How small-to-midsize firms can not only survive, but flourish, in an age of compressed margins, increasing regulation and tough competition, was a major theme at the HFM Boston Operational Leaders Summit, sponsored by FundCount and other companies.
FundCount led a roundtable discussion entitled “Tackling technology: selection, implementation & security.” In all three sessions, participants voiced the same concerns:
- The need to be as operationally efficient as possible, mostly defined as the interconnection of disparate systems and data normalization
- Controlling and managing data, and ensuring that data is secure
- Controlling fund expenses – fund administration, legal, marketing and personnel
- The challenge of finding people with experience and the right skills
While there was general agreement about the need for trading systems, data, good personnel, marketing and other functions, roundtable participants cast a more skeptical eye toward duplicating their fund administrator’s work. There was much discussion about the role of – and need for – having a system for shadow-book accounting. Since the 2008 meltdown, fund administrators have become a significant expense, and to many participants, this is all the “technology” investment they think is needed.
To reduce the cost of fund administration, some attendees have moved from full shadowing to partial shadowing. With this approach, accounting operations such as NAV computations, reconciliation and fund statement administration are left to the fund admin, while higher-risk operations such as valuation of illiquid assets or complex fee calculations continue to be “shadowed” and performed by both the firm itself and their fund administrator.
Another determinant of “to shadow or not to shadow” is the type of target client. Participants whose firms target institutional clients (pension funds, foundations, etc.) were uniform in saying that full shadow book accounting is required. Those firms targeting high-net worth individuals or mass affluent platforms believe they do not.
“To reduce the cost of fund administration, some attendees have moved from full shadowing to partial shadowing.”
Whether as a primary fund/investor accounting system, for full or partial shadow accounting, there’s no debate that an integrated accounting system offers manifold benefits compared to a hodgepodge of unconnected systems.