Know-your-customer rules usually have a negative connotation. Developed to protect financial institutions from fraud, KYC is often touted by regulators as a risk management tactic. When the Financial Crimes Enforcement Network has written KYC-related rules, the "Know" can often by associated with "Beware." The intention is to prevent money laundering by ensuring that a client is a law-abiding individual and not a "bad actor."

But what is often unnoticed is a very positive unintended side effect from the KYC philosophy: knowing your customer can provide you with data to better serve your customers' needs, especially the needs of millennials.

An example of positive benefits is in the data-gathering efforts of fintech financial managers known as robo-advisers. The Financial Industry Regulatory Authority mentioned KYC in a recent report on digital investment advice, through the context of Finra rules for broker-dealers.

Ironically, the very rules that mandate firms establish credibility of investors are offering institutions extraordinary access to data that can improve the customer experience. In this respect, KYC rules aren't all about covering your assets, but instead, they represent a real opportunity to grow assets under management.

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Millennials, who came of financial age during the recent economic downturn and who stand to benefit from an unprecedented generation transfer of wealth, are somewhat more distrustful of traditional banking brands. Millennials want their financial services providers to know them — to take the time to understand who they are in relation to investment goals and horizons. Therefore, the KYC process can actually be more reassuring than unnerving to investors who are interested in having a personalized relationship with a financial institution.

For banks, information obtained through KYC requirements is quantifiably valuable data, such as age, financial capacity and tax status. This is the sort of data that market research firms are paid to mine. Collectively, this data reveals the unifying factors that define a client base, allowing for development of niche engagement strategies.

KYC rules may also facilitate better communication with clients by motivating firms to keep track of important life events and lifestyle changes. This is information that can help banks enhance millennial engagement, attract stickier assets and, ultimately, connect more with customers. Knowing your customer — from motivations to concerns — is a first step to engaging audiences that are less impressed with legacy brands and more interested in connectivity and client service.

Using this data to engage with millennials, however, will also require technological integration. Firms must blend automation, responsiveness and consultation to meet the expectations of discerning clients. Further, banks need to meet customers where they congregate to seek and exchange advice. This is no longer accomplished simply by having a social media profile or a mobile banking app. If KYC data reveals existence of niche populations, for instance, banks can develop marketing strategies tailored to the demographic targets — be it online or at local offline events where the groups congregate.

How well you actually know your clients — and can demonstrate that understanding — will emerge as a critical brand differentiator among younger investors.

April Rudin is chief executive and founder of the Rudin Group, a wealth marketing firm. She can be reached @TheRudinGroup.