By David CoffaroThe biblical adage that “every kingdom divided against itself is brought to desolation, and every house divided against itself will not stand” could easily be translated to the present business challenge of organizational silos. The more independently departments within organizations operate, the less synergy the organization can generate toward common goals and customers. What better example of a divided house is there than today’s financial services firm, where the compliance group is often operating completely separately from the client-facing business development organization?
Given the proliferation of financial regulation in most developed countries over the past decade, it’s not surprising that firms have reacted by bulking up compliance and risk staffing, adding policies and positioning risk managers as superheroes to defend institutions against all evils. Often these troop surges take place in isolation, albeit with the best of intentions: protection of the firm.
Unfortunately, an unintended consequence in many firms is that compliance with regulations and risk management become completely separated from business development and service delivery. The compliance group earns the unofficial moniker of the “business avoidance department,” and sales people are highly frustrated by their perception that their risk management colleagues don’t have a clue about what it’s like to serve clients and develop new business.
Conversely, the compliance team worries that their business development colleagues don’t understand the level of scrutiny they’re operating under—and worry that they may view risk management work as a distant afterthought to bringing in new business. As a result, neither group optimizes its role, and more importantly, the client experience suffers because relationship intelligence is not shared across departments and built upon.
Serving two masters or mastering two services?
Evolving past this paradigm, which posits compliance and new business development as separate and opposing forces, requires a fundamental shift in focus from an internal orientation to one where the locus of gravity is the client. This shift can position the firm to master the art and science of knowing the client and creating an extraordinary experience. Deep client knowledge, systemically uncovered and documented allows the firm to fully dimension risk, fulfill compliance requirements, understand how to properly satisfy the client’s current financial needs and anticipate future needs.
The shared alignment between compliance and business development around understanding the client in no way diminishes the lines of defense in the firm. When the process of knowing a client is deliberately designed, documented and executed with the purpose of understanding the client (not filling out a form) the financial services provider is extraordinarily well positioned to manage risk, address current needs, anticipate likely future needs and preserve distinctions between the first and second lines of defense. The result can be one holistically framed process with two beneficial outcomes.
As simple as it sounds, a fundamental first step in creating a new paradigm of client understanding is defining and designing an operating agreement shared by compliance and business development: an end-state dynamic profile built upon deep knowledge of the client. The agreement between these two departments of the firm is about knowing the client: who they are, what they do, how they do it and what they plan to accomplish in their financial affairs.
Client profiles are not new. What is different about this type of profile is in the purpose and process of this dynamic approach to understanding a client, mutually agreed to by compliance and business development leaders. The purpose is to know a client at a level of depth that can satisfy compliance and business development requirements, to document that knowledge, to allow both partners to continuously build upon that knowledge and to apply predictive analytics to anticipate future client needs.
There are three expected outcomes of this dynamic profile agreement: fulfilling all of the client’s financial needs, anticipating likely future needs through predictive analytics and satisfying all regulatory requirements. Such an agreement is based upon a proprietary heuristic of the client—the firm’s process of learning—and the hierarchy of information that is required to begin and sustain a relationship over time.
To optimize the way the firm conceptualizes a client, the heuristic must be dynamic, rather than static. Clients’ financial lives are always in motion, with needs that are changing over time. This dynamic approach says that the foundational information about a client—who they are and the original source of their funds—are more static, less subject to change, while how they operate in their financial activities and what they want to accomplish over time are more malleable. Predictive analytics can play a meaningful role in evolving this dynamic profile, anticipating likely future needs, and pre-evaluating a client’s capacity for a certain service.
Every financial services client has a set of needs to be addressed. The client’s needs should always be the starting point of a relationship. Unfortunately, with many firms, early in the new business development process the narrative shifts from the client to what the firm needs. Rather than an accretion of unique client-specific knowledge, the firm pivots to checking all the boxes on their know-your-customer forms.
Satisfying regulatory requirements is essential. Too often, firms lose sight of the intent of a regulation, and by default, apply the rule as though it were the process itself. What’s interesting about this default approach is that it’s rare for a regulation to define a process. By and large, regulators describe an expected outcome (for example, knowing your client), but leave it to the regulated firm to define its own specific process. In this flexibility there is opportunity for financial services firms to operate differently, satisfy their regulators and more fully address existing and emerging client needs. Designing client-centric processes for understanding a client, employing institutional and external data, managing risk and satisfying regulatory requirements are key ingredients to an extraordinary recipe for success.
The tools and applied advisory analytics
Once a clear agreement about how a firm will know their client in order to satisfy business development and compliance needs has been established, and the process for learning the client and documenting knowledge is in place, the next tool to draw upon is data use. This refers to how client information is gathered, augmented over time, and applied in a predictive fashion to aid the firm in demonstrating value to the client. I call this “applied advisory analytics,” which captures the application of predictive analytics to indicate specific, likely next-most-important points of consideration in a client’s financial life. The applied advisory analytics process takes all the client specific data described above, combined with external information relevant to the client, to deeply understand and anticipate needs.
One way to visualize the dynamic profile approach to knowing a client is to imagine a basic stick figure of a person. The most fundamental information¬—name, date of birth, identification numbers, address—is the basic frame of a stick figure person. It gives the firm a basic framework to build upon, but it doesn’t provide a lot in terms of describing unique characteristics of the client, what she describes as her initial needs for the firm to address or much more that can be used in a predictive manner. It’s foundational, but not terribly actionable.
The opportunity to be extraordinarily meaningful to the client and effectively meet regulatory needs materializes when the firm focuses on adding dimensions to the stick figure. This means the accretion of knowledge about who the client is (beyond the fundamentals), what they do, how they do it and what they plan to accomplish in their financial affairs. Part of this knowledge acquisition comes from a disciplined client learning process—a deeper dive into knowing the person and all aspects of their financial life—covering what they have documented (financial plans, wills, insurance, trusts, privately held business structures), assets, liabilities they hold and their family tree. This information can be enhanced with publicly available data appended to the client profile (sources often associated with elevated due diligence for regulatory purposes), adding multiple dimensions to what started as a stick figure person.
From here, the focus is on what clients want to accomplish in their financial life, and through predictive analytics, the identification of important areas of consideration they may not have previously contemplated. This takes the evolving profile of the client from a one-dimensional stick figure to a multi-dimensional view of a unique individual with specific financial activities and objectives. This dynamic profile serves the needs of compliance and business development at the onset of a relationship and provides rich input for predictive analytics around future needs to anticipate and proactively address with the client.
Making it happen
This discussion is about deploying a model that leverages applied advisory analytics for serving clients built on knowledge that can fulfill business development and compliance needs. This is a departure from the common approach where each group—business development and compliance—operating relatively autonomously in terms of how they gather and use client information. While the benefits of an integrated and holistic approach are clear, knowing how and where to start can be a challenge.
Process reengineering is most effective when critical stakeholders (in this case, compliance and business development) make an upfront commitment to the mutually defined and designed future state of operating. That commitment is then translated into a thorough roadmap from the current environment to the future state, including the steps described in this article. With a detailed roadmap to the future state and partner commitment to the shared objectives, implementation is supported by frequently assessing progress and sharing results with all stakeholders.
This strategy can be a powerful step for financial services firms to take in their journey toward exceeding client expectations and at the same time satisfying their regulators.
David Coffaro is principal at Strategic Advisory Consulting Group.