October 2007

CLIENT REPORTING: Everything to report

In these days of mass communication, ever more knowledgable clients expect detailed information, specific to their portfolio. Fund managers should be working towards full automation of client reports. By Angelique Ruzicka CLIENT REPORTINGClient reporting was once an end-of-the-line activity that consisted of a few quarterly ruminations on economics. But the move towards more complex, higher fee generating products, coupled with more rigorous corporate governance levels among investors and intermediaries, has seen a rise in the reporting demands placed on fund managers. Recently, a pension fund trustee was heard to tell a conference that his £10m in fees meant he could set the fund manager’s reporting parameters, and these parameters nowadays mean providers could be expected to give detail as minute as the reasons for specific trades rather than aggregated overviews of performance. Yet it is not just pension funds that are driving this trend. Distributors of high-net-worth products are applying the same exacting standards for their customers. In future, the same demands are only to be expected for retail products, as savvy intermediaries – conscious of their own reputations – start to sell more third-party product into the mass market. One of these distributors is Standard Life Investments, a UK manager that offers internally and externally managed funds. The firm is increasingly automating its reporting processes to make reporting from external managers more efficient. Caroline Trotter, head of client reporting at the firm, says: “[Client reporting] is quite challenging; we can’t always make fund manager X deliver certain text and we’ve spoken to clients about the difficulty in getting the appropriate text to them. “We’ve worked together with managers with whom we’ve had problems in order to reach a solution. We don’t say to clients that it’s not our problem, or that it’s not our fund. “You have to work with other managers to make them appreciate the reasons why we do things… Everything in this industry is about good communication and good relationships and working together to reach a solution.” The experience of Standard Life, as a client of external managers, is not atypical. Peter Bambrough, managing consultant at Citisoft, a management consultancy, says: “Clients are more sophisticated now and they know what they want. These days, clients spread their portfolio around and see how reports are presented. They note that some are timely, accurate and well presented, while some come in late and with errors.” Communication is key
Adding to the pressures placed on the client reporting function by higher fees and increased investor knowledge is the growing need for client reports to be customised. Thanks to the internet, clients are getting used to having a wealth of information at their fingertips and are impressed by the way they are now able to manipulate information via online platforms that provide access to reports. “Part of it is that we live in an information rich world,” says Peter Ellis, principle of Investit, a management consultancy. “You can get information on the web now in a way that you couldn’t get ten years ago and the value of that general information is now less than it used to be and that is why investors, particularly institutional and high-net-worth investors, want more specific information about their investments. That is where managers are falling short.” One industry expert, who didn’t want to be named, pointed out that life would be made easier if the reports received from managers were standardised. “A standard electronic feed would be needed, so that banks can have an exchange of information that is quick and accurate, whether or not our clients’ money is with us or another manager,” she says. “What’s preventing it from happening now is lack of communication and technology, which needs to be improved. I don’t think all firms use the same standards when sending information back and forth.” When performance is dire, client reporting becomes more vital. And this is where some investment management firms are falling short as they fail to inform clients adequately about underperformance. Research by Citisoft backs up the fact that consistent communication is second only to performance as a key decision factor for institutional investors and that outstanding communicators were ten times less likely to lose clients than low-quality communicators. “There is powerful evidence that reports are falling short of what clients want,” says Ellis, at Investit. “What pension funds and high-net-worth individuals want is info that is specific to their mandate and portfolio and about how well the investment has performed. They don’t want generic information on what is happening in the UK economy but want info on why decisions to buy and sell were made this quarter or this month, and why an asset was held onto throughout the period even though maybe the value was falling. When performance is bad, you’ve got to aim at keeping client reporting at a consistent level of quality.” Stand out from the crowd
But pressure from clients and intermediaries is not the only reason why there is a drive toward better customisation. A lot of it has to do with competition between managers because client reporting can be used as a way to distinguish themselves from the crowd. “At one conference we attended, trustees pointed out that it was in fact the competition between investment management firms that was creating more demanding reports,” says Bambrough, of Citisoft. Ellis adds: “Pension funds are now dealing more with different managers as they move away from balanced to specialist mandates. At the same time the investment management industry has become more innovative with the strategies it uses. There was a time when funds were long-only but now there are various strategies, such as LDI and 130/30, so that has made it more competitive. The client report has been dragged into that competitive space and used to give that extra edge whereas that wasn’t the case ten years ago.” Of course, the competition is not only felt from other investment management firms within Europe. The US began the trend of creating more specific client reports and the pressure is on in Europe to follow the trend across the Atlantic. “US reports tend to have lots of detail, pie charts of the total portfolio, detailed stock movements, portfolio value at the start and end of the period, the list goes on,” says Philip Black, sales director of Rhyme Systems. “They’ve been reporting performance for a long time. The UK is in catch-up mode and is still not at the level of complexity or detail as the US. The US is also much more advanced with web-based reporting. Europe also does a lot of vanilla reporting, more so than the UK, with the UK more likely to push for changes and customisations.” Change in perspective
The solution to meeting the needs of ever more demanding institutional investors and intermediaries is not by any means simple. But experts point to a number of things that should be addressed. Full automation is seen by some as the way to delivering more reports, taking less time to do it and improving the accuracy of information. “There are concerns about managers’ ability to keep up with the pace,” says David Mead, head of strategic partnerships at DeskNet. “The majority do it in a manual or semi-manual process and if it’s done that way there is only so many reports that can be customised. And they [investment managers] are falling down in that there are limitations in how many quality reports they can produce while maintaining margins.” As well as improving accuracy, Standard Life Investments  has also used automation to handle growth. Trotter, head of client reporting at the firm says: “The reason for automation is that our funds under management and number of clients has grown dramatically over a very short period of time. So it was very important to send out accurate and timely reports that still looked interesting and appealing. You can eliminate the manual error through automation. It certainly addresses our scalability issues and is definitely something we needed to do.” While outsourcing has helped some fund managers with certain requirements of standardised client reporting, outsourcing is not seen as the panacea for demanding institutional and high-net-worth clients. Mead, at DeskNet, says: “Even if you outsource, the work flow is still required by the investment management company. If you are serving retail at the lower end then you could outsource, but if you are serving institutional investors and high-net-worth individuals you need to provide insight to each client yourself.” There is a need for client reporting to be given more importance. “Historically, client reporting was just seen as something that needs to be done at the end of the production line. It requires more wise investment and a change in perspective. Client reporting should be seen as a business problem, not a technical one,” says Ellis. © fe October 2007

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