In an increasingly complex global investment landscape, how are asset managers and servicers meeting the demands on their middle- and back-office operations? More than five years on from the global financial crisis, the asset management industry continues to adjust, a recent survey by EY of large global asset managers and fund administrators shows.
With margins and fees in decline, firms must seek new ways to increase efficiency while, at the same time, navigating a growing range of regulatory and investor requirements. As business diversification into new products, instruments and territories and increasing regulation continue to transform the industry, firms are challenged to achieve operational effectiveness while meeting new demands on data, risk management and reporting. Consequently, a split has emerged across the industry between a fire-fighting approach to compliance and long-term strategic improvements to data management.
Today, mainstream, previously "long-only" asset managers are just as likely to invest in complex derivatives products as hedge funds. As a result, the asset management market is seeing an ongoing rise in the usage of complex investment instruments such as over-the-counter derivatives and alternative investment vehicles, such as hedge funds.
In our research we found that registered mutual funds are currently the most important investment vehicle, a "high priority" for 62% of asset managers and servicers, followed by institutional separate accounts (46%), institutional commingled vehicles such as unit trusts (39%) and hedge funds (39%).Through our research, we've identified the following challenges faced by today's asset managers and servicers looking to ease operational pressures:
Impact of business diversification: While expanding globally into new geographies has the potential to offer greater returns, it can also introduce operational complexities. The research found that 72% of asset managers and 83% of asset servicers surveyed currently operate in multiple jurisdictions and are having to manage the variation in regulatory reporting requirements from country to country. Additionally the top business challenge today, for 68% of respondents, includes "increasing regulation and the challenges of aggregating data."
For 51% of respondents, the U.S. Foreign Account Tax Compliance Act emerges from the survey as the most challenging regulation for asset managers and servicers. Almost as problematic is the Alternative Investment Fund Managers Directive, which was cited by 44% of firms. The survey found that moving from a country-level to a global approach is important for 78% of firms, who see better support for their global client base as a critical operational goal over the next 12 to 18 months.
Operational inefficiency: The survey reveals that "enhanced operational controls" and "increased efficiency through automation" are the two most important goals for firms' middle- and back-office operations, for 83% and 81% of firms respectively, followed by improved productivity through workflow (79%). Moreover, when it comes to achieving these objectives, asset managers and servicers are focusing on three key strategies: creating greater transparency, outsourcing non-core back-office tasks and infrastructure, and improving risk management.
Increased pressure to leverage data: Asset managers and servicers clearly recognize the growing importance of data management. The survey determined that 62% of firms have cited "better support for data aggregation" as a very important goal of their middle to back-office operations over the next 12 to 18 months. Not surprisingly, therefore, of all types of technology for the middle to back office, 42% of firms anticipate requiring data management solutions most over the next three years. This need is being predominantly driven by risk management, named as the most demanding source of back-office data requirements and analysis. Over half of surveyed firms (51%) see their data for risk management operations as either "fairly immature" or the "least mature."
MAKING DATA MEAN BUSINESS
As the details of regulation continue to be fleshed out and new requirements take effect, the resources of most asset managers and servicers are still consumed by compliance.
But many firms who put technology purchases on hold during the financial crisis are now resuming enhancements to their fund accounting systems and associated middle- and back-office solutions, with the desire to become more efficient, automated, accurate and service-oriented.
Given the many changes to market and industry infrastructure in recent years, it is hardly surprising that organizations are still grappling with core operational issues. The improvement of efficiency and automation is ongoing: a process that, as challenges evolve and new lessons are learned, is possibly never truly complete. Certainly, these are times of almost unprecedented development for the global investment environment, creating new levels of pressure and complexity for middle- and back-office operations.
Tackling this complexity requires, in particular, a new approach to data management. Data is the lifeblood of fund administration processes and needs. to be both accurate and readily available
Yet as Aite Group's research shows, it is all too often generated by multiple, disparate systems. The usual lack of integration between these data sources makes crucial information harder to aggregate for regulatory and risk reporting, and can lead to duplicated and redundant processes.
Above all, it fails to capitalize on the symbiotic relationships that exist between fund administration processes. Put simply, what happens in one operational area will typically have an impact on another.
This in turn will allow them to ease the mounting pressure on their operations, putting them in a stronger position to manage the forces of globalization and become operationally more effective.
Tony Warren is executive vice president of product management for SunGard's asset management business.