There are many reasons for an asset management company to undertake an operational assessment. The most common are that firms grow assets under management, change or add the types of assets traded, expand the range of strategies and/or funds it manages and have a more complex investor base with different requirements for shareholders. All these changes mean systems and processes set up at the beginning of the firm’s life cycle may no longer be fit for purpose.

FinServ Consulting leverages all its experience and expertise gained in working with similar funds or businesses to help support its clients in this exercise. This has given the company unique insights into how assessments can be conducted and what asset management firms will gain from the process.

Identifying Problem Areas

The first step in the process is to look at and analyze an investment firm’s full operations and processes to identify inefficiencies that are holding back the growth of the firm. This process can also reassure investors that the firm is doing everything it can to use its resources effectively while at the same time having processes and controls in place to ensure that operations from front to back office are running smoothly and are fit for the present as well as the future.

The assessments can highlight a variety of areas where firms may want to make changes. This strategic initiative looks at how technology is being used, whether service providers deliver in the most effective way and if teams are structured for optimal efficiency.  The review can expose bottlenecks, suggest areas where best practice can be implemented and show how to streamline a business. Ultimately, a target operating model is defined and presented with a path to get there.

Although operational assessments are routinely conducted by many firms, lately there has been an increase in requests for these evaluations. This is due to several reasons. For example, because of the pandemic, some technology investment has been delayed however, firms have only grown in complexity. Inefficiencies caused by manual processes may be exacerbated as the fund grows its assets under management (AUM).

Many firms still use Excel or have many operations done manually when there are more eloquent automated solutions available. The frequency of this can be a direct result of the infrastructure set up at the beginning of a firm’s life cycle. As it grows, those processes may no longer be adequate, particularly if it has experienced changes in the types of asset classes traded, the size and volume of trades or other factors. These factors mean existing infrastructure is less optimal. The systems used at the start of a business may not be scalable or the most efficient as it grows.

Identifying Where Efficiencies Can Be Made

Once the parameters of the operational assessment are established, everyone involved in a specific process in a fund are interviewed using a set list of questions. This helps identify ways to streamline work – such as trading workflows.

For instance, portfolio managers do not always have all the information they need at their fingertips. There may be a lot of manual work before a trading decision is made. Interviews with portfolio managers, traders, operations, finance, and anyone from the technology side involved in these processes are interviewed to identify areas where there may be ways to update work streams or plan for future expansion.

A list of predetermined questions also gives the conversations a focus and helps identify areas of inefficiency that can be improved.

The resulting list of projects – ways a firm can change processes, technology and even people to be more efficient – can be daunting. These projects can be small or large, complex or simple, easy to implement or difficult.

While it is always up to the firm to decide which projects it wants to tackle in the short or long term, some like to focus on quick wins that may be relatively inexpensive while others put together a program aimed at gradual transformation of processes and procedures.

FinServ Consulting has developed a project impact/effort matrix that helps identify which actions will have the most impact on the business while also judging the difficulty or complexity in implementing these compared with those that are much easier to do but have less overall effect on the business.

This assessment is a snapshot, giving the firm an overview of inefficiencies and what the impact of fixing them will be. Quick wins could include things like reorganization of the folder directory, discontinuing daily reports or giving Bloomberg access to more people. Key improvements that may take longer to implement might include hiring more people, like a tax director, implementing new systems like a portfolio management system (PMS) or a data warehouse.

The addition of new strategies and funds may also put a strain on existing infrastructure. Likewise, the introduction of managed accounts, funds of one or onshore/offshore structures to accommodate a wider range of investors will necessitate different procedures and processes.

Operational due diligence by investors can also identify red flag areas where improvements need to be made.

A Path Forward: Recommendations

At the end of the operational assessment there are usually five to six strategic areas where change is recommended. These range from relatively inexpensive projects to more long-term changes.

The assessment gives a timeline and costs to help firms make decisions on what to tackle first and what it may want to consider in the longer term. It is the firm’s decision what to do next and how.

By using FinServ for this exercise, unlike other consultants, the job does not end at giving the firm recommendations. FinServ is available to help implement all the suggestions, provide assistance in choosing the right technologies, service providers, processes and procedures to ready the firm for present operations as well as for the future.

While the operational assessment does not look at whether and how a firm might go into another business, like loan servicing, the process does look at operations where targeted improvements will make jobs more efficient and scalable. Some growing firms worry that every time they add a new fund or strategy, they will need to hire more persons, adding to the costs and making it difficult to scale the business. For them, outsourcing options and third parties that can assist them and make more staff unnecessary may be better options than adding to the employee list.

Assessments are also made on third party providers, like fund administrators. By looking closely at what a fund administrator provides, they could request more services and gauge whether the amount of money the administrator is charging is close to the costs for similar businesses. The assessments are holistic, looking at all the processes of the entire firm.

Whether the need for an operational assessment is necessitated by operational due diligence by investors, a more complex investor base, firm growth or just a health check after a few years of operations, the process is geared to help tighten processes and procedures, streamline controls, and get the firm to the desired future state where it is capable of being more efficient and making more informed decisions. A fund’s infrastructure should never dictate what trading strategies are permissible or impede a business decision.

Even firms that believe they are relatively straight forward as they only do a small number of investments or trades may be challenged by the complexity of regulatory filings, the different types of data needed for a variety of purposes and a complex investor base.

Conclusion

FinServ Consulting, with years of experience working with a wide variety of asset managers, brings its knowledge and expertise to the operational assessment process – and does not leave the client with a list of “to-dos”. It helps in the implementation of the suggestions to create a firm fit for purpose now and in the future.

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

Integrating external data feeds from your Administrator can facilitate operations and eliminate many of the daily bottlenecks faced by employees. Investor Relations teams may struggle to adequately communicate key performance and investment data to investors if they are simultaneously juggling numerous information sources. Directly feeding Administrator data into Salesforce will allow them to navigate a singular system while answering critical questions. Moreover, you can finally eliminate your countless excel files and the associated processes that mandate excessive manipulation.

Salesforce boasts impressive reporting and data visualization functionality that will enable your firm to draw deeper insights. The amalgamation of Salesforce Reports, Dashboards, and real time data will allow your organization to create visualizations highlighting key investor and performance metrics. Thus, augmenting personnel’s ability to anticipate client needs and answer their questions. FinServ has developed an assortment of pre-built reports and dashboards that isolate data pertaining to investment strategy, region, fee structure, performance, and more.

How to Integrate Your Data

Salesforce offers three primary tools for uploading data into Salesforce: Data Import Wizard, Data Loader, and dataloader.io. Each tool is applicable in its own right with differing use cases and functionality. The Data Import Wizard does not require installation and can easily be found by performing a quick search within Setup. Once you open the Data Import Wizard, it is as simple as selecting your CSV file and mapping the fields via the Salesforce Interface. Although the Data Import Wizard is a useful tool for basic uploads, it’s record count is limited to 50,000 and it cannot export data. The Data Import Wizard can be leveraged for both Custom Objects and Standard Objects such as Accounts, Contacts, Campaign Members, Leads, and Solutions.

Data Loader is a more robust data integration solution than Data Import Wizard. It is an external client application and therefore requires installation. The Data Loader facilitates the importation of 5,000 to 5 million records and is inclusive of both data exportation and deletion functionality. Users can specify configurations with the user interface or command-line interface. More advanced users can use the command-line interface to automate their data processing needs. However, the command-line interface is limited to Windows users and uses the Salesforce Object Query Language.

The final and most developed option is the cloud based MuleSoft solution known as dataloader.io. Similar to Data Loader, dataloader.io boasts importing, exporting, deleting, and scheduling capabilities. However, it can pull data from a variety of sources such as Box, Dropbox, FTP and SFTP repositories. Data Loader’s functionality is dependent on the package offering (Pricing Information) and has 3 editions that are priced at $0, $99, or $299 per month per user. The number of records, file size, and related objects ranges from 10,000, 10MB, and 1,000 to Unlimited, 100MB, and 100,000 per month.

How FinServ Can Help

FinServ’s completion of hundreds of projects spanning the Back, Middle and Front Offices for more than 40 of the top 100 Alternative Asset Mangers has enabled an expertise in industry processes, technological solutions, database management, and more. Additionally, FinServ has a deep understanding of the granular details associated with constructing a customized data model that fulfills your funds operational needs. FinServ is an accomplished integration partner due to countless experiences with Administrators and other Third-Party Data Sources.

Identifying the correct data may appear intuitive, but it is a common pain point throughout the industry. FinServ will host sessions with your various teams to identify and document their requirements. Thus, enabling the structured categorization of necessary and superfluous data. Directly integrating data into Salesforce allows for the elimination of unnecessary calculations that often mandate reconciliation. Subsequently reducing strain on your infrastructure and employees to allow for concentration on value rather than performing endless maintenance.

FinServ’s role extends well beyond the traditional tasks associated with integrating your data feeds. Business processes optimization and the identification of enhancements will originate from more than 15 years of experience within the Alternative Asset Management industry. FinServ will consolidate systems, document procedures, ensure successful implementations, and redesign processes to construct a simple and efficient approach that supports both your business and personnel.

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.

Recent News

The fund administration business is no stranger to the merger mania that has affected other service providers in the financial services industry. In the race to build out the most complete, feature-driven platform, these outsource providers have taken the route of buy (versus build). Recent examples include State Street buying Charles River Development, JP Morgan moving part of their business to Arcesium’s technology platform and SS&C buying Eze Software. These are a few of the more well-known names in the industry, but there are much more. The common denominator in these three cases is that in an effort to build out and expand their product offering, these administrators have chosen to buy a complementary product rather than develop something in-house.

How Did We Get Here?

To understand today’s landscape, it’s worthwhile to go back in time just a few years to give some context. As recently as ten years ago, most fund administrators were perfectly happy to strike a NAV and run some basic reconciliations for a hedge fund (and were paid handsomely for it). As the industry went through a transformation, asset managers in search of alpha started to increase the breadth of their trading. With regulation added to the mix, not only did asset managers have to contend with internal and investor reporting, they had to now consider things like FATCA and Form PF. As a result, fund administrators were finding themselves having roles in the front, middle and back office.

A few of the common themes that we’ve come across in our research is that investors have started having an increased appetite for analytics. This is in turn requires their fund administrators to be able to sate their appetite. If the platform has no capability to handle big data or provide business intelligence, they will immediately find themselves at a disadvantage. One reason why JP Morgan moved part of their fund administration business to Arcesium was for its one-stop shop of integration across the technology stack. In this new paradigm, clients would have access to their own technology and an in-place data model, while providing Middle Office services, NAV calculation and investor reporting.

Joan Kehoe, global head of JP Morgan Alternative Investment Services said, ‘we have seen opportunities to streamline and automate this two-way information transfer between those records we keep as an administrator and our clients’ systems, a task that has historically been complex due to different applications, data models, sourcs of information, and timing.’ In this case, we can go back to the buy vs build question that everyone faces. In this case, even a well-capitalized corporation like JP Morgan decided that there was no internal appetite to build all of these integration points. Instead, they went out to the market and found a service provider in Arcesium, which has already built a tried and tested product. Arcesium today manages more than $100bn in AUA (assets under administration) and counts Balyasny, Blackstone Alternative Asset Management and DE Shaw as clients.

The eternal hunt for alpha has also forced fund administrators to adapt to their clients’ trading activities. Being able to handle multi-asset servicing in an automated fashion via the cloud has become a key driver to fund administration expansion. In the past, with relatively small volumes being traded by few clients, administrators could live with manual processes in the short term. In today’s world, increased volumes from multiple clients require automated solutions. When you add to the mix, algorithmic and high frequency clients, automation has become a must-have. When SS&C closed on the purchase of Eze Software in July 2018, industry veterans pointed to Eze’s new cloud platform, Eclipse, as a prime driver for the acquisition.

The world’s largest fund administrator, BNY Mellon, which has $33.1 trillion under custody and/or management, has recently started an initiative to revamp their Middle Office platform. Their decision included a combination of buy and build. They have a proprietary OMS and their derivatives system remains Summit, which is a product from Finastra. There are plans to upgrade their Collateral systems with new messaging software. Their fund accounting system remains Eagle, which they purchased almost twenty years ago.

It should be noted that asset managers have also looked to fund administrators to outsource their back office operations. Back in 2011, Bridgewater Associates made the decision to outsource their back office to BNY Mellon. This involved carving out roughly 200 employees and turning them into BNY Mellon employees, while still employing them out of the same office in Westport, CT.

Integration of the Front, Middle and Back Offices

Like any other industry, added competition causes everyone to become leaner and provide improved, scalable service. One way of doing this is finding and choosing the best-in-breed component for your product.

When you take a look at the chart of Front-to-Middle-to-Back Office activities, you can see that the Middle Office function has a lot of opportunities by which fund administrators can improve and scale their offering. This area has traditionally been the driver of the mergers we mentioned in the beginning. When State Street bought Charles River Development, it was for their award-winning trade capture/order management offering. They likely looked at competitors like Blackrock, who for years, have had their own OMS system in Aladdin. Lou Maiuri, the head of State Street Global Markets accurately summed it up when he said, ‘the reality is building things internally, starting this from scratch organically, it’s a long journey.” Acquiring another market-leading vendor also ensures that your existing client base is much more likely to continue buying your services.

But, this can be a double-edged sword. When there is opportunity for integration among all the different Middle Office functions, there is also ripe opportunity for things to go wrong. If you can imagine each vertical (ie Trade Support, Derivatives, Collateral, Accounting, Risk and Client Services) coming from a separate module or vendor, there could be up to 6 different disparate systems in the Middle Office! Imagine what could go wrong as a fund administrator attempts to ensure data flows automatically between the six systems. Some of the pain points we’ve seen is: 1. keeping a golden source of trade data as it goes through the trade lifecycle; 2. ensuring that Collateral is kept up-to-date in the Derivatives system and 3. ensuring reference data is persisted throughout the Middle Office.

As much as you can expect each vendor to have integration points upstream and downstream, fund administrators have realized the best way to mitigate data risk is to own your platform and the data that comes with it. Past market surveys that we’ve seen have noted that the three most important factors in selecting a fund administrator are: technology ease of use, technology ease of integration and willingness to customize. What better way to ensure your technology is easy to use and integrate than having control of the product and the platform, in-house?