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Magazine Issues » November 2011

FUNDS ACCOUNTING: Running to stand still

Man-on-tredmillThe complexity of fund structures and the demands of investors have made fund accounting a costly process despite the efforts to improve efficiency. Nicholas Pratt asks what can be done to help managers and administrators get ahead of the curve.

Barrington Partners in the United States has regularly surveyed the cost of fund accounting for the last six years, primarily on the US mutual fund market. Results released in September showed very little difference from 2009 with the cost of fund accounting going up by a fraction of a basis point – from 1.34 to 1.35. This small difference, though, has come as a result of a significant effort among both asset managers and asset servicing firms to reduce their costs, in both systems and people, in the wake of the financial crisis.

The survey assesses fund administration, tax, legal, data feeds and net asset value calculation. It is the latter category that comprises the majority of cost (56%) and within that category it is the salary of operations staff that accounts for 60% of the cost, while technology costs 26%. So despite the increase in automation, fund accounting is in many ways still a people business.

“As a whole, the industry has been shedding jobs for a long time and reduced the need for manual intervention on the more straight forward tasks,” says Ellen Pedro, a consultant at Barrington.

Instead, the manual labour has been focused on more complex and analytical tasks, such as managing exceptions or dealing with the accounting of complex derivatives. So as the level of automation increases, the industry finds new ways to create complexity, she says.

Not many companies have been willing to change their core fund accounting systems in order to get ahead of the constant complexity. Pedro says: “The project can take years to complete and the systems are seen as too important to subject to radical change. A single pricing error could cause an enormous loss.”

In the UK and Europe, UK-based Alpha FMC has found costs were increasing. Bo Lantorp, director of benchmarking, says there are some significant factors contributing to the increase in the underlying costs of fund accounting.

First, most asset managers outsource their fund accounting and are tied into medium-term contracts with set pricing parameters, normally based on assets under management. Second, much fund accounting across the industry is performed using established legacy systems, where the scope for increased automation or efficiency is limited. Finally, any small efficiency savings that have been made have been more than offset by the general increase in oversight requirements, increased fund complexity and the demand for more accurate and timely delivery of fund prices.

Fund accounting systems have been subject to incremental change and development rather than radical change, says Lantorp. “Fund accounting is essentially a procedural business. Many service providers deliver a fundamentally sound and stable level of service and we have seen significant investment in enhancing the workflow technology employed around accounting platforms. But, again, this fits the bill of incremental efficiency enhancements rather than wholesale overhaul – for which there does not appear to be a compelling case.”

Fund accounting is largely a volume game, says Lantorp, and the benefits of having large scale and a wide user base are significant for system vendors, enabling them to keep pace with regulatory and business complexity by investing in their large-scale legacy platforms.

Lantorp cites the commitment of large asset servicing firms to SunGard’s InvestOne and also the apparent increase in the use of Multifonds as examples of the benefit of scale and the rarity of fundamental overhaul. “There have been some niche entrants with relatively new and efficient technology. These have tended to operate at the periphery of the industry and focus on new entrants and alternative business but they may yet play a larger role in future.”

According to Geoff Hodge, chief executive of Milestone Group, a UK-based provider of funds processing systems, fund managers have historically organised their systems around simple fund structures and are not able to cope with more complex structures.

Consequently, it is not uncommon for firms to have stand-alone systems for each process in the fund accounting life cycle.

“The industry has done a good job of automating the trade life cycle, but in terms of fund accounting, there is still a lot of work that can be done,” says Hodge.

Hodge suggests that asset managers and asset servicers develop a more open mind when it comes to their operating models. “There tends to be a very entrenched set of views that force firms to stick with a model that has too many moving parts.”

Rather than looking to automate each step with separate systems, firms should look at systems that can store data on a fund-specific basis, can run the calculations and the validation, and can manage the process from end-to-end, says Hodge. 

Systems vendor DST has developed its HiPortfolio product to address these investment accounting challenges. According to Geoff Harries, head of asset servicing for DST’s investment management solutions, the development work has focused on processes that have been performed outside the core accounting system and then brought back in. “There has been a whole cottage industry of satellite applications that have developed over the years. By putting those applications into the core processes, we can then decommission them over time,” says Harries.

The opportunities for efficiency can be hard to see when it appears that there is some kind of systemic stalemate. Firms can spend significant sums on new systems to meet the demands of regulation and new product types and investors, only to find that these demands all change once the systems are implemented and another round of catch-up commences.

“That is exactly where the market has been – firms take steps to match their requirements and then the requirements change,” says Hodge. “We’re suggesting a new structure that can cope with future requirements instead of struggling to stand still and creating a more complex web.”

©2011 funds europe