Coverage of fund trends usually involves a wave of commentary about expected market performance. Inflation, unemployment, GDP and other economic indicators are also discussed and debated. Yet there are other trends driving the fund industry that will significantly shape how management companies operate. Boston Financial has identified five key forces that continue to alter the industry landscape.
1. Shifts in product distribution channels. Intermediaries are increasingly influencing fund distribution, changing the traditional relationship between fund companies and their underlying investors, and playing a part in an investor's fund selection and asset allocation decision process. The rise in intermediary activity has led to the proliferation of subaccounts and a shift away from traditional transfer agent networked accounts. As a result, roles once overseen by the transfer agent - such as compliance and financial oversight - are now the responsibility of intermediaries.
Fund companies must now rely on intermediaries to provide timely and relevant information to help monitor risk. In a recent survey conducted by Boston Financial, 98% of fund companies suggested that "legal and regulatory risks" related to intermediary oversight was a major issue. Yet, only 74% of fund companies believe their company "has formal policies and procedures in place to oversee intermediaries."
2. An intense regulatory and compliance environment. The heightened regulatory focus across the fund industry is not new news. But, less familiar are the places in which extra attention is needed. These areas include:
* State Regulatory Enforcement: States emerged from the recession battered and cash-strapped. As a result, many have stepped-up their scrutiny in hopes of discovering violations that trigger financial penalties. With laws for Blue-Sky and escheatment often varying by state, compliance needs quickly compound. Fund companies are realizing they need to direct additional resources to focus on state-level requirements.
* Information Security: Privacy and data security have always been of the utmost importance in our industry, but with the increased occurrences of cyber attacks, fund companies are spending even more time and resources to continually evolve and strengthen their security programs.
* Valuation Policies and Practices: In 2013, valuation emerged as a top area of focus. Following several enforcement actions from the SEC, it is clear that fund companies should reevaluate their valuation practices for new investment products and certain asset classes.
* Board Education: Compliance is not just the responsibility of the Chief Compliance Officer (CCO), but the entire fund company. In addition, Boards are being held more accountable, causing them to look to CCOs and their firms for education and help in setting priorities. A compliance program that is continually reviewed, updated and communicated is critical.
3. Interest in fact-based, analytical decision-making. "Big Data" may be the buzzword of the moment, but sophisticated analytics are here to stay. Technology advances and computing power have led to vast troves of data. Such data can be mined to deliver insights that can help improve the customer experience, optimize the effectiveness of messaging and the perceived value of services, and fuel the development of successful products.
Particularly in financial services, creating and understanding customer profiles is a prudent starting point for using analytics. Fund companies are exploring opportunities to leverage information for fraud detection, asset retention, call center relevancy engines, and also to optimize service delivery and workflows, and predict and drive e-adoption.
4. Changing shareholder and advisor behaviors. Technologies including mobile devices and social media have led to a fundamental shift in the buyer/seller relationship. Buyers are armed with more information than ever before, and they expect to access it through a wide range of delivery channels. The customer experience has become paramount. Fund companies need to alter their interactions to keep up with the continually evolving demands and preferences of their customers.
5. An increasingly competitive market environment. Gross margins are being squeezed due to an array of factors. Competitive pressures come from a shifting distribution chain, the cost of new product offerings, necessary investments into infrastructure and technology, the demand for global services and solutions, and the need to reduce fee expense ratios. Fund companies walk a fine line between investing into growth areas and cutting costs. Outsourcing is one way to manage costs while maintaining a focus on areas where they can add the most value and differentiate themselves.
While adapting to meet these five trends may seem overwhelming, many service providers stand ready to help. Drawing on their strengths in compliance, shareholder servicing, data analysis, intermediary relationships, and leading technology, firms like Boston Financial are enhancing existing capabilities and introducing new innovations that help fund companies address the trends - and challenges - ahead.
George Costas and Nicole DeBlois are Global Relationship Executives at Boston Financial Data Services, Inc.
