As the financial services industry as a whole is challenged to evolve services based on digital demands, there is an opportunity for fund administrators to transform into trusted business partners of their asset manager clients, argues global financial technology services provider FIS.
But fund administrators will need to contend with technological change, increased client demands and new competition, according to a recent survey of management executives across the globe commissioned by the firm. Among the survey's key findings: 89% of fund administrators anticipate having to make investments in new systems and technologies before 2020, and 82% of fund administrators believe competition from another sector is somewhat or highly likely by 2020. However, 39% believe fees will come down, while 42% expect an increase.
To better understand those future challenges, at the recent NICSA annual Strategic Leadership Forum in Hollywood, Fla., Money Management Executive moderated a discussion with Dan Houlihan, executive vice president, corporate and institutional services at Northern Trust; Tony Warren, executive vice president and head of strategy and solutions management at FIS; and David Prosser, contributing editor for Longitude Research.
What are some of the key pressures on fund administration fees?
Houlihan: I think it comes from the top down, if you will, and the bottom up. The top down, in the sense that the pressure really starts with asset managers and investors putting cost pressure on them - on the management fee side -- and that obviously flows down to us.
On the bottom-up side, dealing with the pace and complexity of change, things like regulation obviously, things like cyber security, these are all major investments that we need to make on the inside, and try to very delicately monetize those things and figure out ways to recoup those investments. Sometimes, that can be very difficult. Certain regulations, like a Form PF, are easier to put an explicit fee on.
Other components of the regulations aren't so clear-cut, so there's definite, very real pressure on the bottom.
The other side of the pressure, I would say from a cost standpoint, is really complexity, in particular asset class convergence and the need for us and other administrators to be able to value a very complex array of asset classes and types, essentially in real time, and give back the analytics. And that's not an easy task. So, yes, the cost pressure is very real, and coming from both sides. It's also an extremely competitive marketplace, just from a pricing standpoint.
Warren: I think if you look at the asset management, where it all begins, they're obviously marketing their products, and you've got a mixed bag of different types of funds, so it is the tracking funds versus the actively managed fund.
At the end of the day, the investors want to pay fewer fees.
Prosser: This speaks to is disparity about where people see fees going. It seems clear to me that the only way in which there is any relief from that pressure on margins is where administrators can find ways to point to the value they're creating, and charge accordingly. It's tough to do that. Unless you can show some asset managers how your services are worth paying a little bit extra for, and that's not monetized model, that's very much the value-added model.
Does it complicate matters when a client doesn't distinguish between an actively-managed fund and an index-tracking fund, and they try to put it in the same bucket?
Warren: Absolutely, and I think that's half the problem. Especially in times like this, where the markets are somewhat flat, so the returns are reduced to the investor. It just accentuates the problem.
But I would say I think the flip side of this is that it does present the administrators. It presents an opportunity for the administrators to provide those services, and secure the business of the asset manager. If you think about the key headlines, you have a growth into emerging markets, coupled with this cross-asset-class that the managers are now getting into, and of course then overlay the whole thing with regulations, which start to vary depending on the class and the market that you're doing business in.
It becomes quite a tangled, and somewhat expensive web to solve. It's critical that technology is underpinning all of that so it doesn't derail the scale that the administrators need to achieve.
Do clients have a different approach, the ones that are primarily focused on the U.S., versus more international firms, in terms of how they think about fund administration?
Warren: Yes, I think so. I think so, because the more global the firm, I guess, the more complex the beast that you're working with. The demand is going to be higher, and I'm sure, Dan, you find that dealing with asset managers who want to be cross-asset-class and global by nature.
Houlihan: Yes, particularly if they have disparate infrastructures across different jurisdictions in the world. That's obviously a cost burden. So, that's an opportunity for firms like ours to take, help take costs out, by putting them on a single platform.
Is there an increased service expectation for fees paid to administrators?
Houlihan: A great example is cyber security. We spend a very large amount of money ensuring that our clients' data is safe, and even funds now, the independent directors are under more pressure to ensure that there are cyber policies, or even you know, cyber officer, and in essence that's us.
We're making big investments, but how do we again monetize that and recoup those investments in a way that's palatable for the client base? That's tricky. But it has to - it just fundamentally has to happen.
Prosser: One of the things that several fund managers said to us, actually, was that they found it very frustrating when moving into new asset classes or new markets, (and) that their existing administrator wasn't able to service that particular investment they were making, simply because their administrator wasn't in that market or in that asset class. Clearly, that's a frustration for asset managers.
So, no, I would definitely say that's some of the trends that we're talking about, delivering global scale as an end result of that.
With the rise of the automated investment service, how real is this threat of disintermediation? And, just how might young, digital disruptor firms be countered?
Warren: I would say yes, the threats are very real, and I would say ongoing I would look at our role here. It's to really help the industry. If you think about some of the things we've already discussed there, about the value-added services that you can provide back to the asset manager themselves, I think the key for us is to make sure that we can commoditize and scale where possible, so bringing in things like exception management, work flow, so you can get high-speed but very accurate operations, and leveraging the day-to-day stuff, thus freeing up the resources to focus on value-added services back to the asset manager. Then of course, the asset manager becomes the differentiator, with their skill of the strategies that they're running, and hopefully outperforms these automated tools.
Houlihan: I think for us, it's more of a direct impact, a direct threat to the asset management side of our business.
I think the challenge for us -- getting back to the technology side -- is how do we now integrate to a next generation set of portals that are different from one that we've historically looked and worked with in a way that's safe and well-controlled, from a data perspective. For me, the bigger disruptors and threats would be things like; block-chain settlement, and whether or not that actually gets legs and has the transformation capabilities that people say it could have.
Now, it remains to be seen if it will actually work, but obviously a lot of investments are being made, including banks. So, it'll be interesting.
Were you surprised by BlackRock's acquisition of Future Advisor, and then Invesco's acquisition recently of Jemstep? These large firms are making the decision to acquire the technology at the provider when they could have just built it themselves?
Prosser: Yes, it's an interesting point, isn't it? I mean, I think what it speaks to is the desire of these large asset management firms to acquire that very specialist technological functionality - in a sense, the way they acquire it I guess is less important.
Whether it's by acquisition, or whether it's by building in-house, I think the point to take from these deals -- and from the broader discussion that we're having here -- is that the complexity that we're talking about; it's not easy to evolve a response that organically. The kind of services that we're seeing, and the breadth of services that we're seeing, really is going to continue to drive that over the next three or four years. If you're starting from a green field perspective, then that's one thing. If you're trying to evolve that current pricing system, I think different providers will take different decisions about how to respond to that. From the administrator's perspective you've got to be on the front third, otherwise you're going to get left behind.
How will that digital advice trend then affect fund administration?
Houlihan: I think it's the connectivity to our client base and how that fundamentally changes, or doesn't, is based on the new model.
Warren: Yes, I'd agree with what Dan just said there I think it's all about forming the partnerships with the asset administrator, all the way up to the asset managers and their investors.
What are some of the must-have tools, and what can be implemented over a more gradual sort of schedule?
Prosser: I think a huge investment in cybersecurity, for example, is an absolute starting point. In terms of the kind of value added things that we've been talking about -- I guess regulatory compliance, too -- until you feel that your systems are robust enough to cope with the regulatory challenges to come; those are all must-have tools. And then there are value-enhancing tools. I think those are trickier.
My advice would be follow the money. Where are asset managers going? Well, they're going towards multi-asset class investing. They're going towards ETFs. So, it's going to be tools that add functionality, and those areas are going to be our priorities.