Asset managers that stay on top of regulatory demands not only keep authorities happy, they gain a competitive advantage against other firms, says one fund administration executive.
This year, managers face a number of proposed regulations impacting liquidity risk management, financial reporting and the use of derivatives, all of which are expected to drive the need for operations that provide automation and flexibility, notes Lisa Shea, a senior product manager on the fund services team at Northern Trust. Mutual fund companies, she says, will be tasked with finding new ways to drive down costs while still complying SEC proposals like the 22e-4, which would require classification of fund assets and risk assessment on proposed forms N-PORT and N-CEN.
"The ability to use your own data to identify things that would require attention is something I think the asset manager community is going to have the opportunity to use to not only to find a regulatory item that requires their attention, or risks for that matter, but if you really use the data to its full advantage it can help form your distribution model," Shea said in an interview with Money Management Executive.
From a resurgence of R-Shares for retirement plan investors, to increased use of traditional mutual fund distribution disrupters like robo advisor tools, Shea says managers are focusing every method available to ensure their funds stay competitive.
What is the biggest regulation hurdle for managers this year?
If you look at the SEC's exam priorities for 2016, they're very clear in outlining and continuing with the same theme's that they've been looking at in the last couple of years; mitigating risk in the market and protecting the interests of investors - in particular retail and retirement investors.
They are also getting better at data analytics and using the data to be able to identify systemic risk and other things that are warranting their attention in the marketplace.
When you look at the current avalanche of regulations descending upon the industry, managers have been really working with proposal after proposal yet there's nothing in the proposal from the SEC that is inconsistent with the commission's stated priorities.
Really what I'm seeing, from a trends perspective, is they're asking for more data, they're seeking information that they think is going to help them protect the end investor and they want to ensure orderly, efficient and fair markets.
Now, the industry may or may not agree with some of the prescriptive approaches in the proposals, and that's where the comment period allows the industry to give that feedback, but I think the theme is pretty clear.
What kind of tools can help mitigate the burden on managers?
From a regulatory perspective, the ability to use your own data to identify things that would require attention is something I think the asset manager community is going to have the opportunity to use, to not only to find a regulatory item that requires their attention, or risks for that matter, but if you really use the data to its full advantage it can help form your distribution model.
You can learn about the behavior of your end investor, and it can help you to drive your whole business forward - both from a regulatory advisor perspective and for the planning of your distribution model for the future.
It's an overwhelming amount of data that's going to be required (it's really an overwhelming amount of data for any manager to simply have access to), so by working with the right partners, you can figure out how to read that data, how to use it and how to leverage it as well as understand what it is that you've got access to.
How important is it to deliver cost-effective structures?
From a cost perspective, the education of the end investor and the education of the investing public, to understand what they're paying for, has been in the forefront from a number of regulatory bodies in the last couple of years. With the Department of Labor's Rule 408(b)(2), there really is more of a push for that end-investor to understand what they're paying for in a clear and simple way.
From a cost-effectiveness perspective, what the managers are challenged to do is create a product suite that can service their target end investor community and develop the right kinds of products for the markets they're trying to reach.
Before you decide what type of product or fund wrapper you want to launch that strategy in, you really have to understand who you're trying to sell to and what that marketplace is going to demand. The evolution of the distribution landscape has really influenced which product wrappers managers filed their strategies in.
Do you see this as a heavy lift for managers or is this something they should have already been working towards?
I think it's less of an overhaul and more or an evolution. When you look at the landscape of funds over the last 10 or 15 years, you've seen more and more of a shift in the models, but the hot topics of the day continue to change.
A year ago we were all talking about liquid alternatives and ETFs, but I think if you look at the product landscape, there is room for multiple types of wrappers. The key is determining who your audience is - or who you are trying to sell your funds to. That decision should be at the forefront of all of your product decisions when you are deciding which funds to launch in which wrappers. You have to know who you want to sell to before you create your product.
I think that when you look at the marketplace it's easy to follow what's hot, but every asset manager is going to need to make a decision. Asset managers really have to understand and decide what their strategy is for distribution. If you follow what's hot, you may create a product that you don't have marketplace for based on your landscape of distribution.
Questions to keep in mind to help inform your product lineup: Are you institutional? Are you retail? Are you hitting the retirement market? Do you have a captive sales force or sales channel? Are you marketing for the wirehouse distribution?
If you just follow what's hot, you could end up investing in launching a product that really doesn't make sense for your footprint and that's not an effective use of the firm's time or money.
How important is transparency?
Transparency is very important from a number of perspectives. From the perspective of the regulators, they want to know more detail than ever about the underlying fund portfolios - things like the liquidity risk management requirements.
The proposal, again, is fairly prescriptive. Whether or not that level of detail winds up in the final proposal remains to be seen, but there is a good indication that they are looking for some granular detail on the portfolio side.
From the investor education side, there will be the continued push for clarity around fees.
Understanding what you're paying for is key and that way the investor can make a conscious decision around what level of involvement they want from an advisor or from a broker, versus not really understanding embedded fees.
I think it's going to be more relevant for the industry at the forefront of decision making. I think from a regulatory perspective, the disclosure is the availability of information that should be expected to be geared towards that end investor experience as well as making it easy for the end investor to understand what the fees are, what they represent and why they're there.
From a risk mitigation perspective, managers have to make sure that they have the ability to extract the data that they need to look at the total picture. Technology has to evolve so we can do that now.
What types of products do you see developing the in the years ahead?
Well R-Shares, for example, have been around for a while and they are designed around the retirement marketplace. Cost structures are geared for the retirement marketplace, but the thing about R-Shares that might make them more attractive to a plan fiduciary is that they are in mutual fund wrappers, which are under a different regulatory infrastructure than a collective investment trust that also has lower expenses than you're traditional mutual fund.
You'll see a push for the lower cost in the registered fund wrapper, and that's where they might become more attractive, depending on the retirement plan that you're working with.
But I think there's room for every product. Collective trusts certainly aren't losing any momentum or going away and there is an appeal for a low-cost option in a registered fund wrapper.
Where should managers be right now when it comes to adopting new technological tools?
I think it depends. Again, the appeal of the robo advisor depends on who you're trying to reach. There are a lot of considerations that you have to look at.
For instance; at what point does program-based management work? Do you use it as an entry point to reach newer investors with technology and the appeal of new technology? You're inputting these key factors and we're helping based on those key factors that were helping you create your portfolio. Is that a target market in itself? Is it a gateway to becoming more sophisticated in your investing?
Those are the things managers need to consider when they look at the robo landscape - What is the goal? Do I buy it because it's hot or do I do it because it's part of a deliberate strategy around getting my investment philosophy out to a new audience?
Is there a better way to view compliance from a firm perspective?
I think the spirit of the regulation is something I think we can all agree on as an industry - we want to do the best for our investors (for our clients) and have products and services that meet the needs of the investing public.
So, if you keep that goal of servicing your end investing audience at the forefront, I think it becomes easier to embrace the spirit of the rules and certainly we're going to continue to comment on the particulars of the proposals from a cost analysis perspective.
That will continue to be a spirited discussion, but I don't think regulation should be viewed as a hurdle so much as an industry wide goal for servicing that end investor.