Mid-market asset managers drowning in compliance costs are reaching for better reconciliation systems in order to expand their AUM without collapsing their margins.
For many investment management firms, new channels of product distribution bring additional back-office operational burdens: new systems to learn, different ways to retrieve data and additional headaches.
Global investment management firms already have the scale it takes to justify building their own automated reconciliation and reporting systems, while niche firms can usually get by with doing things by hand and on paper.
But in-between firms, mid-market asset managers, are having trouble and are underserved. This is why our CEO James Carney reached out to $10 billion fund manager Luther King Capital Management to get their perspective.
Complexity as the wages of growth
If Luther King is any indication, automation is rapidly becoming an essential concern for firms that want to expand their investment footprint.
Take reconciliation, for example. In theory, it’s a simple process of matching the trading numbers back to the custodian and brokerage statements.
But the bigger you get, the faster those numbers multiply — and the more statements you need to check.
With regulators pushing for shorter and shorter reconciliation cycles, even multi-billion-dollar asset managers are struggling to keep up.
“Ten years ago a month-end reconciliation of positions was all that was required,” notes Pam Presswood, director of information systems at Luther King. “Now we bring in daily transactions.”
And because the results of that checking need to be documented, certified and archived to show auditors, training people to do it all manually and by the book isn’t really a practical option.
Luther King’s compliance staff needed to demonstrate that the trades were actually checked with a high degree of accuracy. That meant Pam Presswood had to find an electronic solution.
The challenge there: the firm was already operating in a space so complex that building the systems in-house would’ve been a nightmare.
“We deal with about 80 custodians and each one has a different format for their data so it requires a lot of manpower to reformat or write programs,” she says. “And if something changes at the custodian, you have to do it again.”
It looked like a no-win scenario until Presswood found a partner that could aggregate all that multi-custodian data into a single-format stream — before it moves into Luther King’s internal systems.
Now this task scales much more smoothly and the firm has the capacity to capture new assets without choking on the incremental data trail they would throw off, she says.
Workflows are more organized and scalable. Turnaround is tighter. And human resources can be diverted to mission-critical tasks, feeding growth instead of mere maintenance.
Automation is becoming more than a luxury
Presswood says everyone in her peer group is hungry for any lever they can find to streamline their operations and squeeze added efficiencies out of the assets they already run.
Stephen Van der Wetering, CEO of California back-office service bureau Empaxis Data Management, believes heavier regulatory loads will force more firms to look at automation as a necessity and not just an edge.
Here, too, the bigger you are, the less viable the homemade spreadsheet approach to reconciliation gets.
“All of this stuff is easily handled if you have low volume,” he points out. “If you have one trade and it has a credit default swap or some kind of equity swap, you can likely reconcile it in Excel. As soon as you start increasing volume, it becomes very challenging.”
Obviously, firms that work with anything more sophisticated than vanilla stocks and bonds have more complex needs as well — and the expertise to even evaluate these trades will be relatively scarce and expensive.
In any event, Van der Wetering scoffs at the idea that even a small firm without a strong electronic paper trail could convince today’s regulators that all reconciliation breaks are being followed up.
“They may feel that they can handle things in Excel if they have low volume, printing off what they did as far as matching,” he says. “How they got there, however, usually isn’t in any sort of documentation.”
And if your “compliance” can’t convince the regulators, any money you spend keeping that spreadsheet current — whether you outsource or keep reconciliation in-house – is just going down the drain.
The future is now
Growth in itself is anything but a bad thing, which is why just about every asset manager in the country is eager to boost their AUM by any means necessary.
But growth without efficiency only generates exponentially larger clouds of operational data and the compliance headaches that go with it.
As a result, strategically oriented firms are hunting efficiency at least as aggressively as they’re chasing the assets.
They’re outsourcing everything they can and deploying new systems to keep their in-house operations as lean as possible.
Throw in the tightening regulatory cycle, and James Carney now thinks even a low-profile task like reconciliation can become a game-changer.
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