News headlines today are riddled with fines and lawsuits against some of the biggest financial brands in the world, even as regulators crack down and push major legislative overhauls into implementation, such as 2010 Dodd-Frank Wall Street Reform Act in the U.S. and Retail Distribution Review (RDR) in the UK.
What's becoming unavoidably clear is that the market environment is changing and so must our industry, particularly when it comes to fees and fee management.
Fees and commissions cause investors to flinch-downward pressures on fees are challenging fund firms to lower costs in order to improve the bottom line. "Fee-free" is becoming increasingly popular and investors are paying greater attention to the fees they are paying and why those fees are justified. Although fees may continue to be a standard part of the fund industry-what if investors discovered that those fees weren't always accurate and somewhere along the line, between the fund manager and a distributor, or even within the firm itself, fees were "leaked"?
What many don't realize about the fee management process is that it's still largely reliant on manual processes, i.e. Excel spreadsheets. Considering the sheer volume of fees and the complexity of fee agreements, it's astonishing that a firm can stay on top of the fee billing process, let alone be 100% accurate.
Without a clear technology process or some level of automation, the manual management of fees is bound to result in fee leakage, and as a result, thousands if not millions of dollars may be errantly overpaid or underpaid-creating a potential increase in costs to the investor.
In November of 2012, a major custodian came under investigation with allegations it had overcharged a number of major pension funds, to the tune of several million euros. In this instance, a potential fee leakage case was revealed to the public-but how many fee leakage incidents are getting swept under the rug?
In one of Bonaire's 2012 surveys, we discovered that 50% of firms cited "minimizing fee leakage and improving accuracy" as the most difficult challenge for an organization to overcome. The main obstacles? Respondents cited "consolidating data from various systems" (37%) and "inefficient processes" (35%) as the root causes.
The reality of today's regulatory environment is that the fee management process can no longer afford to be managed manually. Compliance is a top concern for fund firms and to avoid hefty fines and remain in compliance, fund firms need to get their fee billing and management process under control.
In response to these challenges, fund companies are seeking out ways to move away from error-prone processes in order to meet new audit and reporting requirements. Asset managers are pursuing improved software as well as centralized revenue and expense management platforms that ensure the accuracy of fee calculations to prevent any potential fee leakage.
Systematizing the fund rebates process does not just have to be an efficiency endeavor. Some firms are turning compliance into opportunity by leveraging automated fund rebate solutions to deliver invaluable business intelligence regarding distributor relationships. Using an automated solution allows a fund manager to quickly and, most importantly, accurately calculate fee structures and rebates so that firms can improve third party distribution. By being able to rapidly and easily analyze distributor data, firms can determine which products are most successful and with which distributors. Additionally, a central solution allows for straight-through-processing of commissions, calculations, gains/losses postings and reversals.
2013 may yet again be another year of news filled with stories of hefty fines and surprising lawsuits. As regulations are implemented and investors increasingly demand transparency, firms cannot afford more bad news. Although technology has typically been viewed as the business laggard, today, it can be a business saver. The right investments in the right solutions can empower firms to be completely confident in processes like fee billing where an errant zero or an overlooked invoice could result in millions of dollars in mistaken fees.
Let's turn "fee leakage" into "fee confidence"-so that fund firms and their investors can rest assured that the fees that are being paid are accurate and appropriate.
Chris John is the chief executive officer of Bonaire, a provider of revenue management, fee billing and accounting solutions to the asset management industry.