Tech it or leave it
As they face increasing demands from clients and regulators alike, fund administrators could be best off leaving back-office technology upgrades to the professionals, according to Kelly Ashe of Pacific Fund Systems
The role that technology can play in enabling the fund administrator to perform its traditional net asset value (NAV) accounting and shareholder services was historically underutilised, however those days are long gone.
In 2017, it is an undisputable fact that the fund administration sector continues to evolve, particularly in respect to the industry’s appetite for—and attitude towards—information technology, and its emergence as an integral capability and a key differentiator when it comes to winning new business and retaining existing clients.
Finding themselves increasingly under the spotlight, fund managers are demanding far more of their administrators than ever before in order to comply with ever-increasing regulatory and reporting requirements demanded by the world’s regulators and tax authorities.
The ongoing challenge for administrators to improve their levels of automation, transparency and efficiency by embracing new technology while simultaneously responding to pressures on reducing fees is substantial. The threat of a game-changing disruptor entering the industry to exploit the inefficiencies and excessive costs that exist has never been higher.
Servicing an industry in such a constant state of flux is no easy task, and as a software vendor that exclusively focuses on this niche industry, Pacific Fund Systems has invested time and resources to analyse the ways in which the needs of fund administrators have changed, and continue to change.
Our software development objectives are defined by the aim of ensuring that we continue to develop functionality that will assist clients to embrace these emerging technological advances, in order to automate areas of the additional responsibility placed upon them, ultimately improving efficiencies and increasing operating margins.
With the inescapable evolution of technological advance, as fund clients and their fund managers become more demanding and the regulatory environment continues to mature, the inevitable conclusion is that fund administrators must systemically adapt their business processes, operating models and underlying core technology where necessary, in order to keep their services competitive and fit for purpose.
As a fund administration software provider constantly monitoring the industry to identify what adaptions are in view, we aim to ensure solutions are in place before they are needed. By adopting this proactive approach we consistently exceed the expectations of our clients, allowing Pacific Fund Systems to retain its enviable position as the software supplier of choice for the fund administration industry, with PFS-PAXUS continuing to satisfy the needs of the most sophisticated fund administrators.
So how should fund administrators adapt? On the one hand, administrators seek to modernise their operations to manage this range of new pressures and embrace a new generation of technology, while competing for business in an environment rife with competition and margins under increasing pressure.
The adoption of technology in the fund administration back office will remain a principal focus for many fund administrators in 2017 and beyond. The opportunities for automation, and the resultant switch to exception-based processing in particular, will provide all early adopters with a strategic competitive edge that cannot be overlooked.
To operate effectively, fund administrators are under pressure to increase their levels of transparency, accuracy and responsiveness while significantly improving the efficiency of their operations, and this is simply an unattainable challenge for many of the legacy back-office applications still in use today.
With regulators continuing to push for increased transparency and accountability across the industry, the new reporting requirements increasingly fall to the administrator, resulting in the additional burden to deliver the required data on behalf of their clients.
In addition to regulatory pressure, the demands for increased data are manifold: end investors want access to more detailed and sophisticated information; fund managers need to gain a deeper understanding of investor behaviour to capitalise on changing distribution trends as they emerge; and the adoption of continually improving risk insight and analytics tools can support informed investment decisions.
Although leveraging ‘big data’ is no longer a new concept to the asset servicing industry, it appears that fund administrators have been slower to react, most likely due in part to legacy technology issues.
In light of the fact that most of the new regulatory requirements dictate that fund administrators and transfer agents obtain, store and validate more fund- and investor-related data than ever before, the challenge of implementation continues to present an opportunity to pro-active system vendors such as Pacific Fund Systems, as many administrators look to gain a competitive advantage by transforming raw big data into actionable business insight.
Our clients are able to add this valuable service to their offering simply by taking advantage of the open relational database design of the PFS-PAXUS application.
We cannot discuss advanced technology in the back office without focusing on automation and the essential investment in straight-through processing (STP) technology that many administrators still need to make.
Those of us who have spent time manually inputting transactions and shareholder information and manually producing investor communications know better than most that the manual back-office administration undertaken by the fund service providers is by its very nature perfectly suited for automation.
It is repetitive, often includes very complex data-intensive processes and it has a lot of underlying moving parts, yet it can be accurately defined within existing data sets which, in turn, align with prescribed accounting formats.
“Utilising technology to increase automation is crucial if an administrator wants to be both efficient and accurate,” says Paul Kneen, COO of Pacific Fund Systems. “A successful administrator will maximise its use of technology and will constantly seek out new and improved technologies, continually pushing the boundary of what is achievable within the budget allocated.”
Although alternative funds in general still have a long way to go to achieve the STP levels seen in the retail fund space, we are witnessing an emergence in the automation of private equity funds. One obvious explanation for this is the growth of private equity as an asset class, meaning that there are simply many more of these fund types in existence. More consciously, private equity fund managers have seen how successful automation has been with retail and hedge funds and have sensibly questioned if the same could also be true for the types of funds that they manage.
At the same time, private equity and real estate fund managers are also facing increased expectation and demand from their investors to provide third-party validation of asset pricing and performance. As such, it seems that the exact same conditions that fundamentally drove the shift to employ third-party fund administrators for hedge funds, exist today for private equity and real estate funds.
Mainstream third-party administrators that have both the technology in place and the understanding to administer these funds will be best placed to take advantage of this active growing market opportunity. With capital flows into private equity funds predicted to considerably increase, amid the market uncertainty and predicted outflows affecting hedge funds, this is an opportunity that some fund administrators cannot afford to miss.
Administrators that have a system in place that enables them to offer this expanded range of services across both traditional and alternative funds, such as PFS-PAXUS, which integrates both fund accounting and investor services for all fund types on a single application, have a tangible opportunity to expand their offerings by taking advantage of the convergence between traditional asset managers and alternative asset managers, and bringing the administration of private equity and real estate funds on board.
Cloud technology is a valuable consideration to mention also. With the increased focus on investors and transparency—along with a growing expectation for 24/7 real-time access to information—data availability and security are clearly defined key differentiators to remaining competitive.
Continued improvements in cloud technologies, and reduction of related costs, particularly via the software-as-a-service delivery model, offer service providers access to improved operational efficiencies that were previously out of reach to all but the largest of industry participants.
The availability of a cloud-based application facilitates greater global scalability, accessibility and flexibility, and by reducing the IT infrastructure burden, fund administrators are free to focus resources on their operations.
In line with the aim of staying ahead of current technological trends and the efficiencies they create, Pacific Fund Systems is currently enhancing its offering with the planned delivery of PFS-PAXUS via the cloud, as a hosted solution targeted for launch in 2017. The existing ‘client-hosted’ model will continue to be offered in parallel with PFS-CLOUD, providing new and existing clients with an enhanced range of hosting options.
With the number of interfaces expected to grow in scale and complexity, it will make technical and financial sense to have experts managing the core technology environment on behalf of clients, in turn allowing those administrators to focus on their core business.