Fund Industry Back Offices To Evolve From Cost Centers Into Growth Drivers
Three global trends converging to create paradigm shift in 2014
January 7, 2014
In 2014, Confluence predicts fund administrators will begin the paradigm shift from cost centers to strategic growth engines by tapping long-overlooked data goldmines. New technology investments will enable them to deliver instantaneous and accurate information, thus creating competitive advantage in an increasingly global marketplace.
Regulatory and technological advances have positioned the investment fund industry to become truly global, but old technology has constrained growth. In the coming year, downward price pressure from fund managers and growing demands to support international distribution will prompt new back office investments in both efficiency and innovation.
"It is no longer enough for back offices to merely cut costs. Going forward, the most innovative won't just reduce – they will produce," Confluence Chief Operating Officer Skip Smith said. "They will also apply the lessons the banking industry learned more than a decade ago and find new ways to leverage data and automate to achieve real efficiency and drive growth."
This evolution from cost center to growth driver will be facilitated by:
1. Leveraging data as a strategic growth asset
2. Explosive growth of distribution in Europe
3. Investment advisers becoming less specialized
Back Offices that Tap Their Data Goldmines will Avoid Commoditization and Contribute to Growth
The fund industry is becoming commoditized as fund managers scrutinize the costs of undifferentiated third-party administrators and seek better service at a better price. In the next 12 months, Confluence believes more money will be spent on back-office technology, but with far fewer vendors.
"Savvy fund administrators will realize they sit on a goldmine of data that, if extracted quickly and delivered in a consumable format in real time, can help drive sales growth. They will differentiate themselves with more solutions, quick payoffs and transformative technology," Smith said. "We expect more back offices to automate routine activities and displace prevailing processes such as typesetting, which is currently an outsourced reporting bottleneck. And they will use technology to deliver fact sheets and other data to their middle and front offices faster and more accurately, enabling fund companies to better attract investors and thereby extract real value from the back office."
Explosive Growth in Europe will Necessitate Long-Overdue Back-Office Technology Updates
The private placement regime allows non-European alternative investment managers to distribute to Europe, and AIFMD and UCITS "passports" are reducing the burdens and costs of cross-border selling on the Continent. Fund administrators on both sides of the pond have the opportunity to build competitive advantage by offering new services that can help their clients increase distribution into global channels.
"In recent years, tumultuous financial markets and lower profits have inhibited IT spending among financial services firms," Smith said. "But the heavily manual processes and spreadsheets still used in many back offices now pose a very real risk of impeding fund companies' growth by limiting their scalability and exposing them to reputational risk."
Confluence believes an increase in distribution activity across Europe in 2014 will lead to increased investment in data management and automation to accommodate the scale necessary to operate internationally and to aid in regulatory compliance.
As Investment Advisors Become Less Specialized, Administrators Will Need Flexible Platforms that Support Various Investment Types
In 2014, Confluence believes that even more asset managers will sponsor multiple types of funds, e.g. companies that typically offered mutual funds will launch hedge funds, and vice versa. Further, fund advisors are diversifying more than just fund types: Individual advisors are launching multiple fund types within multiple domiciles.
Some back offices have cobbled together disparate platforms to create systems that can handle the various requirements of traditional, mutual funds, UCITS, alternative investments, ETFs and other products, but these systems cannot yet handle the consolidated investor reporting clients will demand, or meet high standards in transparency, risk management and regulatory compliance across the entire suite of funds.
In 2014, we will see back-office technology advance to provide more efficient data harmonization, and those who can automate global regulatory changes and reporting across a diverse suite of funds will be better able to take advantage of opportunities for scale and adapt to P&L challenges.
Confluence is a global technology solutions provider delivering innovative products to the worldwide money management industry, to meet asset managers’ and service providers’ performance, reporting, analytics, risk and data needs. With the recent acquisition of StatPro, Confluence offers its clients a broader range of data-driven managed investment solutions including post-trade regulatory and shareholder reporting, performance and attribution, portfolio analytics, and asset data services and data management, delivering a full technology suite to the front, middle and back office. Headquartered in Pittsburgh, PA, Confluence serves the international fund industry with locations across Europe, North America, South Africa, Australia and Asia.