How Digital Transformation Impacts Client Communications

By Ed Wegener, Dean Pelos and Jeff Wilk

Abstract Digital Graphic background element

Digital tools have evolved, making access to information and the ability to transact far easier then ever before for the average investor. However, there are risks and challenges around this technology. What does this mean for your business?  

In today’s podcast, Oyster Consulting’s experts explore the evolution of client-focused technology, the risks for securities industry businesses and some of the ways we are seeing firms mitigate them. 


Transcript provided by TEMI

Libby Hall:  Hi , and welcome to the Oyster Stew podcast. I’m Libby Hall, Director of Communications for Oyster Consulting.  Digital tools have evolved making access to information and the ability to transact far easier than ever before for the average investor. However, there are risks and challenges around this technology. So what does this mean for your business in today’s podcast? Oyster Consulting’s experts explore the evolution of client focused technology, the risk for securities industry businesses, and some of the ways we’re seeing firms mitigate them. Let’s get started.  Ed….

Ed Wegener:  Well, thank you, Libby, and hello everyone. I’m Ed Wegner and I am the head of Governance, Risk, and Compliance at Oyster Consulting. Today’s podcast is part of a series of podcasts that we’ve done regarding the digital transformation in the securities industry. And today we want to discuss how this digital transformation impacts how firms interact with their clients.  As we’ll discuss, the evolution of digital tools has made getting access to information and the ability to transact , so much easier, so much more effective, and so much more convenient. And it’s sure to revolutionize how financial services firms interact with their customers currently and definitely, in the future.  That being said, there are a number of risks associated with this transformation and regulators have been in the process of assessing those risks and , providing guidance as appropriate. So we wanted to talk about this transformation and what firms that are engaged in this type of activity should be considering. And to help me discuss this evolution, I’m very fortunate to have with me, Jeff Wilk. Jeff is one of the leaders of our digital transformation efforts in Oyster’s Strategic Planning and Execution practice.  And I also have with me today , Dean Pelos.  Dean is a Managing Director in Governance, Risk and Compliance at Oyster. And he has worked with several clients who offer digital applications to their clients and has had to help them navigate some of these tricky regulatory issues. So thanks, both of you, for joining me today. Why don’t we start with you, Jeff?  So, from the business perspective, how have client facing digital applications evolved?

Jeff Wilk:  Thanks , Ed . And that’s an interesting question. I could probably talk for an hour on the history of digital apps and mobile access, but I think if you think about it, the whole mobile access, what we now call digital applications, really started in a mainstream way in the financial business back when ATM machines first got introduced.  The first-time people had the opportunity to interact with their money without an in person encounter with somebody else, was 40 years ago.  And that took 15 plus years to reach a point of mass adoption from there. Obviously we transformed mostly into account lookup capabilities before the true mobile banking app started launching into the 2010s. And then the big leap obviously came with the introduction of tremendous transactional capabilities on your existing accounts. And now where with the tap of a few buttons, if you will, on a mobile device, an individual can open an account from scratch. They can use auto fill from their phone to fill in most of the information. Then they can select a menu of optional answers and then simply authorize full background checks. And within minutes, a new account is opened, and they can invest. And of course, now the big trend that we’re starting to see is moving towards this term called gamification and some apps are looking to capture the excitement of potential long-term upsides of investing . And then I think finally, embedded finance is a big buzzword being used these days for a good reason. It’s basically the insertion of investment based financial based tools into other applications  to what I like to call the moment of decision for consumers. So it’s really come a long way. Adoption takes a while , but once something catches on, I think the innovation behind it becomes quite accelerated.

Ed Wegener:   You talked about the evolution of ATM’s, sort of the first iteration of this and at 15 years. And it’s kind of hard to think back to a time period before ATMs, but you’re right. It did take a fair amount of time for that to go from being something that was new to something that people were using some of the time to, you know, to a point where that’s the way people bank now. And I think if you think about the securities industry, we’re somewhere in that evolution.  When you talk about digital applications, it’s probably beyond just being a completely new thing. People are starting to use it. Firms are starting to offer it, but I wouldn’t be surprised if in the future, that that is the way people are interacting for the most part with their securities firms, with their investment advisors, broker dealers, and that’s the way business is done in the future. All of that being said, can you talk about the advantages for firms of interacting with their clients through digital applications and how that benefits both the firms and the clients?

Jeff Wilk:   Sure. And I think the interesting thing is that we talk about digital apps as one big category, but the reality of it is, within that space, firms bring different models of their apps to the market, and they do different things, and different forms, to focus in on different benefits for different target markets .  Everything from focusing in on the beginning investor through automated investment approaches that could be triggered off of other financial interactions, some firms out there with apps that, you’ve got to be careful of terminology here, but they’ll allow a Roundup feature and the Roundup of a dollar amount on a consumer transaction, for that additional money to be moved over into an investment account. So a different flare on automated investment strategies, all of that being triggered again by the use of artificial intelligence, tapping into some of the robot functionalities that are out there.  As well as many firms seeing the need to stay in a hybrid approach, leverage the mobile apps, but yet still allow the interaction with an advisor, a human advisor, throughout the course of a client’s investments practice, so lots and lots of advantages.  Capture the consumer at the moment of decision, still tie it in with artificial intelligence and link it into a human advisor to enrich the overall experience and the retention of that client.

Ed Wegener:  And  you think about the convenience for the customers.  Even if it’s just the ability to view what’s in your account and how your account is performing.  You think about people who have 401ks.  The way the market’s been recently with all of the ups and downs, it almost takes a lot of discipline not to look at your account and see how it’s performing all the time, but you just have so much more access. And this is coming from somebody who’s an older person, sort of closer to retirement than I am at the beginning of my career.  But you think about new customers coming aboard, where their interactions have almost entirely been digital – the way they communicate with each other, the way they access services.  It is just becoming the way people interact with each other in general. And I think, it’s the natural evolution for that to happen in the financial services industry.  And all of those things are definitely a benefit for the firms, benefit for the clients, but they also come with challenges. Anytime there’s these kind of changes, challenges and risks, and I’ll throw to both of you, what are some of the challenges that you see associated with digital apps, both from the business side, and also from the regulatory side.  Jeff, maybe we’ll start with you on that one.

Jeff Wilk:  Sure. Ed , and I think, you actually touched on probably from a business perspective, the main challenge is the lack of that human interaction, the lack of interaction with an advisor to help. Well, let’s put it this way to help keep investors investing during volatile times. I mean, you said it so well, it’s that when the markets are on these high highs and low lows over the past couple of months, it’s so easy for an individual just to grab their phone and get out. Move to cash. And we’re in , I hate to call it this, but in the old days, they would have to be interacting with their advisor, or at least through a call center who would be actively trained on coaching and educating that investor. Who’s calling in, perhaps in some degree of a panic to say, stay invested. It’s a long term . If you pull out now, here are the different things that history has shown might happen in terms of missing out on the best days by trying to avoid the worst days, things like that. So I think that’s perhaps the biggest challenge for the business and the long term . How do you foster that connection, a retention strategy with an investor who’s going strictly digital.

Ed Wegener:  Those are clearly challenges from the business side to consider. But also as  we mentioned, the regulators are looking at this in terms of how to apply rules that weren’t written for this type of environment, and applying those to this environment, which can be tricky and difficult for firms to navigate.  Dean, what do you see as, some of the major regulatory issues that are associated with this type of interaction?

Dean Pelos:  Yeah. Thanks, Ed. I think, from my standpoint, the important thing that we’re looking at here from a risk standpoint with the applications that are out there presently, is whether or not they’re considered games or contests.  The gamification that we talked about of these digital apps – are you making it a game? Are you trying to relate your app to perhaps a sports betting app? There’s been a lot of advertising around sports betting apps that are out there. Presently, are you trying to create some sort of mechanics here on the application itself that will allow people to feel like they’re betting on the stock market, like they’re betting on taking positions in certain issues and then moving out of those issues. Are you creating that atmosphere on your app where it appears that you’re playing a game or you’re betting in some fashion?  Those are real concerns for the SEC and for FINRA.  Are there visual cues on your apps? Are there chatbots that might be used to attract a client or a potential client? Also, there are risks that are associated with how it could lead to a client opening up their application on their phone, and then trading quite frequently getting enticed into trading a lot more than they’re used to , not understanding the risks that are associated with this. The disclosures that a business may want to consider putting on their app to assist a client with how they’re going to trade moving forward would be something that I would consider to be very important.  And have that consideration be something that a business put on, and be able to effectively warn a client about the risks involved in that. Are there certain things that they can click to hyperlinks that will help them better understand the risks associated with using that particular app? Because again, like Jeff had mentioned earlier, you want to avoid situations where you have market fluctuations that could be affecting how someone thinks, not having the opportunity to sit down and speak with someone, but be able to make just a couple clicks on your app and be able to move out of, and move to cash, get out of your positions and then missing market movements that may benefit you in the future. These are all things that are we’re all thinking about that. I think regulators are struggling with how we observe this and control it and make sure that clients are not being disadvantaged by using these devices.

Ed Wegener:  You know, that’s absolutely (true). And when you think about this, a lot of this stuff isn’t necessarily new or strictly with respect to digital apps. This whole issue about clients not overly speculating or trading like they’re gambling that goes back to the days of day traders, where the concern was unsophisticated people trading like they’re gambling and getting themselves overextended and engaging in risky behavior that doesn’t necessarily align with their risk tolerance or their sophistication. And that’s just, enhanced with the ease at which you can do this type of trading through these digital apps.   And that’s exacerbated by some of these tools, like the gamification.  The things that might make it appear as though you are playing a game, as opposed to taking significant risk by investing in complex products , complex options , strategies, those types of things, or excessively trading in securities or taking on margin.  Those things that they’re easier through these applications.  And people can get overextended. And the SEC issued a request for comment around digital practices, digital engagement practices. And those are a number of the things that they highlighted.  The main concern being our firms encouraging, through the use of these applications, investors to trade beyond their risk tolerance, to trade things that they otherwise wouldn’t, or that if they were dealing with a person, they wouldn’t recommend that the investor take these types of risks. So definitely things that the regulators are focused on. And, the other thing that you mentioned that I think is extremely important, is just the disclosure piece of this.  I think that the applications themselves make it easier to deliver those disclosures to customers, and do it in a fairly efficient way. The challenge that you have is if you think about how you typically deal with disclosures on your phone or on your , um, mobile app or, or tablet, you usually get these terms and conditions that you scroll through really quickly, don’t read, click the button, just so you can move on to the screen. And if there’s important disclosures in there, the problem is people aren’t reading those things . And that’s another issue that regulators are struggling with. So it’ll be interesting to see what is learned as the SEC and other regulators continue to get more information about this, continue to research the subject. And then as they start providing rulemaking and guidance and enforcement actions resulting from some of these activities.  But as a result of that, what do you think that our clients, firms, broker dealers, investment advisors, who are thinking about engaging in these types of applications, what are some of the things that they can do to make sure that they are addressing these risks and mitigating them?

Dean Pelos:   Yeah, I think the most important thing from my standpoint is how is this all supervised? What controls do you have in place in order to be able to observe activity that’s taking place for an individual client that might be investing quite frequently almost to the point where they become, where they could be identified as a day trader?  Are you observing that activity? Are you reaching out to that client and having a conversation with that client to give them the proper perspective of what the activity is that’s taking place? Have you vetted that client appropriately? Are there things there that you are having them complete where you’ve supervised the application process in an efficient manner, where you’ve identified that client is able and understanding of the risks involved with that type of app that’s being used and the trading that’s involved?  Have you been able to properly have controls around that? Are you supervising your representatives appropriately with the conversations that they’re having with a client or a potential client that would be getting involved in this app? Those are the things that I would be thinking about, and those are the things that I’m making strides with my clients to better understand what their risks are in running their business that way.   So, those are hopefully things that anyone who’s getting into this would be thinking about.

Ed Wegener:  Well , absolutely. And those are all things that aren’t unique to digital apps. They just become more challenging and are probably something that you have to focus on more carefully, when you’re interacting with clients using these digital apps and where you don’t have as much or any interaction with a person. And so having that comprehensive supervisory strategy around how you communicate on the apps.  One thing that’s important too, because you’re sharing information about the client’s account on these apps and it’s done through the use of technology, is you really should have a means to test the accuracy of that information, including the labels and the data that you’re displaying on those apps.   Whether it’s account values or performance information, all that stuff needs to be accurate. And you should be testing to make sure that it is accurate and that the information that you’re providing continues to be. So those I think are extremely important things that firms should be considering.

Dean Pelos:  Yeah, Ed , there’s a couple things that I think people who are thinking about using apps for their business, whether they be an investment advisor or broker dealer, they should be thinking about as well are who’s your clearing agent that’s collecting this information.  Have they worked with other businesses that have apps where they’re efficient enough to understand and accommodate your business? The other thing that I’m thinking about too, that’s important here is a lot of people nowadays who use apps for gambling or gamification.  Let’s say where they’re using a gaming app.  And they’re also using a trading app. Those are people usually that are a little bit younger than I am, that <laugh> are on perhaps social media a lot more than I am, and the social media and the advertising that takes place on social media. The promotions that take place on social media nowadays are things that are very relevant in our society. You have people that use the apps that are also on social media. And they’re also looking at advertising on social media for these apps, and they’re reading the posts and they’re understanding what they can and can’t do with these apps. Those are things that have to be controlled as well. You have to be able to supervise that you have to be able to understand when you’re seeing a new post, I’ve got to be able to monitor that post and be able to curb what I feel is inappropriate or misleading so that the advertising is efficient when you’re trying to promote your business through social media. So those are a couple of things that I’ve thought about that I think are extremely important as well with this process.

Ed Wegener:  Well, that’s definitely something to be mindful of. And I know FINRA has issued a lot of guidance around how firms should supervise the marketing, that’s done communications that are done via social media. And with these apps, a lot of the marketing that’s done are through social media, and that not only is the communications that the firm itself is making, but in some cases it could be communications by third parties, depending on whether there’s the communications are entangled or adopted by the broker dealer or the investment advisor. So those are definitely things that firms should be considering and make sure that you’re aware of the guidance that was provided by FINRA and the SEC, with respect to marketing and social media.  All things that are really important. And another thing that’s related to that is looking at the communications that are made and making sure that those communications, whether they’re on social media or whether they’re on the apps themselves, don’t cross the line and become recommendations subject to the requirements of things like Reg BI.  A lot of the firms that offer these types of apps do so under a business model for self-directed trading and will say that because it’s self-directed trading, we don’t have to comply with the requirements of reg BI , which for the most part is accurate.  But depending on the types of communications that you make, you may cross the line from providing just information to creating a recommendation in which case, those rules would apply. And those rules are very extensive. So that’s something that you need to consider as well.

Dean Pelos:  Yeah. There are applications that are out there right now, where you have perhaps a model that where algorithms are looking at market conditions and they’re spitting out certain types of models that are on the app, where in individuals looking at their phone and they’re seeing, okay, based on market conditions right now, here’s a couple of trading models that our algorithms are providing you with that will help you decide whether or not you want to click on that particular trading opportunity.  Or you can sit there and weigh whether or not what your risk is associated with it. Is it a high-risk trade? Is it a low-risk trade?  I’m a low-risk person. I don’t want to consider situations where market conditions have warranted that I don’t trade today, but I’m going to take that chance anyway.  Or that model that I’m being presented with, is that a recommendation or is that not a recommendation? How do you work around that? If you’re a broker dealer and you’re providing these potential trades that could be construed as a recommendation, are you properly disclosing that information? So that individual understands that this is strictly my decision. It’s a self-directed thing on my part, or is it something where I’ve been being influenced to get in on this position at this very moment?

Ed Wegener:  Well , absolutely, and I think it all goes back to the first thing that we mentioned which is, make sure that you ensure that you have a strong supervisory system and that you’ve assessed all of these potential challenges and risks and that your supervisory system accounts for all of those. So definitely something that people need to be on the lookout for.

 Well, I think there’s more to come in this area.  It definitely continues to involve both in terms of the business side and how regulators are viewing the risks and challenges that are associated with this type of activity. So I’m sure that we’ll be back at some point talking about how this has developed in future podcasts, but we really appreciate you joining us today, and I really enjoyed the discussion and appreciate you sharing what you know with our clients.

Libby Hall:  Thanks everyone for listening. If you’d like to learn more about our experts and how Oyster can help your firm, visit our  And if you like what you heard today, follow us on whatever platform you listen to and give us a review. Reviews make it easier for people to find us.  Have a great day.

About The Podcast Speakers
Photo of Ed Wegener

Ed Wegener

Ed Wegener is an innovative compliance, risk management and supervisory controls expert with deep understanding of Federal Securities Laws and the rules of self-regulatory organizations, as well as technology optimization and risk mitigation. Prior to joining Oyster, Ed held several posts in FINRA, most recently as  Senior VP and Midwest Regional Director.

Photo of Dean Pelos

Dean Pelos

With over 30 years of experience as a financial services professional, Dean Pelos has extensive experience helping firms maintain regulatory compliance, grow sales, and control costs. Dean has a strong background in compliance for investment advisers and broker-dealers and additional experience specializing in regulatory compliance for investment companies.

Photo of Jeff Wilk

Jeffrey Wilk

Jeff Wilk started his career as an Advisor and has a strong track record of executive success in strategic planning and execution, business assessment, transformation and growth. Jeff was directly accountable for several mergers/acquisitions, product and digital platform transformations, patent-pending products, and operating model RFPs and overhauls, including delivering the industry’s first “Robo” platform.

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