Executives at mutual fund companies, asset management companies and support providers rated client reporting--which included any reporting that is created for the purpose of distribution to clients--as their top challenge followed closely by risk management in Money Management Executive's third annual Operations Survey.
The potential hit companies face in litigation, regulatory action and reputational damage is why operations managers are still so concerned about risk, the survey--sponsored by Ultimus Fund Solutions--shows. And those threats won't diminish anytime soon. The ranking differs just slightly from last year when risk management topped concerns, followed closely by regulatory reporting. All in all, however, are the results surprising?
No, according to Jim Atkinson, CEO of California-based Guinness Atkinson Asset Management, which oversees $366 million in eight mutual funds.
"The asset management business has seen an increasing emphasis on compliance and risk management year over year for at least the last decade," he said, noting that compliance monitoring has grown steadily in sophistication over the period.
According to Atkinson, this is a function of more thought and resources being applied to compliance and risk management. "Obviously some of this is driven by increasing regulation but some of it is driven by the realization that there are risks in the business and a robust effort to identify and manage those risks makes sound business sense," he said. "Put another way, once you recognize that your compliance program needs to be robust for regulatory purposes and once you put highly qualified people in place there is a strong tendency for the compliance and risk management program to build upon itself and to improve and adapt over time."
Nancy Wiser, chief operating officer of Wells Fargo Funds Management agrees. "Managing current risks and identifying emerging risks are increasingly important," she noted. "The world is moving at a faster pace, changes are happening more quickly and that will introduce new risks." Wiser said that she is increasingly discussing risk management with her team. But Wiser and other managers are doing more than just talking.
Knowing Where Risks Exist
Money Management Executive Operations Survey was conducted by Lodestar Research, a New Jersey-based advisory services firm. The survey was conducted from August 1 through August 9, 2013 and data was based on responses from 210 asset managers, including mutual fund and ETF providers.
The survey also found managers extremely worried about the potential for error of certain functions, including reconciliation, regulatory reporting and valuation.
Wiser said that it's essential for mutual fund companies, asset management companies and service providers to know where risks exist--whether it is technological or operational, as it is important to not just identify and monitor risks, but to focus on remediating risks as well. The big mistake organizations make when it comes to risk management, she said, is trying to address the symptom as opposed to the cause. For example, sometimes operational staff will run a report, notice a mistake and correct that report instead of looking through the problem at the origin. "The problems often stem from the data, not the report," Wiser stated.
A focus on valuation--or the pricing of securities that are held in portfolios, which lead to pricing of funds-is another key area of concern among fund managers. "It's one of the most critical areas to ensure no errors," Wiser noted, adding that data management is another area of focus for her. "If you can get the data right, everything that springs off of that is more likely to be correct."
The worries highlighted in the survey reflect the increasing pressure that operation executives in the fund business feel as regulators worldwide boost their scrutiny of financial firms. The Dodd-Frank Act and investor demands are the two most important drivers of change for firm operations, according to the survey. New product additions and the IRS' cost basis reporting requirements were listed as additional drivers.
A total of 38% of survey respondents cited investor demands as a "very important" driver of change for firm operations, followed by Dodd-Frank (31%), cost reduction (30%), and the IRS' costbasis reporting requirements (27%). New product additions were cited by 20% of those surveyed.
Survey participants also indicated that they were "somewhat concerned" about reference data management (20%), customeronboarding (18%), risk management (18%) and performance metrics (18%).
Areas that were listed "not a concern at all" were OTC derivatives clearing (30%), OTC derivatives collateral management (28%), counterparty data management (26%), margin account management (25%) and valuation (23%).
In comparison, last year's survey showed that 60% of respondents said that response to the credit crisis of 2008 was either an "important" or "very important" driver of change in their funds' operations. Of large firms with more than $51 billion in assets under management, that rose to 76% who felt Dodd-Frank was going to be a big driver of change. IRS rules on cost-basis accounting were cited by 50% of respondents as important drivers of change.
Combating Potential for Errors
To combat the potential for errors, respondents to this year's operations survey highlighted a level in automation across a range of functions. Functions with the highest level of automation include trade matching and confirmation (34% of respondents cited that they have this function "highly automated"). Other areas with the highest levels of automation include reconciliation (33%), client reporting (33%), clearance and settlement (33%), financial reporting (32%) and performance metrics (28%).
A total of 18% of respondents cited "somewhat automated" for each of the functions: client reporting, financial reporting, and risk management. Performance metrics (19%), customer onboarding (17%) and regulatory reporting (17%) were other areas that were "somewhat automated."
The areas with the highest rateof low to no automation were risk management (18%) and customer onboarding (17%).
The fewer human touches, the greater reduction of risk and potential error, according to Wiser. "The more times a human touches a process, the more chances for error," she stated.
Last year's study showed that reconciliation of details of trades was the category with the most automation. Forty-nine percent of respondents said matching and confirming trades was either automated or highly automated at their firms. Another 29% said they were somewhat automated.
Investing In Client and Regulatory Reporting
When it comes to spending over the next 12 to 18 months to improve functions, most fund managers plan to invest in client and regulatory reporting. The functions where fund managers said they were "not likely at all" to improve in the next 12 to 18 months were securities lending and/or repos along with margin account management.
For respondents to the survey planning to spend money to increase automation over the next 12 to 18 months, a combination of a homegrown platform, licensed platform and combination of various platforms were the most popular choices.
For Wiser, she said her business is investing most heavily in CRM for its sales and service team along with data warehouse and enhancing e-business and web capabilities for content management tools.