially by each province’s securities commissions based on national rules with provincial nuances. This means the rules and regulations vary to a large degree between provinces for the exempt market, whereas for MFDA members, each province’s rules are the same.

In the MFDA world, they do not have varying provincial rules. More so, EMDs are not the only ones affected by the various differences in provincial regulations; as Issuers also need to be aware of the rules of each province in which they want to raise money, and abide by them accordingly. Exempt Edge seamlessly accommodates the needs of industry with fintech robust enough to account for the different investment criteria set out by each provincial securities commission, along with the guidance put in place by the CSA.

IV. CRM2

EMD’s across the country whether large or small now needed to provide quarterly statements to their clients that report on: fees, transactions, position, cost and performance. This was a stick of dynamite with a short fuse ready to explode on July 14th 2017; when CRM2 reporting becomes mandatory for the exempt market.

It’s no secret that large MFDA institutions were struggling to comply with the need to produce these statements so you can imagine the burden placed on much smaller firms in the Exempt Market. Exempt Edge offers a statement platform that allows EMDs to track all of their clients and distributions while also providing the reporting tools necessary to meet CRM2 requirements.

"Signing up with Exempt Edge was a very easy decision for us to make at R&D.   Thanks to the focused tech solutions designed specifically for the exempt market, we are very happy and confident with all of our back office needs going forward." – Jason Park, President Rethink & Diversify Securities Inc.

The Next Solution: For Issuers

We have recently released a technology solution specifically for Issuers. Raising capital is a costly and time-consuming endeavor and we wanted to create software that would drastically reduce many of the expenses associated with this task.

Rather than tell the Issuers what we thought they needed, and as we did before with Raintree, we sought out an industry leader, Rockspring Capital, to collaborate and partner with to find out precisely what a successful Issuer wanted in a robust software system. 

We created automated work flows and developed a system that integrates and communicates with our existing back office system, so we could eliminate an issuer’s need for expensive administration staff whose sole tasks were manual data entry and data management. The reduction in costs and the efficiencies created through this software allows Issuers to focus on their core business while easing the administrative burden of the capital raising process.

“Getting to incorporate EE’s new product into our interface means taking another step for our investors to create an experience that is customized to their needs backed be the quality that Olympia/Exempt Edge have established.” – Michael Kastel, Director Investor Relations, Rockspring Capital

Our Vision for the Exempt Market

Our vision is to continue to provide technology solutions specifically for the exempt market that reduce costs, create efficiencies, increases automation, and reduces time spent on manual data management.  Exempt Edge addresses the time-consuming core administrative tasks faced by industry participants so exempt market participants have the freedom to focus on their core business activities.

At the end of the day, fintech tools should not be a cost burden – rather, the solution should pay for itself in terms of reduced administration hours, automated processes, reduced risks, and increased efficiencies. In order for fintech tools to work for the exempt market, they must do the specific things that the industry needs, that is customized to our industry’s unique workflows.

We have already received a tremendous amount of buy-in and support from industry who see the vision we are presenting and that what we are building together will fundamentally change the exempt market industry for the better.

Stephen has been actively involved in the financial industry for almost a decade including extensive experience with start-ups and international real estate projects. He is extremely passionate about the exempt market and brings a wealth of knowledge and expertise to the industry. He graduated from Mount Royal University with a BBA in Financial Services and has also completed the Canadian Securities Course. Stephen is currently the Vice President of Exempt Edge Inc, and can be contacted at stephen@exemptedge.com.