By Kirk Littleton, VP - Director of Business Development at Ultimus Fund Solutions THE TRUE VALUE OF THE MIDDLE OFFICE

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1 Getting the Most Out of Your Middle Office How to evolve from manufacturing data to analyzing your data to make better investment and business decisions By Kirk Littleton, VP - Director of Business Development at Ultimus Fund Solutions W hile most investment advisors have been outsourcing back-office functions for years, some are still reluctant to cede control of the middle-office or perhaps they have and they re not getting the support they investment decisions need. Some may feel the middle office is toomake closebetter to their core business to let go. Others may have chosen a FRONT OFFICE middle-office provider whose primary focus is now on larger advisors. No matter the reason for staying the course, it s becoming clear that many advisors are spending too much time on their middle-office functions missing opportunities to optimize resources, improve decision making, and improve their client relationships which collectively can take their businesses to the next level. Buried in middle-office data demands When investment professionals establish advisory firms, few ifare any, plan on building a technology infrastructure YOU KEEPING PACE WITH YOUR EXISTING TECHNOLOGY AND CUSTOMER DEMANDS? and operations group to maintain massive amounts of investment data - It just happens. There s no question that the number and complexity of investment products is on the rise. Couple that fact with increasing investor demand for more transparency along with detailed performance reporting, an ever-growing set 2020 of regulatory 2010 requirements, and the amount of data being generated out of a single advisor s middle office can be staggering. In the current dynamic where data demands are multiplying by the day, advisors default to becoming data factories doing all they can to simply manufacture the data required to satisfy the basic needs of the firm, FROM its clients and regulators. OU ARE Y 2025 DATA PARTNERSHIP MANUFACTURING TO THE BUSINESS As a result, advisors have neither the time nor the focus to DECISION SUPPORT get the most value out of their middle-office information. In the best case scenario, middle-office data can and should be used to support three primary functions; 1) Your Investment Decision Process, 2) Investor Reporting, and 3) Regulatory Reporting. Advisors are far too often caught OUT T S AB the IP up in their own daily data processing to realize there s a problem or to take the time fix it. Like many Iissues, H HAN NERS too ORE T know if they re first step toward a solution is recognizing there is a problem. But how does anmadvisor spending T R A E P C much time manufacturing data and not enough analyzing their mission critical SOUR ON REdata? ATI GY ALLOC O L O N MORE THAN TECH Ultimus Fund Solutions, LLC 225 Pictoria Drive, Suite 450 Cincinnati, Ohio IT S A MANCU DE

2 Recognizing the signs that your firm has become a data factory significantly elevating your firm s risk profile. There are a few telltale signs, and whether an advisor recognizes it or not, the symptoms are most likely already Make better investment decisions there data processing issues, low investor FRONT service OFFICElevels, inefficiencies from a makeshift platform cobbled together from disparate and often antiquated technologies. If it s not obvious here are some questions to help diagnose the problem: How many different software systems am I utilizing to support my middle office? How well do they talk to each other? Is my core investment accounting/recordkeeping system keeping pace as my business changes? Is my accounting software vendor continuing to invest in R&D or is it dying a slow death. ARE YOU KEEPING PACE WITH YOUR EXISTING TECHNOLOGY AND CUSTOMER DEMANDS? ORE THAN OURCE CATION PARTNERSHIP Do I still have mission critical data in spreadsheets? What would our regulators and investors think about our firm s data governance policies? Do we even have a data governance strategy? FROM Can we meet the newly proposed SEC reporting requirements for SMAs? 1. Form PF DATA type reporting (currently required for private funds) MANUFACTURING TO THE BUSINESS 2. Maintenance of underlying data required to support our GIPS performance reporting DECISION SUPPORT How many dedicated professionals do I have supporting my middle office functions? How could I better utilize those resources to enhance my investment process? Do we have key man risk in our operations and/or technology team? Are we delivering our investor s data using the latest secure methods and protocols or are we still delivering our client s hard copy statements via unsecure ? Are we ready for mobile reporting options required by the next generation of investors? How often am I renewing software licenses or upgrading software systems and how much am I paying when I do? If you step out from amongst the trees and see the entire forest, you may realize that you too are running a technology business within your investment firm and maybe now is a good time to evaluate your alternatives.

3 Realizing the real value of the middle-office The true value of the middle office isn t in the generation of data, it s leveraging that data as a decision support tool to drive other key functions of an advisor s business. The front office uses this data to make better investment decisions, investors use it as an indicator of an advisor s value and regulators use it to help determine whether a firm is committed to maintaining a culture of compliance. But decision support doesn t coincide with data manufacturing. And for most advisors there comes a time when they realize it s time to start looking to an outside expert to help them manage the middle office more effectively. Make better investment decisions FRONT OFFICE More and more firms are now turning to service providers to take over various middle-office operations, including daily record keeping, reconciliation with custodians, performance and attribution, GIPS composite monitoring and reporting, and client billing and statements among others. With the pace of change from both a technology standpoint and a data requirement perspective, the performance efficiencies, resource allocation and decision support advantages gained from outsourcing have become too strong to ignore. The outsourcing advantage By using an outsourcing provider, advisors can immediately enhance their middle-office capabilities, THE TRUE better VALUE utilize internal OF THE resources MIDDLE and OFFICE protect themselves from the A Decision Support accounting Tool system to drive obsolescence. Key Functions of an Advisor s Business EPING PACE WITH YOUR EXISTING TECHNOLOGY AND CUSTOMER DEMANDS? The recent consolidation Make better of many investment of the industry s decisions accounting systems under a FRONT OFFICE single provider has left many advisors feeling vulnerable. There is a valid concern that many of the existing systems may be decommissioned leaving advisors who have built all Indicator their processes of advisor s around those value systems to scramble for a new solution. Partnering with a firm that uses industry standard systems (with significant annual 10 R&D), can 2020 protect advisors from 2025 that problem today while eliminating considerable technology costs in the future. FROM Firms can avoid ongoing maintenance costs and large upfront capital expenditures for new systems, and some information technology personnel can focus on taking your business to the next level. NG TO THE BUSINESS PORT ING PACE WITH YOUR EXISTING TECHNOLOGY AND CUSTOMER DEMANDS? Advisors can dedicate their time and talent to investment perfomance, to client relationships and to gathering and maintaining the critical assets that drive their business. Outsourcing is also about risk transfer. The level of compliance technology and competency that can be achieved working with the experienced team of an outside partner often far exceeds what limited internal resources can deliver. There are economies of scale and a depth of expertise that a provider can achieve that are simply not possible for a single advisor. And that is becoming more and more important in what is a constantly evolving and increasingly onerous regulatory environment. Perhaps the most important benefit for advisors is the ability to focus on their core business. Advisors can dedicate their time and talent to investment performance, to client relationships and to gathering and maintaining the critical assets that drive their business.

4 N OGY MORE THAN RESOURCE ALLOCATION An underserved market It s no secret that larger outsourcing providers are under serving or shedding altogether advisors they deem to be too small and unprofitable. In many cases those advisors, typically with assets under management between $1 billion and $10 billion, have felt they either have to accept a lesser level of service, pay much higher service fees or develop an in-house middle office solution. Recently providers focused specifically on this underserved segment have entered the marketplace to fill the gap with institutional-grade offerings for mid-market advisors. However, some providers focus too much on delivering baseline hard copy reports rather than the increased level of customization and transparency required by advisors, their investors and their regulators. The most sophisticated providers are delivering on all of these things to help streamline middle office operations and to provide a better digital reporting experience for investors. Choosing the right partner The challenges for many advisors involve choosing the right middle-office provider, creating the right kind of business relationships and agreeing on the best service level agreements to Make ensure better accountability investment decisions and desired FRONT OFFICE outcomes. However, the right partner can mean different things for different advisors. Top-notch technology and expertise should be considered table stakes when choosing a middle office business partner. What really sets partners apart is how well they fit within a firm s culture Help determine and how a much firm s commitment they tailor their to compliance services to meet a firm s goals and specific business requirements as opposed to driving a pre-determined process. It s important that an advisor understands how a provider operates, who will be on the team and what the day to day interactions will be throughout the course of the relationship. Advisors should ask to speak with a provider s ARE YOU KEEPING existing PACE clients. WITH YOUR They EXISTING should feel TECHNOLOGY confident AND that CUSTOMER they are aligned DEMANDS? with a provider s typical client profile. Some providers may take on smaller advisors but really focus their business and best resources on advisors with a much higher level of assets and those relationships don t work for anyone. But advisors don t always know the right questions to ask to ensure the best partner fit, especially if they have never outsourced before. Below are some proven questions to ask service providers in order to help advisors drive a strategic selection process and increase the probability of success. Do you have clients with investment products and investment strategies similar to our firm? Do all of your middle office operations (Trade Processing, Investment Accounting, Performance, Client Invoices and Statements etc.) support the asset classes and data volumes of our firm? Do your technology partners make significant annual reinvestment in their platforms? How much of your technology is proprietary and do you use spreadsheets and other bespoke technologies within your FROM middle office service offering? Do you have any experience working DATA with my front office decision support PARTNERSHIP platforms (Trading/OMS, MANUFACTURING Risk Management System, TO FactSet, THE Proxy BUSINESS Services etc.?) DECISION SUPPORT

5 TECHNOLOGY ALLOCATION PARTNERSHIP MANUFACTURING TO What is the average industry experience of your middle office operations DECISION team? SUPPORT Please provide bios on the team that will service our firm? Describe your problem resolution process (issue tracking, escalation procedures, etc.) Describe the ideal staff member(s) that will liaise with your middle office team (how many, industry experience, required skill sets, etc.). Describe your onboarding/transition process. Specifically, how will you convert my accounts/positions/taxlots and performance data from my current provider and or in-house systems? Describe how your solution supports our data governance policies and all required regulatory reporting requirements. How do you ensure that your operations and technologies are keeping up with the DATA latest industry regulations? MANUFACTURING TO Describe your cybersecurity, disaster recovery, and business continuity policies. DECISION SUPPORT Does your fee structure support a variable cost model (i.e. will our fees increase as we grow and decrease if our business contracts)? Making the move With the due diligence done and the decision made, the last step in the process is actually making the shift to outsource your middle-office operations for many advisors it s the biggest MORE THAN MORE THAN RESOURCE MORE THAN TECHNOLOGY MORE THAN RESOURCE ALLOCATION PARTNERSHIP FROM DATA FROM FROM DATA MANUFACTURING TO DECISION SUPPORT THE BUSINESS THE BUSINESS challenge of all. It requires a commitment to the process and a change in mindset. It demands a level of trust with the new partner and that starts with a clear and transparent process. Advisors must feel confident that they understand all the steps in the transition and beyond. They must have clear expectations for outcomes, for roles and responsibilities and for costs. They must buy into the strategy and feel comfortable discussing any issue at any time with their provider. Because outsourcing is about more than technology, it s about more than resource allocation; it s about partnership, it s about moving from data manufacturing to decision support and most importantly it s about moving the business forward. That s the true benefit. That s getting the most out of the middle office.

6 ABOUT THE AUTHORS Kirk Littleton, Vice President, Director of Business Development Kirk joined Ultimus in March of As Director of Business Development, Kirk s primary responsibility is to promote Ultimus high quality fund services. Prior to joining Ultimus, Kirk served as Managing Director of Global Outsourcing, for a leading investment management company s second generation middle office, outsourcing services to mutual funds, institutional asset managers, insurance companies and hedge funds. He has also served as a Sales Manager for Eagle Investment Systems. Prior to that he worked in sales, product design and implementation roles at SunGard Investment Systems. He is a graduate of West Chester University of Pennsylvania and has been in the industry since ABOUT ULTIMUS FUND SOLUTIONS Based in Cincinnati, Ohio, Ultimus is one of the largest independent providers of mutual fund services in the country. We provide fund organizational services, fund administration and distribution, fund accounting and financial reporting, plus transfer agent and shareholder services for open-end funds. We also provide fund administration and fund accounting services to closed-end funds. Our experienced teams of Passionate Professionals create customized Smart Solutions to generate Remarkable Results for investment managers and their funds., which allows them to focus on growing assets and their investment strategies. For more information, visit. POWERED BY FUND S OLUTIONS 2016 Ultimus Fund Solutions, LLC, Cincinnati, OH Ultimus Advisor Solutions is a product of Ultimus Fund Solutions, LLC