Global markets have experienced tremendous growth in the outsourcing of back office functions in recent years. For instance, 80% of hedge fund AUM is handled by a third party service provider, according to PwC. Middle office functions appear to be trending in the same direction with an expected growth rate of 19%. As a consequence, regulators, chartered with ensuring the appropriate oversight framework is in place, have become active commentators creating a common, international theme throughout the asset management industry.
The bigger picture is that it doesn't matter whether regulation has been instituted by the U.S., global counterparts, or not at all. There are no jurisdictional walls when it comes to the damaging effects of net asset value errors and the impact they have on an asset manager and the global investor community. This realization and the global collaboration taking place to address it are creating the new, global standard for "best practice" with or without the existence of domestic or foreign regulatory policy.
In our 2014 survey of North American asset managers, reputational preservation came out as the top reason for asset managers' increasing levels of fund oversight. Milestone Group found that when respondents were asked to select from five reasons that would cause them to increase the level of fund oversight at their firm, reputational preservation was key.
The reality is, however, that performing fund oversight at the level of depth required to truly mitigate risk and protect reputation requires the compilation and independent analysis of large amounts of data in a very short period of time. It therefore comes as no surprise that within the same survey, the highest ranking "desired area of improvement" among respondents was automation.
Improved identification and accuracy are the most important considerations, and asset manager priorities within the survey results underscored this point. The bottom line is that protecting their business and shareholder interests are a top priority. Realistically, regardless of who makes an error, the asset manager will be held accountable. Oversight is just like any other operational process that needs to be managed. Proper preparation, implementation and ongoing management by key staff can foster and protect relationships with service administrators, providing insurance that everything is, and will remain, on track and in support of service-level agreements.
Full visibility at one-touch is ideally what asset managers are looking for. First, exceptions within the entire end-to-end process need to be immediately and independently identifiable. Secondly, they need to be easy to research/report on. Drilling into the full details of a particular break, if and when needed, must be a simple click and go process. Hours typically spent on collecting and centralizing data must be transformed into a more streamlined automated process that allows that time to be redirected and focused on analyzing the data. This is the way forward for organizations and will allow them to continue to scale as regulations and industry complexities escalate.
Faster turnaround, value-added analysis capability, and consistency of approach all play into how well the asset manager can respond to investor needs, whether they be ad-hoc requests or regularly scheduled updates and reporting. As the market continues to evolve, investors have become even more cautious regarding their interests and are demanding regular look-through reporting to help provide them with assurance that their money is safe. An automated end-to-end process demonstrates the asset manager and service provider are working together to do everything they can to protect their clients. The ability to turn information around, quickly and accurately, will also positively affect downstream consumers within the business that are dependent on this information to service clients. Fewer, more accurate iterations of accounting data undoubtedly makes sales, tax and financial teams' jobs much easier.
The arrival of an automated solution for oversight recognizes the function as a core business process, integral to the operating models of firms that have outsourced accounting and related functions. It alleviates the pressure for firms to hire more people to provide oversight as demands for heightened control, transparency, granularity and timeliness continue to grow. Efficient, scalable technology that protects you/your firm from exposure without high impact to your bottom line is imperative. The approach minimizes manually intensive processes (i.e., paper and spreadsheets) and eliminates duplication of checks and validations of data between the asset manager and service provider. It supports focused exception management, streamlined to the point where little effort is required to undertake daily oversight and take corrective action if needed.
It's important to remember that instituting the right level of control does not have to become a heavy cost burden with significant infrastructure. A hosted solution fits well within the model, requiring little infrastructure at lower cost. Doing away with spreadsheets (68% of asset managers polled are still using some form of these in tandem with other solutions to perform oversight) and moving to an exception-based environment creates efficiency, and protects asset managers and their investors from the unnecessary damage of valuation error.