Global market data spend recently exceeded $30 billion per year¹. In an increasingly data-driven investment world, market data spend is only expected to rise, as firms seek out new alpha-generating data sets to enhance returns. Additionally, quantitative investment strategies have never been more in vogue with investors; the literal arms race to find better, more powerful data sets is sometimes merely just a struggle to “Keep Up with the Joneses”.

Market data is a critical component of modern fund management; however, wrangling market data expenses has never been more important due to rising costs and increasing complexity. In this article, FinServ will cover:

• Why is Market Data Expense Management Important?
• What Makes Market Data Expense Management Hard?
• What Technology Solutions are Available?
• Complementary Solutions and Services
• How FinServ Can Help

Why is Market Data Expense Management Important?

Market data is a Top 5 expense at most investment managers, but it is often the #1 headache. Although other expenses like employee compensation, real estate, and general technology spend reach similar (or greater) heights, market data expense management often lacks the same direct and consistent level of stewardship. Everyone wants to decrease market data expenses, even though they tend to be the least understood (e.g. complex contracts, metered services) and it is easy to pass the buck on ownership between technology, finance, operations, and the front-office. Strong, centralized control of the market data management process can help firms save millions by eliminating unused and underutilized services; however, even when market data has an organization’s focus, there are several inherent challenges with managing market data expenses without help.

What Makes Market Data Expense Management Hard?

Market data is incredibly costly and difficult to manage due to its complexity. Market data expense managers are tasked with providing structure to market data programs facing an ever-growing list of responsibilities and related challenges. These include managing a variety of execution-focused priorities, while also driving organizational change via strategic initiatives like optimizing data usage/flow and cutting out unnecessary costs. These activities include:

Expense Allocations & Invoice Reconciliation Controls:

• Market data allocations are usually more complex than vanilla corporate expenses. A single invoice could get allocation to some combination of individuals, groups, departments, and/or strategy (e.g. fund AUM-based allocations).
• This requires a clear understanding of the market data services and solutions currently in use, including an understanding of services purchased. How you pay matters as well; any soft dollar payments should be tightly managed along with appropriate firm compliance officers.
• Due to the volume and complexity of market data vendor invoices, the invoice reconciliation process demands a strong technological solution to facilitate daily market data expense management.

Usage Management:

• Keeping track of actual market data usage is required to get a handle of how to cut unnecessary costs. This includes knowing which applications use specific data, how it’s licensed, and when renewals will occur.
• Market data usage and expense reports are required for the business to make informed decisions related to overall needs. This includes a mechanism to track usage and verify that it is in line with the original business objective.
• Mitigate audit exposure as a firm and remediate any compliance breaches. Understand how the firm’s contracted capabilities compare with actual data usage. Determine if licenses exist for all services utilized across the organization?

Strategic Platform Management:

• Review and implement industry best practices for market data expense management.
• Align the overall strategy with the strategic initiatives of the business and technology teams.
• How may the organization optimize market data consumption across the board to reduce costs?
• How many data vendors are currently used?
• Are any services duplicative/redundant?
• Are there any unused/underutilized services?
• Are there better platforms available for meeting corporate strategy?

What Technology Solutions are Available?

MDSL: Market Data Manager (MDM) and TRG: Financial Information Tracking System (FITS) are two of the leading market data expense management system providers in the financial services and asset management space. The overall landscape has been heavily influenced by private equity merger and acquisition activity. MDSL recently merged with Calero, a telecom expense vendor, and TRG acquired a third player in the market data expense marketplace called Screen: INFOmatch in 2019. Both MDSL and TRG aim to provide structure and clarity to manage firmwide market data, research, software and enterprise subscription spend on subscriptions to market data providers like Bloomberg, Reuters, and FactSet.

• Contract Management and Centralized Inventory: Allows organizations to track, organize, and calculate costs related to market data vendors, contracts, products, and users. Contracts and licensing inventory details may be captured to create a centralized inventory of market data assets for use in invoicing and allocation.
• Compliance Workflow: Compliance approval workflows may be leveraged to review soft and hard dollar eligible costs.
• Invoicing Workflow, Reconciliation, and Allocation: Invoice processing becomes streamlined when matching against structured inventory records. Robust organizational structures may be accommodated to allocate to departments, groups, and/or individual users.

Complementary Solutions and Services

• Managed Services: Both MDSL and TRG offer managed service offerings inclusive of contract maintenance, compliance reviews, and invoice reconciliations. If you are underwater with your current market data expense management process, consider leveraging managed services as part of an initial implementation.
• Usage Monitoring and Control Products: MDSL: Access Compliance Engine (ACE) and TRG ResearchMonitor provide access controls and usage monitoring for subscription services, allowing you to reduce spend on underutilized services and directly ensure compliance with data access contracts/agreements.

How FinServ Can Help

Managing market data expense is often a headache for investment managers, but there are several leading marketplace solutions that help relieve the burden placed on market data managers. FinServ Consulting’s industry expertise and unparalleled track record of service for asset management clients makes us the right partner to help you select the right solution for your organization.

To learn more about FinServ Consulting’s services, please contact us at info@finservconsulting.com or (646) 603-3799.

¹ Based on a Burton-Taylor Research Report.

Overview

Many investment funds outsource their back office and fund administration services to third-party administrators.  Fund administration services typically include calculation of net asset value (NAV), daily, weekly or monthly P&L reporting, fee calculations and other activities that constitute being the official books and records.  The reasons for using third-party administrators are well documented and typically include investors’ preference for an independent firm to oversee a fund’s financials.  In addition, third-party administrators provide the ability to scale and often provide a sliding pricing model that goes up when a firm does well and down when a firm does not.  Lastly, firms can take advantage of admin technology without the need for supporting this infrastructure in-house.

Shadow accounting is the process of maintaining an additional set of financial books for the purposes of comparison with the third-party administrator.

Reasons for shadowing your administrator

Full Shadow Accounting vs. ‘NAV lite’

NAV lite (or NAV light) is the process of taking in key inputs from the admin or other external sources and performing a check on the NAV calculation.  In addition, it is common for the internal fund team to perform fee calculations as both an input and output to the NAV.  Funds choose to do this to gain a level of comfort and provide senior management with confidence that the calculations are correct.  The advantages of this approach are staffing requirements are reduced, and a full-service fund accounting system is not needed.   Having confidence in the calculations is often enough to ensure the accuracy of the administrators.  Some would argue however, there is no substitute for starting from the trade and entering all the debits and credits needed to calculate a NAV and a full set of financials in order to ensure accuracy.  Shadowing only the NAV involves dependencies from the data being supplied by the admin and therefore comes with risks that mistakes could be made and the NAV can still be incorrect.

The Verdict

A recent survey indicated that over 80% of all investment managers perform some level of shadow accounting.  It is rare for an investment firm to have the ability to raise capital without additional scrutiny that has become the norm in the industry.  Investors and allocators have a large population of investment managers to choose from and have applied increased scrutiny as part of their due diligence.  Most allocators have made it clear that shadow accounting is a requirement or at least desired.  In addition, the data investors, auditors, and regulators are asking for is easier and quicker to produce when internal systems can be used.  Therefore, funds have overwhelmingly made the choice to fully shadow or partially shadow their admins.

The Realities of Shadow Accounting

The realities of this decision are the increased investment from a cost and resource perspective, in a fund’s infrastructure.  Funds are increasingly choosing order management systems and performance management applications that either has an accounting engine or can produce reports that can be used to produce a NAV.  Choosing a system or systems to perform this function can be difficult and proper resources should be dedicated towards the selection and implementation.  Similarly, choosing an outsourced shadow accounting provider is a critical decision that should be made after proper vetting.  All funds are unique and therefore making decisions based on what worked for other funds typically leads to failed implementations.  Choosing a system or vendor is a long term decision that is difficult to undo and requires attention to detail and diligence to get it done properly.

FinServ Consulting has been providing advisory, technology and business solutions to investment firms for over 15 years.

For more information on how we can help or guide your strategic direction, please contact us at info@finservconsulting.com or 646-603-3799.

Getting Started

After a long selection process, your company decided to go with Workday Financials. You have been sold on the “power of one” and are really looking forward to re-designing your financial processes and finally having a good answer for your auditors. The pre-sales teams have come in and have demonstrated solutions to your current problems. But now the realization sets in….This is going to be a lot of work!
Hopefully, your company has also spent time selecting the right integration partner and have augmented their staff with dedicated internal and external project individuals. A critical first step, is an internal one, spend time thinking about how you want the process to look or what reports you want to produce. This will allow your firm to answer important questions from Workday or the integration partner more effectively.

Workday Methodology

Workday has a formalized methodology and whether your integration partner is Workday themselves or a certified partner, you will find the process to be regimented. The first step in the process is called the Foundation Alignment Sessions (“FAS”). You will be given workbooks to populate which detail your current process. Workday, or the integration partner will ask questions to guide you on how you want this information to be stored in Workday. It is important to note, that a process review is not part of this process. Changes to future processes will be based on decisions made outside of alignment sessions. During the sessions, you may be asked questions to which you don’t know the answer. You may also answer questions having not fully understood the ramifications of the decision. That said, there is still time at this point to re-visit these decisions.

The FAS will cover everything from financial accounting, budgets, expenses, customers, suppliers, banking and any other process or “SKU” that was purchased from Workday. Every session will focus on a business process which is the approval flow associated with the transaction, as well as the key worktags that will need to be populated.
Upon completion of the FAS, the integration partner will conduct a walkthrough of the Workday environment in what is called customer confirmation sessions. This is a chance to fine tune the configuration and make additional decisions.

Testing

After these sessions, the configuration team will update the system and deliver a unit test tenant, at which time, you will be responsible for producing unit test scripts. Upon successful completion of the unit tests (and subsequent updates to the configuration), there will be user acceptance testing (which essentially strings together unit tests) and data conversion. These efforts can be time consuming and should not be underestimated.
A separate wortkstream is needed for managing interfaces (called integrations) and could be with banks or other third-party applications. Additionally, IT is typically involved in SSO and potentially user roles and security. Communication, training and hand holding can be expected.

Go-Live

Your original assessment that this will be a lot of work turned out to be true. However, what you can expect is a powerful platform capable of detailed and flexible analytics to support both your financial and management reporting requirements. Many processes that took you hours or days will be reduced to seconds or minutes. The user community will be capable of self service, which will free up your time to do more value-added activities. Most importantly, the information will be consistent, accurate and necessitate less time with auditors and regulators.FinServ Consulting has been providing technology and business solutions to financial services firms for over 15 years.

For more information on how we can help or guide your strategic direction, please contact us at info@finservconsulting.com or 646-603-3799.

As investment firms compete for capital, investors along with their consultants have been asking for more information and often want to understand the decision-making process undertaken by investment managers. A thorough analysis of new funds or strategies is required to determine the viability and profitability of new or existing businesses and therefore, whether it’s worthy of an investment.

As data becomes more accessible, GP’s want to leverage this data to help determine what businesses should be expanded or contracted or whether it may be necessary to shift resources.

To make informed decisions, it is critically important to plan and understand profitability and the factors that impact it. Profitability can be analyzed across business lines, geographic regions, office, strategy, product, etc. Many organizations capture costs at the cost center level which may or may not be equivalent to the above groupings. Similarly, income can be captured at the same level or a subset of the above.

The financial planning and analysis (“FP&A”) group within a company, is often responsible for forecasting and analyzing profitability. To fully understand whether a department or business line is profitable, it is necessary to allocate costs and income where applicable to these areas.

Expense Allocations

One of the more time-consuming tasks of the FP&A department is the allocation of costs. At investment firms, the allocation of actual expenses is typically used for management reporting purposes only (and therefore do not impact financial statements). In addition, the results of these allocations can be used as the basis for forecasting future periods.

There are a variety of different approaches to expense allocations with some companies seeking to allocate all management company or administrative expenses to revenue-generating business lines. With this approach, expenses associated with functional areas like IT, HR and Accounting are 100% allocated to revenue areas (e.g. Private Investments, Fixed Income, etc.). The result is a ‘fully loaded’ P&L for these departments. The methodologies used to allocate expenses can be just as varied.

Common allocation methodologies include square footage for rent, headcount for support functions (helpdesk, HR, etc.) and committed capital or AUM for other costs such as accounting fees, corporate legal expenses, and office supplies. Other costs such as market data and research can utilize third-party systems to determine actual usage and act as the basis for cost distribution. Some firms can allocate at a very granular level e.g. IT costs allocated by person who has a cell phone, or laptop, etc. Other firms choose to allocate at a higher level.

Some companies choose to allocate a subset of costs and keep residual balances as corporate expenses. This is often done to eliminate potential issues which may arise when allocated costs can be more ‘expensive’ to a business line than procuring services from third parties or to avoid disagreements over the necessity of certain expenses.

Revenue allocations / Revenue Sharing

When assigning or forecasting revenue, certain companies need to allow for revenue share agreements or for cases when portfolio managers work across multiple business areas. This requires a separate data set that houses this allocation data and can be used to distribute income across the firm.

Intercompany allocations

When allocating revenue or expense amounts across different legal entities, this will result in a ‘due to / due from’ entry in both the sending and receiving companies. It is important to note, that when allocating actuals across business lines, this will lead to a cash event that will require one entity to reimburse the other to clear the intercompany balances.

Above the Line vs. Below the Line

Finally, allocations can be at different levels on a financial statement. Some allocations are made using the same level of detail as the original journal. For example, IT allocations can be made using a specific account such as licensing costs or they can be done more generally as part of an allocation such as IT allocations. Senior management must decide how they would like their financial statements (or forecasted financial statements) to look and choose a methodology accordingly.

Forecasting

Projecting revenue and expenses is one of the more important tasks the Finance team performs. Typically, several iterations of a forecast are performed to predict results using a variety of factors. Firms can use an optimistic version to predict profitability when revenue is high, and expenses are low. Other iterations for pessimistic and likely scenarios are also used.

Rolling Forecasts

Rolling forecasts are useful to highlight actual costs to date against the original forecast. This should give firms insight as to how quickly the firm is burning through their budget and how much additional costs you can expect.

Forecasts using allocations

To properly forecast P&L for departments or business lines, FP&A teams typically utilize similar allocations as discussed above. The basis for forecasted allocations are usually based on actuals or using some assumptions for growth (e.g. headcount will grow at a higher rate for the Equities group and therefore will receive additional allocations in the future).

Technology

It is not uncommon to see Excel being used almost exclusively by FP&A departments at investment firms. The advantages and disadvantages of Excel are well documented, however, the sophistication and flexibility of new systems in the marketplace, make the case for using Excel much less appealing.

There are a variety of applications that streamline allocations, forecasting and the associated reporting. Some firms utilize robust ERP applications that have allocations and forecasting capabilities embedded in the product. The advantage to this approach is that the financial data is already in the software. If data not residing in the ERP package is required, it will need to be added through interfaces or manually through uploads or data entry.

Other solutions include BI tools and data warehouses. The advantage to BI tools is that they tend to make the user interface similar to Excel and therefore more readily adopted by the user community. They also include common spreading or allocation methodologies as part of the standard package.

Similarly, data warehouses can do a really nice job of aggregating all relevant data needed for allocations and forecasting. Depending on the product, certain functions may be easier or more difficult to customize.

Summary

The FP&A team can be a real competitive advantage to the Investment firms that employ them. A well thought out approach aided by technology can add tremendous value to senior management and assist with directional decisions that can lead to maximum profitability.

Understanding the various options from a functional and technical perspective is the first step in creating a best in class FP&A department.