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Building Efficiency On Solid Data Foundations

Daniel Eriksson, Director of Solutions Management, Advent Software EMEA, 30 September 2009

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One of the primary advantages offered by independent asset managers is that clients can choose the best custodian for their assets, however this presents its own challenges in terms of data consolidation.

Maintaining the highest levels of client service is imperative to the independent asset management community, but providing the consistently high level of performance and communication clients expect depends on having raw data to work with from the start. As the saying goes: “Garbage In, Garbage Out.”

Data aggregation, therefore, is a critical part of an asset manager’s operational tasks. But given the complexity of many of their clients’ wealth holdings, and the multiplicity of trading-related relationships they may have, bringing all the requisite information together in an accurate, timely and efficient manner presents managers with a sizable operational burden.

An expanse of data

Portfolio sophistication will be one part of the issue. In an effort to diversify risk and returns to achieve an optimal mix of asset protection and accumulation, clients’ investments will often span an array of domestic and international asset types. As a result, their holdings are often spread between a number of different custodians, brokers and banking institutions.

Indeed, one of the distinguishing features and primary attractions of the independent asset management model is the opportunity it affords clients to choose the best custodian bank for their assets, and the freedom to select products in addition to those offered by the manager so as to achieve the best possible returns.

The complexities of consolidation

But the challenge for the asset manager in this situation is to obtain the information detailing the daily transactions and account positions of its clients' holdings at the different custodian banks used, and reconcile that data with what is held on their internal systems to ensure their records are accurate and current. Where any discrepancies arise they must then be checked and resolved.

Furnished with this reconciled account information from the various custodians, the firm needs to draw the data together to get a consolidated, “big picture” view of their client’s portfolio. Armed with this the manager will be in a position to monitor its asset class, currency and investment strategy exposures, assess its risk management policies, calculate performance and make better informed asset allocation decisions.

And where an organisation outsources chunks of the portfolio management to multiple investment managers there is an extra layer of complexity.

In this instance the firm will determine how the client’s assets are to be allocated to cash, bonds, equities, commodities, real estate, private equity, hedge funds and so on, while engaging separate managers that specialise in each class to run particular aspects of the portfolio.

But that subsequently requires it to do the account aggregation across multiple managers, and the various custodians they use, in order to obtain the necessary overview of its positions. For only then can it see, for example, the client’s consolidated exposure across multiple counterparties, or assess its underlying exposures to different sectors or investment strategies in cases where it is using hedge fund of funds.

Efficiency through automation

So given the sheer volume of data involved, and the potential for costly errors to result wherever manual intervention occurs in the chain, it is essential that firms have a framework in place for automating the data consolidation and reconciliation activities.

That process starts with an ability to efficiently collect relevant data from the custodian sources concerned. Automating the custodial reconciliation then requires a rules-based engine that can be configured according to matching criteria defined by the user, to enable the electronic matching of transactions based on their specific parameters. Meanwhile, any reconciliation discrepancies that crop up need to be filtered out for quick manual resolution where necessary, with the ability for staff to easily amend client files if required.

With this type of reconciliation workflow – that to the utmost degree possible eliminates manual data input and the work involved in checking and fixing the errors that result – a firm will be able to maintain accurate cash and securities balances, reduce settlement and other operational risks, ensure compliant trading and produce more accurate client statements much faster.

Time better spent

And once these measures are put in place, because asset managers’ staff are no longer tied up with such laborious administrative tasks, they will be free to concentrate on those activities that add greater value to both client and firm.

What is more, by automating another part of the operational process the asset manager is breaking down the correlation between its headcount and the quality of client service it can provide, and assets under management it supports. As such, it will have the flexibility to accommodate both a growth or contraction in its business, keep a tight control on costs and maintain its high standards of customer care.

These considerations must be top priority for firms at a time where assets under management remain depressed as a result of the credit crisis, cost-income ratios have increased, after-tax return on equity has dropped and industry consolidation has accelerated in the face of heightened competition. Now, more than ever, independent asset managers will need to do everything in their power to sharpen their competitive advantage if they are to safeguard their future.

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