The race to innovate fund services: who will win?
Over the last five or six years there has been tremendous consolidation in the alternative fund administration space, with the likes of SS&C Technologies and Apex Fund Services acquiring specialist fund administrators. At the same time, the industry has continued to witness a race to zero, as service providers look to drive down costs – and offer more competitive pricing – using the latest technology innovations to win client mandates. This is fine at the larger end of the spectrum but for smaller fund administrators, these margin pressures are harder to absorb.
As risk in all its many forms continues to grow in financial markets so too does the sophistication of risk management systems. Innovative fund technology can place fund administrators in a much stronger position to manage cyber, regulatory and operational risk while maintaining the integrity of their greatest assets: clients’ data.
However, achieving that level of sophistication is far from easy in this cost-competitive environment. To overcome this, it is becoming increasingly important to stand out and offer true value-add services that go above and beyond the ordinary, and in effect bring fund administrators more closely into their clients’ front-office; offering an array of data analytics and reporting solutions to help fund managers build successful, sustainable businesses.
Technology is key to this, but fund administrators still need human expertise to enhance the client experience.
As Simon Bodjanski, Senior Relationship Management Director, TMF Group, said in a recent webinar hosted by Hedgeweek in conjunction with FIS, “Developing a winning strategy is about how you distinguish yourself from a system perspective, in terms of delivery, and in terms of expertise, in terms of client engagement.
“You need to make sure everything is aligned. There are a lot of IT systems in the market. For us, it is a case of working out how to make things more modular and more efficient, in conjunction with our own proprietary systems, so that when data is ingested it goes through the whole value chain, all the way to the end client and their investors.”
In some respects, technology is a double-edged sword. Smaller fund administrators can use sophisticated technology to deliver a more niche, customised experience, which fund managers appreciate, but they increasingly want more for less. Technology is an enabler and a way to improve client satisfaction but it is also contributing to this race to zero.
Fund administrators have to consider this, from a budget allocation perspective. If a new system integration is to be introduced, for example, the return on investment has to be understood.
Jason Stevens is CTO at Ultimus Fund Solutions, LLC. He said that when Ultimus works on bids with prospective clients, it is important to think about what they can do in response to fee pressures, using technology as a baseline to provide customised services and other value-adds to help win clients.
This might be access to data, analytic insights, transparency into their funds, and customisation (in terms of reporting). “Doing these things can help you compete with administrators who focus more on price,” remarked Stevens. “You have to find a combination between the two (price and value-added services). I think using technology can help to drive down costs while at the same provide a customised service.
“Automation efficiencies can offset expenses that we bear on our side; this enables us to lay the foundations on which to offer more services, without impacting the bottom line.”
Bucking the trend
The asset management industry continues to grow and become more complex. Quantitative and AI strategies, alternative risk premia, quantamental strategies, bank loan strategies and strategies that use equity swaps, interest rate swaps and other derivatives have all risen to prominence. Moreover, liquid and illiquid assets are becoming merged in fund portfolios as alternative fund managers seek to offer more hybrid fund solutions to investors.
While this is undoubtedly putting fund administrators under more pressure to achieve greater operational efficiencies, there are potentially significant opportunities on offer for those who can offer more comprehensive middle-office and front-office analytic services to buck the trend of this race to zero.
“The ones that are doing well are able to really deliver on the middle-office,” said Jason Baldesare, Director, Strategy and Solutions Management, Buy-Side Solutions, FIS. “A recent FIS survey showed that there continues to be a trend among fund managers to outsource middle-office functions: upwards of 40 per cent of survey respondents said they planned to do that in 2018, and 45 per cent in 2019.”
Administrators who can deliver IBOR services, who can get the right data at the right time, and deliver risk and performance solutions, are going to have a real opportunity to increase market share, added Baldesare.
Also, to best position themselves in the eyes of fund managers, especially those operating in the private equity and real estate space who may not wish to outsource all of their middle-office functions, a modular approach is beneficial. By understanding the relationship between the service provider, the scalability of its platform and the depth of its expertise, it can help managers determine to what extent duties can be outsourced.
Developing a winning strategy
At Ultimus, a big focus is being placed on using Robotic Process Automation (RPA) technology, which is still in its infancy in financial services, to better streamline workflow capabilities and allow for more custom development and integration with vendors.
The aim is to use RPA technology to establish end-to-end automation with no human intervention in manual processes, allowing staff to focus instead on exceptions management and analysis.
“We’ve invested in RPA at Ultimus and I think combining this with custom development internally is important. You also need to have a good API strategy so that you have direct connections with data vendors so that all of your systems can talk to each another. Getting the proper technology foundations is key to automating your processes,” opined Stevens.
Freeing up staff to do more meaningful analytical work will make them more experienced. They will be more informed and know their clients’ funds inside out. Such a strategy could, over time, allow fund administrators to build teams of fund analysts that become a true extension of their clients, as opposed to merely being fund accountants.
Baldesare confirmed that FIS was working to embed RPA and advanced technologies into its solutions and all of its core investment operations solutions to operate with strong exception management tools. Another area that FIS is investing heavily in is to ensure that its solutions have open APIs.
“We need to make it easy for clients to get data out of our solutions into other solutions they might have in their ecosystem,” explained Baldesare. “We are also working on advanced digital channel solutions to help our clients receive, digest, and analyse data across not just FIS solutions, but non-FIS solutions as well.
“Where we’ve integrated several of our solutions into a ‘Solution Suite’, we’re exploring a common user interface layer to make the user experience more efficient.”
Workflow technology is an essential component to this with Baldesare adding that FIS has seen upwards of 15 per cent efficiency gains when using workflow solutions with core platforms, specifically in the investment operations space.
Whether it’s operational efficiency or technical efficiency, these investments are all aimed at lowering the total cost of ownership – making it easier for fund administrators to offer value-added services while still remaining profitable.
The better able fund administrators can deliver solutions such as risk and performance analytics, the more they will be able to differentiate and mitigate against bargain basement pricing.
Adrian Holt is Product Manager and Strategy Owner, FIS. In his view, the ability to generate end of day or periodic reports with modern visualisation tools is a must, but also somewhat commoditised.
To differentiate, he said, service providers need to provide advanced risk management capabilities that allow clients to pro-actively manage their risk including pre-trade, running different scenario analyses for a range of market conditions that can influence their decision processes; and better understand what is driving returns in their portfolio.
“Managers are looking to bring lots of other data together at the same time; information on performance, how they positioned relative to benchmarks, are portfolio managers making returns in the areas they are supposed to, based on investment strategy guidelines?
“It’s the ability to integrate data together from different systems using APIs to deliver a truly meaningful report and present everything in a clear, digital format; maybe via dashboards for clients to drill down in to and understand risk and return. I think this will be key in terms of what fund managers will come to expect from their risk reports,” commented Holt.
Moving closer to the front-office
He added that fund administrators who are developing winning strategies and looking to expand their service offering beyond traditional middle and back-office services towards the front-office is a clear and current trend.
“If we are going to move more towards the front-office I think it will represent a seismic change in terms of the scope of what service providers need to deliver, particularly as it relates to their requirements in terms of data, analytical capabilities and the timeliness of data delivery.
“Many front offices users will be demanding that they see their P&L and risk figures on a real-time basis. That represents a significant challenge and at FIS it is a key part of the integration framework that we are working on,” confirmed Holt.
Looking ahead, Stevens said Ultimus would continue to develop a customised, niche approach for its clients. He acknowledged that technology plays a huge role in this. One needs to have a strong IT foundation in order to provide clients with customised reports and data feeds, and to better understand clients’ needs in order to react quickly. By doing so, this gives them an additional level of client service.
Bodjanski said that at TMF Group, “We are always looking for new acquisitions to grow. There’s organic growth, which takes time, and then there’s dynamic growth, by absorbing the technology of niche players through acquisitions who have set up a specific service delivery not offered by TMF.
“Small providers that take a niche approach will, I think, be absorbed by bigger players over time.”
Bodjanski further added that budget allocation drives a lot of internal discussion with senior executives (COO, CFO) in the context of building a more efficient, more comprehensive service offering. Those discussions are important in determining “where we, as a global fund administrator, should be focusing, and the ROI that we believe will satisfy the needs of the market”.
In conclusion, Baldesare remarked that at FIS the house view is that winning administrators will likely be those who partner closely with their technology providers and not look at them just as ‘vendors’, but as strategic partners.
“This will allow them to influence product roadmaps and ensure they are leveraging the latest technology to drive efficiency gains and risk reduction,” said Baldesare.
However the cards fall in the coming years, technology is going to play a pivotal role in determining which fund administrators best adapt to changing market conditions. And demonstrate an aptitude to deliver modular-based, highly customised value-add services; not only in the middle-office, but increasingly in the front-office as well.