Robots v regulators: Digitalisation in fund management

By Tony Warren | 24 April 2017

Tony Warren, Executive Vice President, FIS

Fund administrators face a rapidly evolving ecosystem in which fee pressure, cost constraints and a volatile regulatory environment pose significant challenges to business as usual. In addition to this, the robots are coming. However, many businesses are realising that the robots are largely benevolent; disruption is coming, yes, but this is not a zero-sum game.

For a growing number of fund administrators, digitalisation is helping to offset the challenges of competition, cost and compliance. Rather than inciting a front-to-back-office revolution it is helping to fine-tune workflows via higher levels of automation and allow a more extensive client offering – vital as competition increases.

There are numerous reasons that digitalisation is needed: with the rise of passive adoption over active strategies, fund managers face pressure to expand and diversify investment offerings, as well as to adopt smart betas and low fee sets of product structures.

Amid fee compression and a regulatory environment that is pushing hard on the traditional active-equity model, investment operations must also accommodate growing data volumes from multiple different sources; collecting, collating and analysing them. This data has to be secure, consistent and of a high quality; particularly as compliance burdens increase.

A regulatory environment including the introduction of the Markets in Financial Instruments Directive (“MiFID II”) and its related Regulation (“MiFIR”) has only increased this pressure. Under MiFID II, for example, the frequency with which asset managers must provide clients with portfolio statements will be increased from six monthly to quarterly.

The report must include valuations – if necessary on a “best efforts” basis – a review of activities and performance during the relevant period, any depreciation in the value of the portfolio that exceeds 10%, and certain prescribed information on ownership issues such as assets subject to title transfer or security arrangements. Under enhanced operations and compliance procedures required under MiFID II, more detailed record keeping requirements will also be introduced; records of decisions to deal will become more detailed with the initial decision covered by 16 fields and another 40 thereafter.

There is little argument that modern platforms are needed to support administrators in making sure that the data they receive meets these requirements. A rise in client data can, with the right tools, also be harnessed for investment decision support, risk management and reporting purposes – combining structured and unstructured data to make better business decisions. Think of this as a “lite” version of robotics and artificial intelligence – and simply the next stage in the commoditization of the standard fund administration processes.

Automation has already changed the industry

Automation has already brought the back office a long way: from a manual environment, running separate reports from investment ledger to general ledger, to a single, paperless operational unit where exception management tools have replaced the traditional checking of printed pages. Such innovations have created opportunities for fund administrators to increase efficiency and drive down costs. For larger players, comprehensive automation has also opened the doors to offering outsourced services and creating offshore centres of excellence for business process outsourcing.

Alongside regulatory pressure, operational efficiency, in short, is proving one of the primary driving factors for digital transformation efforts. This extends to operational efficiency in extracting insights on a real-time basis from assets under management, as digitalisation redefines where value is created in the value chain – allowing fund managers to add different analytical models to real time data inputs, transforming commoditised services into a premium proposition.

And as the need to retain operational efficiency, investment performance and manage regulatory constraints converge as a trio of pressure, investment to modernize legacy infrastructure is going to be crucial. This is going to take investment. And not in simply automating away the human element of fund management – with fees of 0.5% on €10,000 amounting to a mere €50 per year on a standalone roboadvisor for example, the economics of running an automated execution and fund management platform look unappealing.

For fund administrators, digitalising balance sheets to leverage their business looks the better bet – creating the optimal infrastructure for front and back offices through closer integration with vendors and increased reliance on cloud computing to reduce fixed technology costs. At the front end, increased value is going to be placed on the convenience of the service and the quality of information provided.

End-to-end digitalisation can mean improved customer experience – improving client touch-points through digital channels, more efficient provision of services, effective use of big data and data analytics and improved synchronisation with partners’ interfaces. The improvements in infrastructure needed to make this happen are not just going to allow for automated trade processing and client service, but also facilitate the use of adaptive algorithms that facilitate leaner, smarter fund management marketplaces. The robots are coming. The sooner we learn to work with them, the better for both human and machine.