The changing regulatory environment has put fund managers under increasingly powerful scrutiny. That has put more pressure on management and compliance teams to find a way to increase transparency yet control risk. Both are important for firms, their clients, investors, regulators and trading partners. Though increased regulatory demands might worry some fund managers, regulatory data can provide an opportunity to gain insight into how the business runs. That, in turn, allows managers to make more educated decisions. But this data and insight are only available when mangers have the right operational and IT platform in place. These solutions must be designed to help the fund manager meet its requirements, while reducing the amount of risk that the firm faces.
For fund managers, asking the right questions is the first step toward mitigating risk and fairly assessing their operational and IT platform. The five questions below can help identify areas of risk that are frequently encountered by those who work in or around investment operations.
1. Am I Managing My
People Effectively?
Great people make a great company. And great managers know, or learn, how to get the most out of those great people so that the firm can thrive. Managers need to put their people in a position to succeed, which begins as soon as they're hired and continues throughout their time with the firm. Employees need to have the proper training from experienced staff, and receive relevant and consistent feedback. Similarly, the best managers provide an outlet for their staff to give feedback - especially for the middle- and back-office procedures of which some managers might not have as great an understanding. Using a system of checks and balances on all levels significantly reduces the risk that something was missed along the way.
Making sure staff members are versatile is also critical to avoiding operational risk. Cross-training isn't just for athletes anymore. Within an investment firm, it promotes teamwork and helps to keep individuals from assuming sole responsibility for a function. Creating an environment where members of the team are flexible enough to serve in different roles also improves communication between different people and departments.
At the same time, fund managers will strive to maintain sufficient and qualified staff to ensure proper segregation of duties. While cross-training is critical, checks and balances can evaporate quickly when all performed by the same individual. For smaller organizations, the use of external service providers can help with this challenge.
2. Am I Refining My Processes?
An effective mix of communication and technology can help solve many of the most common operational problems - as long as firms have well-established policies and procedures to govern the usage of both. Information is constantly moving between people, departments and even organizations; an environment where a small ripple can create a tidal wave. System and workflow diagrams can help ease the flow of data and provide guidance for everyone involved in the process. While technology is a powerful tool for consistent reporting and decreased operational risk, reliance solely upon technology creates new hazards.
Staff members and consultants need to know how to survive without the technology, perform tasks manually and have an understanding of their operational context in the event of a system breakdown. Firms need to consistently keep these policies up-to-date and readily available to both lower day-to-day risk and uphold the distinction between the investment firm and the fund it runs.
3. Am I Reading the Fine Print?
Increased regulation demands a more comprehensive look at all legal documents, with a keen eye focused on the organizations involved in the process. Both attorneys and experienced operational managers need to review these to identify their legal counterparty and figure out who has jurisdiction. In addition to that, in order to properly asses risk, firms should continuously monitor the counterparty's credit worthiness. Managers must also stay up to date with various changes to reporting requirements like FATCA and Form CPO-PQR, or for private fund managers Form PF, Annex IV reporting under AIFMD and Open Protocol Enabling Risk Aggregation standards reporting (OPERA). With an increasing number of these requirements, that means building out a team of experts, not just having a few people managing the entire process.
4. Am I Minding the Customer Pipeline?
The modern client, and investor, expects more. They expect more transparency, faster reporting and fewer risks. On top of that, clients expect lower advisory fees. To keep clients and investors happy, while keeping risk at bay, firms need to be experts in reading the tea leaves. Forward-looking firms know that there's always something around the corner, and will work to anticipate which direction regulation is heading and what investors are demanding.
5. Can I Manage Any Needed Change Myself?
For those organizations who identify shortfalls as they reflect on operational risk, a candid self-assessment of their ability to manage change is in order. If systems, processes or people are in need of an upgrade, fund managers must consider whether they can realistically implement necessary improvements on their own and absorb the additional risks that such upgrades can introduce. Even if a firm is able to manage large-scale improvements, it may not wish to dedicate the resources necessary to ensure the changes are successful or to keep from falling behind again. Finding the best answer and platform to reduce a firm's operational, regulatory and technological risk begins with asking the proper questions to evaluate the risk to which the company might already be exposed. Combined with the insight gained from regulatory data, investment firms can use the answers provided here to stay relevant in a competitive marketplace, while also meeting the changing needs of regulators and current investors.
Holly Miller is SEI's managing director of middle office services.
