Investor Onboarding | Navigating the Challenges of Digitization

Private market companies are setting their sights on retail investors and exploring technology and innovative funding structures to overcome the sector’s barriers. Such retail investors are turning to private markets for diversified risk, better returns, and lower volatility.

However, today’s investors expect a digital onboarding experience from wealth managers that parallels the standards seen across other online marketplaces. To meet that demand, wealth managers are going digital while offering services such as managing investor wealth, finding opportunities to create more, and revisiting investment plans at intervals. Automated investor verification compresses initial onboarding from weeks of correspondence to minutes of checks, which is where the conversion gain comes from. The investment sector is transforming, and it is exposed to a growing risk of financial crime as it does.

What is investor onboarding?

Investor onboarding is introducing new investors to a financial or investment platform while screening them against financial crime databases through KYI checks, confirming that their initial investments come from legitimate sources. The traditional procedure usually takes months. Investment firms can use automated Know Your Investor (KYI) checks to carry out the same process in seconds.

The first step of the KYI verification process is to establish the true identities of investors, followed by anti-money laundering screening and due diligence checks. AML is one of the key steps in investor onboarding, because it screens potential investors against a global financial crime database and confirms they are not linked to any crime. Once investors clear the AML screening phase, they can transact.

Why is a legitimate investor onboarding process important?

Investor onboarding is a component of the fundraising process, so why does it matter so much to investment firms? Meeting know your investor compliance is a regulatory obligation, and verifying identities helps firms meet it alongside Know Your Customer (KYC) and Anti-Money Laundering (AML) standards. An effective onboarding procedure means KYI, KYC, and AML checks run systematically, which reduces the risk of onboarding fraudsters.

Beyond compliance, the onboarding process shapes the first impression a firm makes on the investor community, and that shapes how long those relationships last. That depends on integrating capable KYI solutions, because a slow, tedious onboarding procedure produces drop-offs and delays in capital deployment.

A frictionless onboarding journey frees up capacity for investment firms to focus on finding new investors and managing portfolios.

Which rules apply to investor onboarding

Two regimes matter most, and the article that follows was written before either reached its current form.

• The EU AML Regulation. Regulation 2024/1624 replaces the directive-based framework with a single rulebook applying directly in every member state, with no national transposition. It applies from 10 July 2027, and the new authority, AMLA, begins direct supervision of 40 large financial institutions on 1 January 2028. Firms onboarding EU investors have that as a fixed deadline rather than a consultation.
• SEC accredited investor verification. Rule 506(c), in force since 2013, requires issuers relying on it to take reasonable steps to verify that every purchaser is an accredited investor. Self-certification is not enough, which is why US private placements need a verification step that produces evidence, not just a tick box.

What steps are involved with onboarding investors?

Across all jurisdictions, particularly across Europe and the US, investment firms must run certain checks to onboard compliantly. These steps include:

• Information collection. Gather investors’ personally identifiable information, government-issued identity documents, and the investor profiles required to complete onboarding.
• Document authentication. Automated checks build templates and match them against the ID documents held in the database.
• AML screening. Background screening against financial crime databases to confirm a clean track record.
• Results. The investor is onboarded and authorized to invest once verification succeeds.

While those steps look simple, when done manually, they involve an array of emails, form filling, and ongoing communication with each potential investor. That is not adequate for anyone involved. Manual onboarding can damage an investment firm’s reputation and reduce conversion. It also exposes a firm to risks including GDPR compliance breaches, particularly around gathering and managing investors’ personally identifiable information. Some investors find the process onerous enough to back out and place their funds elsewhere. The onboarding process should be simple, investor-centric, and straightforward for every party.

Back-end complexities in the digital investment sector

The improvements automation has made to customer onboarding are notable. The complexity and blockages around compliance, verification, onboarding, and payments hurt both investors and the firm.

Compliance roadblocks

Any digital service beyond opening a bank account can involve a complex compliance structure and extensive due diligence, though that compliance exists to protect investors. Many investment firms have failed to connect the disparate technologies and services that would make investor onboarding frictionless. From investors’ identity verification to due diligence to AML screening, manual handoffs are what make onboarding times fluctuate.

Remote onboarding has also acquired a threat the paper process never had. Generated faces and injected video can satisfy a selfie check that only compares two images, and a private placement is a high-value target for exactly that reason. Deepfake detection and liveness are what keep a remote check equivalent to meeting someone in a room.

Order execution bottlenecks

Buying equity is fast, and settlement has caught up with it. North America moved to T+1 settlement on 28 May 2024, and the UK, EU, Switzerland and Liechtenstein transition together on 11 October 2027. What has not caught up is fund order execution, which remains notoriously inconsistent. End-of-month clauses are not uncommon and take days or months before money is invested. Investors seeking to benefit from timing and market corrections end up frustrated.

Transfer delays

It is hard for many to understand why automation has not transformed the whole wealth management sector. Some hurdles are more fundamental than others, including transferring funds, switching between wealth managers, and meeting regulatory obligations while relying on manual expert reviews. The most acute of these is the transfer of assets. Moving between highly regulated and privately managed or self-directed schemes is one of the most time-consuming processes an investor faces. It often takes months, by which point the market has moved. This has become an industry-wide challenge.

Manual onboarding process

Conventional paper-based investor onboarding requires multiple staff and outside counsel to handle document processing, including limited partner and non-disclosure agreements, side letters, and tax documents, alongside AML and Know Your Customer monitoring checks. Managing that manually means spreadsheets, checklists, emails, and disparate platforms. Determining an investor’s status slows things further. The back-and-forth of paperwork, signatures, and follow-ups can take days or months to verify one investor’s identity. Automation removes the repetitive parts of that and the inefficiency, delays, and drop-offs that come with them.

Digital investor onboarding, the practical route

Digitizing the journey with automation is the way to simplify investor onboarding and communicate effectively.

Automated investor onboarding reduces human error, removes friction, increases transparency, automates document processing, and cuts onboarding time, while improving the investor’s experience.

Here are some of the technologies that support it:

1. Optical character recognition (OCR) to fast-track document verification through automated data extraction.
2. E-signature to automate approvals.
3. Face biometric authentication for liveness detection and contactless onboarding.
4. Customer relationship management to track investor interactions, payments, and activity.
5. Integration with third-party identity verification services to save cost and onboarding time.
6. Automated document verification to shorten the onboarding process.
7. NFC-based solutions for reading chip-enabled documents and securing payments.

Investment and wealth management firms will not automate every component of onboarding at once. Automating the repetitive and redundant tasks first is what frees capacity to handle the complex parts properly.

How Shufti helps firms onboard legitimate investors

Shufti provides investment firms with know your investor verification that establishes an investor’s identity while authenticating their status and documents in real time. The solution supports 10,000+ ID document types in more than 150 languages across 240+ countries and territories, at 99.8 per cent accuracy and under three seconds per check.

With Shufti, your firm can:

1. Onboard only legitimate investors, reducing the risk carried into the fund.
2. Draw on experienced Money Laundering Reporting Officers as part of the service.
3. Comply with KYI, KYC and AML obligations and protect the firm’s reputation.
4. Produce the evidence trail a supervisor asks for, as a by-product of onboarding rather than a separate exercise.