Capturing Institutional Investors: Definition and Their Onboarding Routine

A recipe for working with institutional investors

Among many other types of investors there are institutional ones — a big deal on the trading market and it is worthwhile getting to know who they are. Why? One of the major business policies is to make the relationships with clients and partners perfectly transparent. Thus companies always have to to be aware of where the money participating in transactions are coming from and if there is any fraudulent intents behind big corporations and institutions.

Let’s take this opportunity to lay out the facts and get to understand the nature of institutional investors better.

What is an institutional investor

An institutional investor is an organization that makes investments and trades securities on behalf of its members and in large enough quantities to qualify for privileged treatment and lower fees. Institutional investors are accredited for the most of the stock trading volume.

Institutions are the largest force behind the majority of supply and demand in securities markets with makes them major influencers of the securities prices. Some examples of institutional investors are pension funds, commercial banks, endowment funds, hedge funds, insurance companies and private equity investors.

The definition and established powers are quite similar across countries with variations depending on specific cases. For example, U.S. institutional investors are regulated by the Securities and Exchange Commission. SEC requires institutional investors to file a Form 13F to report their quarterly holdings. They must also file a Form 13G if they own more than 5% of a company’s stock.

Institutional investors are considered knowledgeable in terms of business market and are less expected to turn to an uneducated investment. Institutional investors are also subjects to fewer protective regulations assigned by SEC, than usually assigned to a common investor.

What makes institutional investor a valid player on the market

How powerful are they? Due to their size, institutional investors have a tremendous influence on stock. They move entire blocks of shares while not using their own money and investing for other people. Institutional investors get to negotiate better fees on their investments and gain access to the offers normal investors can not, such as opportunities with bigger minimum buy-ins.

Access to many channels and resources to back up investment decisions in favor of a particular company or industry save institutional investors from grave mistakes and in-depth research with the use of robust analytics tools helps to evaluate the entire market.

All of the above puts institutional investors in a superior position over non-professional investors who have to ask for help of traditional or online brokerages to put securities deals through.

Institutional vs retail investors

The difference between institutional and retail investors is hard to miss — institutional investors manage other people’s assets, benefiting from accessible to them special offers. Retailers are the ones spending or saving their own money to reach personal targets.

  • Personal goals

Retail investors are people who are not investing on someone else’s behalf, but manage their own money, with specific personal goals, which can be planning for the retirement, saving up for children’s education or investing in a large purchase.

  • Assistance in Purchasing and Sales

Non-institutional investors buy and sell equity, debt, or other investments through another parties such as brokers, real estate agents, and banks.

  • Higher Fees

Retailers are required to pay higher trade fees, including marketing and commission.

By definition, the SEC treats retail investors as unsophisticated with restrictions that prevent them from risky and complex investments out of their competence.

Institutional investor KYC and due diligence

Similar to any other investor case, institutional investors have to be verified by each company that makes any transactions with them. The process is a part of Anti-Money Laundering policy and is strictly regulated by local and international laws. It is even more important, as institutional investors have a great influence on the market. Because if there is damage to their service or reputation, it will harm the market and likely destroy the institution itself.

What investors need is to submit legitimate, documented proof of their investment history and proof of funds manifested in bank statements, tax returns, etc.

We have highlighted three main steps to successfully complete investor verification, ensure the safety of future transactions and comply with state regulations. Read the full guide to investor verification.

Institutional investors are market’s big players. They can be knowledgeable, experienced and even trusted by many. Nevertheless the verification is an obligatory process that eliminates even the slightest chance of a fraudulent attack. Investor verification is most efficiently made through an automated KYC/AML solution that doesn’t waste time on manual checks but provides automated, fast and engaging verification for such big and important clients to stay onboard.

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