Financial advice can be a sensitive topic – those giving it don’t want to mislead customers, while customers are wary about the level of trust they can place in their advisers. Nonetheless, done correctly, investing can be a very beneficial way for someone to use their funds. This November we are exploring all the aspects of wealthtech and how the industry has developed this year.
While personal finance and investment management play vital roles in the wealthtech sector, another major contributor is alternative investments. Alternative investments, investments that do not fit into the traditional mould, are not exactly a new phenomenon, however, the hype surrounding various alternative investments, like cryptocurrencies, has seen the sector soar.
Where there is a drastic change in the value of something, the risks involved become much greater, so we reached out to industry experts to find out how regulations and regulators have played a role in ensuring alternative investing is secure.
More transparency and disclosure
Trilliam Jeong, CEO of WealthBlock
Looking across the globe, Trilliam Jeong, CEO of WealthBlock, the investor onboarding software provider, highlights how regulators are introducing rules to ensure investors are given greater flexibility to access information when they need it, all while keeping users safe from fraud.
He explains: “Global regulations have changed to make investing in alternative assets like private equity, hedge funds and cryptocurrencies safer. Governments now require more transparency and disclosure so investors have better access to important information. In the US, laws like Dodd-Frank enforce stricter rules for hedge funds, while Europe’s AIFMD regulates alternative investment managers to protect investors.
“With cryptocurrencies, countries like the US and Singapore have introduced clear rules on trading and security to prevent fraud. Overall, these regulations help investors feel more secure by improving transparency and protecting against risks in alternative assets.”
Encouraging tech
Christian Faes, founder and CEO of Faes & Co
Organisations are often keen to use technology to get an edge over competitors. However, they can often be restricted in this regard due to strict regulations. According to Christian Faes, founder and CEO of investment firm Faes & Co, good regulation will ultimately result in more options for firms to offer, which in turn leads to happier customers.
“Regulators across the globe have become more familiar and encouraging of technology, and this has been fed into the broader regulatory environment. An example of this was seen in the UK with the original crowdfunding legislation and the birth of ‘peer-to-peer’, and also in the US with the enactment of the JOBS Act.
“Through this environment, we have seen a more ‘tech-enabled’ ecosystem flourish, and I think that ultimately the consumer has benefitted by having more options (and information) available to them.”
Pros and cons
Sigita Kotlere, chief executive officer at nectaro
Sigita Kotlere, chief executive officer at nectaro, the licensed platform offering passive income through loans, explores how a more regulated space can be beneficial for users. However, she also notes that it has its limitations too.
“Investment services are becoming much more regulated in Europe, globally and in general. It is important to understand that not everyone has the expertise to conduct due diligence on every company they want to work with. If a customer chooses a regulated institution, regulated fintech, then they can have some degree of certainty that background checks have already been performed and that the company is competent and knowledgeable.
“Because of it, the investment environment has become more accessible, safer, and more understandable for the average investor. Regulation is constantly being revised and even this year the European Parliament voted to amend the Alternative Investment Fund Managers Directive with new, even stricter requirements for reporting, rules for liquidity risk management and improved investor protection measures.
“However, as with all regulation, there are limiting factors. For a company to operate in a regulated environment means higher costs and more resources needed, but not everyone can afford it. Therefore, it reduces competition, limits the ability to offer new functionality, and it makes companies slower, taking away some of their focus from the investor. It can be very cost-intensive to be regulated.”
Greater awareness and access
Steve Drew, SVP of marketing, strategy and technology at Caliber Companies
Steve Drew, SVP of marketing, strategy and technology at Caliber Companies, the real estate investor, developer, and manager, explores how alternative investments have become less exclusive and more accessible to investors since 2012, and with current projections are expected to grow by 50 per cent in the next four years.
“The JOBS Act of 2012, and specifically the resulting Rule 506(c) exemption to SEC Regulation D, forever changed access to alternative asset investment opportunities, including commercial real estate investing, by enabling investment sponsors to broadly communicate the availability of these opportunities through digital media and traditional marketing channels.
“These marketing efforts significantly increased awareness and access to alternative asset investments beyond privileged circles to a much broader audience of accredited investors. As a result, investment in alternative assets is forecasted to increase 50 per cent from 2023 to 2028 to $24.5trillion as accredited investors seek to increase their portfolio diversification and achieve potentially higher returns.
“Wealthtech firms have leveraged these regulatory changes to develop online platforms such as CrowdStreet, FundRise and Cadre which present real estate offerings to the public that span multiple Sponsors.
“At the same time, individual sponsors, such as Caliber, Driftwood and Origin, have enhanced their own websites and significantly increased their education efforts around this asset class to market their own offerings independently.”
The first step towards more friendly digital asset regulation
Scott Harrigan, president of Alto
Scott Harrigan, president of Alto, an alternative asset platform that enables individuals to invest in alternative assets using retirement funds analyses how regulations can generate more options despite initial set backs from demanding requirements.
He says: “The regulatory landscape has become increasingly difficult for fund managers, financial advisors and investors to navigate over the last few years. Specifically, in the US, the SEC implemented rules with the goal of enhancing transparency, protecting investors, and alleviating systemic risk. Globally, the alternative investment ecosystem faces aggressive AML and CTF standards, demanding tax compliance, reporting, disclosures, and transparency requirements.
“However, these shifts can simultaneously provide more opportunities in the alternative investment space, as while firms are being urged to adapt their compliance systems, they are also being provided with opportunities to grow and become more innovative. Additionally, as the Fed decreases rates, investor confidence may go up – specifically as it relates to private equity and venture capital investors, which may lead to increased investment in this space.
“Finally, we’re seeing a rise in technology-driven solutions and likely a shift towards updated regulations that are friendlier to digital assets and cryptocurrencies These technological solutions will boost liquidity, reduce transaction costs, and enable access to a vast range of investors, while, which regulation changes may open new avenues for alternative investment firms to explore tokeniwation and blockchain-based investments.”
The post How do Regulations Make the World of Alternative Investment More Secure? appeared first on The Fintech Times.
