In the wake of Dodd-Frank reform and the increasing popularity of liquid alternative strategies, the landscape for mutual fund and ETF managers can be summed up in two words - complexity and competition. And those two words make one other word more important than ever before - operations.
In today's environment, increased regulatory scrutiny, heightened competition for assets and changing investor expectations have made operational excellence critical to the success of any fund. While most mutual funds and ETF investment managers recognize the increasing importance of operations, not all have the internal resources or expertise to achieve the operational best practices that will help set them apart from the competition and allow them to focus on gathering assets in the new landscape.
For new funds, choosing the right experienced service provider allows the fund to get up and running quicker without cutting compliance corners or sacrificing operational standards. For existing funds that are changing service providers or custodians, the decision to change may allow the fund to recognize desired operational excellence and best practices that have eluded them in the past while providing investors with a seamless and painless conversion.
To help mutual fund managers and ETF investment managers compete amid new levels of competition and complexity, below are a set of practical tips for achieving operational excellence during the timeframe of a conversion or fund launch process, which set a foundation for long-term fund success.
Expect to be Asked the Right Questions - It might sound simple, but operational excellence starts with understanding the fund's operations. A service provider should perform a level of due diligence to truly understand the operational needs of the fund based on the profile of the investors, the investment strategy, the servicing needs and many other factors. What is the typical shareholder profile? How do shareholders like to be communicated with? How frequently are portfolio trades executed? How will the fund be distributed? Perhaps most importantly, does the service provider have proven expertise with the fund's strategy? These are just a few of the questions that help the investment manager and service provider determine the fund's operational profile and put a plan in place to meet those needs on a daily basis. Expect the service provider to undertake a thorough discovery process that considers all these questions and more while looking at the components of transfer agency, fund accounting and administration.
The more detail obtained on the front end, the more effective you and the service provider can be in building out an operational plan that meets the needs of the funds today and scales as they grow tomorrow.
Design Operations to Meet Your Needs - There's not one kind of fund and there's certainly not a one-size-fits-all operations strategy. A service provider will take the information gathered during the discovery process and use it to build an operational blueprint that fits the needs of your fund and your investors. If a service provider is trying to fit you into their box instead of being flexible to your needs, you may want to reconsider. Make sure all the operational departments work together throughout the process, including compliance and legal.
Processes To Be Tested Thoroughly - The devil may be in the detail but when it comes to fund operations, the confidence is in the testing. When converting funds, set the expectation that there will be an open line of communication between the outgoing and incoming service providers. That will help ensure that all relevant information is shared, data is mapped and transferred correctly, and set the foundation for a seamless transition. To ensure the smoothest transition possible, service providers should perform thorough tests of procedures and systems prior to the go-live date. Talk through any potential hurdles to take the surprises and the stress out of the conversion.
Adjust Willingly - Flexibility is a key component of operational success. If operational hiccups are discovered, work with your chosen service provider to diagnose issues quickly and adjust resources and practices willingly to accommodate your fund's needs.
The fund landscape has changed dramatically in recent years and achieving operational success may require a change in mindset for many managers and providers. Such operational success demands attention to details perhaps not previously considered and requires a new level of expertise. The good news is that if approached properly, operational efficiency also delivers a greater return than ever before. Because in the era of competition and complexity, investors expect greater operational excellence and those who deliver it will be much more likely to attract and retain assets and build a business that thrives.
Todd Heim is client implementation manager at Ultimus Fund Solutions