1 Surfacing and Addressing the Hidden Risks of Omnibus Distribution Session #2 Operational Risks Topics: - Risk Gap applied to omnibus distribution (review) - Manual invoice processing overview - Primary documents: Contracts and Invoices - Operational Risks in manual invoice process - Payment risk - Cash flow risk - Audit risk - Preview of Financial Risk session
2 Central Premise of Webinar Series Every market innovation (behavior change) creates a gap between existing practice, and new practice required to service the new norm. The larger (and longer) the gap, the greater the risk. Omnibus distribution is a major innovation in how the market behaves.
3 Intermediary compensation trend Direct (Compensation IS visible through TA system) Omnibus (Compensation is NOT visible for B/D, insurance, DC channels) (projected) Where is SubTA expense going?
4 Risk Gap of manual payment processes Omnibus Distribution (intermediary proliferation) Risk Gap Manual processes for: Contract management Invoice handling Expense allocation Reporting Closer look at operational risks of manual contract and payment processes Time Today
5 Today s Invoice Processing Distributor #3 Distributor #2 Distributor Internal Invoicing System Distributor calculates invoices Sends to fund company Extract Data Required for Invoice Calculations FundCo Manually Read Invoice PDFs Fund Invoice Processing, FundCo #1 Sub-TA Platform Manually validate against TA data. Distributor Payment Receipt Manual Lookup Contracts Manually validate invoice against contract Manually track invoice history Manually generate payments
6 High level risk factors Distribution Relationships Distributor compensation relationships are complex Each block of assets can have multiple fee agreements Each fee agreement can have multiple terms change over time Relationship managers introduce new distributors Distributors acquire assets from other distributors Fee agreements change over time (typically increasing) Each agreement change has an effective date that should be reflected in invoices Gap between agreement and invoice creates undiscovered liability grow in number Anywhere from different intermediaries per mutual fund
7 High level risk factors Fee agreements Fee agreements are complex and variable No standard for defining agreements Written terms mixed with fee parameters Agreements change over time Distributor renegotiations Result: Paper document with signature Hard to access during manual invoice validation Which is the correct version? Gaps between agreement changes and invoices create undiscovered liabilities
8 High level risk factors Invoices Invoices are complex and variable Each distributor sends invoice data in a different format XLS, RTF, HTML, XLSX, PDF Bill Quarterly, Monthly, or Quarterly/Monthly Number of invoice files can vary from month to month All different ways of reporting data (AUM, # of subaccounts, fee descriptions, amounts) The actual format of data can change from month to month even from the same distributor within the same invoice Distributors change billing platforms Same assets, completely different invoice format Invoice format can change without notice Final result after processing Invoice data scattered in a variety of different formats across directories Makes reporting difficult
9 High level risk factors Multiplying complexity Invoice validation and payment process is complex Not linear, multiplicative: (Number of intermediaries) X (Number of agreements per intermediary) X (Number of parameters/agreement) X (Number of products distributed through the intermediary) X (Number of invoices received) = (Number of invoice items to validate) Significant distribution payments amplify the impact of any processing errors.
10 Operational risk summary Excel is the only operations tool Spreadsheet risk Lack of cross reference between invoices and contract parameters Each manual data touch involves risk of error Example: 65 page invoice with manual validation of each line Audits are a challenge Large volume and variation of spreadsheet footprints No means to automatically cross reference payments to contracts Operational risk will multiply with complexity and invoice processing volume
11 Today s Invoice Processing First you have to find the right document sometimes in a box somewhere and parameters change Who defines the rules about where payments should be allocated? Where are rules recorded? Do rules change? Who summarizes all this data? Where is it stored? Does anybody know how to find it but the person who updates the spreadsheets? Hundreds of line items to recalc, multiple different agreements, different invoice formats that change from month to month really hard to do! Hundreds of manual (XL) calculations which affect important flows of payments to funds or corporate really hard to do!
12 Risk factor Invoice processing is not career friendly Operations people who process invoices are setup to fail Operations Executive It s not the people doing the work that are the problem Highly complex, frustrating work with little upside Turnover causes loss of valuable people and their knowledge Compounds the risk problem The root problem is The industry has changed Invoice processing has not
13 What force will cause the change in processes? Omnibus Distribution (intermediary proliferation) Risk Gap Manual processes for: Contract management Invoice handling Expense allocation Reporting Industry is now in Risk Gap What force will cause the correction of business processes to close risk gap? Time Today
14 Preview of Financial Risk Webinar Need clean data to analyze, monitor and manage SubTA expenses Uncovering risks buried in the invoices B/D as custodian for TPA assets. Getting billed twice for same assets? Need to control SubTA expense impact on fund performance and expense ratio The critical importance of consistent expense allocation How to cap expenses going to the funds Closing the loop of financial risk Need to improve financial performance through continuous monitoring Identify underwater assets Evaluate intermediary performance (overall revenue generated vs. payments) Evaluate contract effectivity (contract specific revenue vs payments)
15 For Further Discussion: Capnetix, LLC 100 Cummings Park, Suite 457-J Beverly, MA Phone: Website: Charlie Peppler: CEO