By providing investment data management automation systems for top asset management firms worldwide, those of us at Confluence have a close-up view of the back-office challenges these firms continue to face. 

In fact, we’re right in the thick of things with these companies as they reshape their operations to meet evolving regulatory requirements and to keep pace with broader market trends.

From this unique perspective, we’ve taken a look back at 2018 in the back office to predict what’s in store for these teams and their operations as we continue forward in 2019.  Here’s what we see.

The Big Picture

Asset managers will continue to face challenges meeting their expense reduction goals.  With business requirements and market trends making cost-cutting measures even more important, teams will need to make deeper cuts while simultaneously being asked to do more.

What’s new here for fund administration is that firms started in 2018 to see the way forward, a path toward significant increases in operational efficiency.  For back-office operations, this path has two elements.  The first is new efficiencies that teams are finding as a result of their starting to adopt newer functionalities, such as artificial intelligence and machine learning.  The second is broader application of the successful work that firms did in 2018 to comply with both legacy and new regulatory requirements.

Together, these will enable greater process automation and new information delivery options.  In turn, those advances will drive big gains in operational efficiency as well as major OpEx reductions in 2019.  This new operational agility will be key as firms worldwide seek smarter ways to handle new regulatory mandates in the U.S. and around the world.  Over the longer term, automation and alternative delivery methods will play major roles in making a true digital experience the new reality for the industry.

Prediction #1:  The Cost Crunch Continues

Cost-cutting efforts that were common across the industry last year are increasing in 2019.  One factor contributing to the demand for higher operational efficiency and ROI is downward margin pressure.  As more low- and no-cost investment products enter the market, more operational belt-tightening is a certainty. Another factor, which has always been a part of the OpEx equation, but is looming larger these days, is the cost of compliance.  As firms grapple with the ever-growing impact of Regulation T, they are seeing their compliance costs steadily rise.  One part of this is evolving regulations in the countries where funds are based.  But the big delta here is the cost of complying with relevant mandates in other countries where they do business.

Dealing with a variety of regulations is one thing. It’s quite another – and a more expensive thing – when those regulations cut across multiple jurisdictions.  With the world getting smaller and the investment markets becoming more overlapped and intertwined, the cost of compliance has become an ever-growing burden for firms.

Prediction #2:  The Industry Goes Digital – But Where, Exactly?

Following directions set by SEC Modernization, and especially given the latest emerging thoughts related to the Rule 30e-3 paperless options, in 2018 many firms began to imagine what the digital future looks like in the fund industry. The new “notice and access” method for electronically delivering investment information to shareholders has given firms a reason to dip their toes into the digital water. Beyond that, innovative firms continue to make progress on disintermediating the humans – automating both human-readable and machine-readable outputs using unified data platforms and strategies.  And once regulators set the ground rules for more simplified disclosures, the processes and formats they mandate will lend further shape and color to the industry’s digital future.

In 2019, big questions continue to surround this aspect of investment management operations.  The overall theoretical vision is clear: provide instant access to real-time investment information anytime, anywhere and from any device for all industry participants (including front, middle and back office staff, institutional and Main Street investors, and regulators). And get rid of nearly all the paper.  That’s an awful lot of automation, data flow, responsive design, user experience and connectivity issues the industry will need to sort out.

The fact is, defining and delivering a true, all-digital experience will take longer than the 12 months. However, the industry will continue to make real progress in 2019.

Prediction #3:  N-PORT and N-CEN Success Drives Compliance Agility in 2019 and Beyond

For back office teams at virtually every U.S. asset management firm, a big part of 2018 was the heads-down grind to ensure preparedness for N-PORT and N-CEN processes.  The good news is that for the vast majority of ’40 Act firms, their efforts were an unqualified success. They are meeting their N-PORT reporting obligations and have completed their Form N-CEN filings with the SEC successfully.  When it comes to how asset managers provision investment data to parties outside their own four walls, many people view these N-PORT and N-CEN wins as the single biggest operational advancement in recent history.

Here at Confluence, we completely agree. But we’re more excited about what these experiences mean for firms and their teams moving forward.  By learning how to accommodate such fundamental changes in their processes, and then doing all the heavy lifting and fine tuning required, firms and their teams gained something even more compelling than reaching their goals -they achieved compliance agility.

By compliance agility, we mean how teams can now use their new thinking, and all those new technologies and processes, to mature and optimize the N-PORT and N-CEN resources they just put in place.  Even more important, with their new modus operandi, these teams and their firms are solidly prepared and well-positioned to handle any new regulations that come at them from anywhere around the world.  Furthermore, they are also ready to adopt these new technologies and processes for regulatory filings that they have already been completing.  So, watch for those 2018 successes to play out in 2019 as repeatable, no-drama processes and easier accommodation of other new data delivery and management requirements.

Conclusion – 2018 a Springboard for 2019 Success

For many back-office teams at asset management firms and administrators, they felt like Sherpas in 2018 – navigating steep and difficult terrain equipped with unfamiliar tools.  But as the year wound down, most teams summited their peaks safely and successfully – and felt the tremendous sense of accomplishment that came with it.  For that they should be proud and take a moment to relish in their achievements.

But now that they are standing on the summit and taking in the view, they will see other nearby peaks that present new and different challenges.  These teams can take the lessons and techniques they learned in 2018 and put them to work as they look to scale those new heights.  That’s what makes 2019 such an exciting time to be in our industry.