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Unlocking Competitive Advantage: The Role of Technology in Fund Administration
In the rapidly expanding--and increasingly complex--landscape of the alternative asset industry, the importance of fund administrators (FA) to managers has reached an unprecedented level. The vast majority of alternative asset managers rely on fund administrators to anchor the critical functions of fund accounting, investor services, and the broader spectrum of middle- and back-office support operations. They stand as the cornerstone of the industry, ensuring seamless operations and adherence to regulatory standards.
As the sector evolves, the alignment of strategic planning, team skills, operational methods, and technology is key to success. Firms must navigate financial market intricacies with these elements in harmony. For instance, adopting new technologies requires a skilled workforce and adaptable processes. Imbalances (such as technology outpacing employee skills or processes not keeping up with strategic changes) risk injecting inefficiency into the firm’s operations. Thus, it's crucial for advancements in any one area to be matched across the organisation, ensuring that operations remain competitive and effective in a dynamic market.
Misalignment among strategy, skills, processes, and technology in alternative asset management can cause operational issues, compliance breaches, and loss of investor trust, leaving firms lagging behind competitors. These discrepancies can lead to increased costs, legal penalties, and technology vulnerabilities, undermining a firm's market responsiveness and strategic goals. Harmonising these elements is essential for operational efficiency, compliance, and maintaining a competitive edge in the fast-paced financial industry.
McKinsey & Company recently wrote a very compelling article on the successful adoption of technology with a focus on ‘people’.
Technology permeates operational excellence—but it isn’t the primary answer to operational issues. Instead, it’s a launching point for three questions that focus on how technology serves people:
- What unique new value could this technology create that otherwise would not be possible?
- How could this technology enhance our organization’s overall operational excellence?
- Will this technology augment our people and enable them to engage in a safer, more productive, more satisfying way?
The evolution and adoption of treasury management technology by Fund Administrators:
The rapid acceleration in market growth has notably overwhelmed many fund administrators, who are grappling to stay abreast of the evolving landscape. Surprisingly, it remains common for high-risk processes to be conducted manually or through email, resulting in a lack of transparency, inadequate controls, and limited scalability and competitiveness. Managers increasingly urge FAs to leverage technology to meet their dynamic needs and reduce risk. This push stems from the fact that FAs historically only focused on basic tasks like cash reconciliations, fund accounting, and investor services but now support cash, payments, and expense management.
However, the growing interest and investment in alternative investments (Alts) have introduced greater complexity. Managers now juggle multiple banking relationships, custodians, and collateral counterparties, including managing subline facilities and forecasting. They expect FAs to adeptly support these multifaceted challenges. This shift occurred gradually, leading many FAs to respond by expanding their workforce rather than adopting a strategic approach to address both immediate and future needs.
Today, many small and mid-market managers demand that FAs offer technological solutions that provide a centralised, transparent view of cash and liquidity, enhanced balance optimisation, and directly facilitate payments with an increasing number of banks. Large managers working with multiple FAs expect them to use their technology partners' platforms to ensure a unified view and control over their operations.
As managers' expectations have escalated, so too has the competition among FAs to implement systems capable of accommodating the expanding market requirements. Several leading FA providers have already made significant strides in this direction, leaving others in a race to catch up and adapt to this fast-changing environment.
Gaining competitive advantage
Fund administrators can benefit significantly from technology adoption by having a dependable and centralised source of information. This provides complete transparency and comprehensive audit trails not only for cash management but also crucially for payment processes, making them more efficient and reliable. Progressive FAs have advanced to a stage where they enable their clients to view, input, or approve payments managed by the fund administrator – some even remotely through mobile devices.
This advancement empowers managers to retain control whilst ensuring transparency, significantly lowering risk, and enhancing operational efficiency for both parties. The era of relying on endless emails, manual checks, physical signatures, and the associated risks of forgery or loss during transmission is fading away. Instead, all operations are executed within a highly secure, enclosed system that minimises the risk of unauthorised access. This unified system allows both Fund Administrators and their clients to log into the same platform, offering a consistent view of the world. It marks the end of the vulnerabilities tied to manual processes, multiple spreadsheets, logins to various banking portals, and callbacks. Technology streamlines middle and back-office operations and provides automation, optimisation, consistent workflows, and a full process audit, offering complete transparency to both parties.
Given that the capabilities of many FAs had not evolved as quickly as market dynamics and demands, some managers began to shift certain functions away or independently verify the FAs' output. Investing in modern technology platforms for their clients can be instrumental in restoring trust and distinguishing the FA's services in a competitive marketplace.
Functionality areas often demanded by FAs undertaking treasury technology projects
- Enhanced Transparency: Centralising cash management improves visibility into financial operations, leading to better decision-making and accountability.
- Streamlined Payment Workflow: Reduces both operational and credit risk by simplifying and securing the payment process.
- Unified System for Accuracy: A single platform for both fund administrators and alternative investment managers ensures a complete audit trail, enhancing data integrity and reliability.
- Dynamic Forecasting Capabilities: Offers the flexibility to plan and project cash flows over short, medium, and long-term horizons, adapting to varying market conditions.
- Automated Cash Optimization: Automated cash sweeps into Money Market Funds (MMFs) or similar instruments enhance liquidity management and yield optimisation.
- Efficiency and Alpha Generation: Quick decision-making and payment capabilities reduce costs and create opportunities for higher returns (alpha).
- Robust Compliance Tools: Includes features like OFAC sanctions screening and duplication controls, ensuring adherence to regulatory requirements and mitigating legal risks.
- Algorithmic Reconciliation: Streamlines the reconciliation process with algorithms that learn and improve over time, enhancing efficiency and accuracy.
- Digitalized Debt Management: Modernizes and adds control to the debt management process, thereby reducing associated risks.
- Advanced Collateral Management: Enables analysis and optimisation of collateral on a large scale, leading to better risk management and utilisation of assets.
Incorporating automation and optimisation into their service offerings distinguishes fund administrators in the competitive market, attracting alternative investment manager clients and fostering long-term relationships. By utilising technology for operational tasks, FAs can efficiently scale up services, freeing skilled personnel to focus on strategic client solutions. This shift away from manual, low-value activities enables FAs to assist clients in optimising and streamlining their processes, thereby becoming indispensable strategic partners in the alternative investment landscape.
Build vs Buy
A common dilemma emerges when consulting FAs on operational process improvements: the feasibility of developing in-house solutions to meet current demands versus the comprehensive costs involved. Firms often underestimate the significant investment required for initial development, necessary expertise, and system flexibility to accommodate both investment managers and private markets, as well as the ongoing support, maintenance, and continuous updates needed to keep pace with the industry's evolution.
But FAs are still learning the lesson that many fund managers learned the hard way over the past decade: they are not software shops. Often, we’ve observed firms allocate substantial capital and resources towards custom-built solutions, only to realise within a year or two that the time to market and development costs are prohibitively high. This recognition leads to the understanding that outsourcing technology to a third-party expert is a more efficient strategy. Firms that have been burned by over-budget integration projects seek out partners that offer seamless integration with existing systems and the ability to scale, providing a hassle-free solution that eliminates concerns over data security, security audits, backup centres, and various other hidden costs. This approach not only saves time and money but also allows FAs to focus on their core competencies and strategic goals. Even the largest fund administrators are spending billions to acquire technology from the providers who specialise in it.
Resistance to change
The reluctance to adopt technology within the financial sector often stems from a variety of common objections. Many argue that their clients aren't demanding technological advancements, viewing them as luxuries rather than necessities. Others cling to traditional methods that have sufficed thus far despite recognising the need for modernisation. A frequent barrier is the perceived lack of resources, budget, or executive support necessary to pursue technological upgrades. Astonishingly, some even admit that internal stakeholders won't prioritise change until a significant risk event or loss occurs. This mindset overlooks the critical lessons from past failures: proactive prevention is far more cost-effective and less damaging than reacting to a disaster, which can result in substantial financial losses, reputational damage, and, in extreme cases, the downfall of the institution.
Implementing technology before a crisis can save millions of dollars for a fraction of the potential loss. Many technology partners offer scalable pricing models to facilitate growth while keeping initial costs manageable. This approach not only mitigates risks but also accelerates the onboarding of new clients, boosting cash flow and driving rapid expansion.
Embracing technology equips fund administrators with stringent controls over cash and payments, averting both persistent errors and losses that are inevitable with manual processes. It safeguards the FA, its clients, employees, and, critically, the investors. As investors grow more informed, they are likely to influence managers' choices of FAs, favouring those who have adopted technological solutions. This trend underscores the importance of technology not just for operational efficiency and risk management but also as a strategic asset in attracting and retaining investment.
Final thoughts
In essence, embracing technology is crucial for fund administrators in the complex alternative asset management industry. FAs are key to executing essential operations for asset managers, but their success hinges on aligning strategy, skills, processes, and technology. Hesitation to adopt technology due to budget constraints, lack of executive support, or the misconception that current methods suffice—neglects the significant benefits of proactive innovation. Implementing tech solutions proactively can avert financial and reputational damage, boost operational efficiency, and secure a competitive edge. Moreover, technology enables scalable growth and positions FAs as essential, strategic partners for their clients and attractive to informed investors. Leveraging tech is not just beneficial but vital for FAs to meet the evolving demands of the financial landscape effectively.
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