Bridging the Gap: Emerging Client Reporting Trends in the Asset Management Industry

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1 A Point of View Bridging the Gap: Emerging Client Reporting Trends in the Asset Management Industry Abstract Asset managers worldwide have stepped up efforts to retain and grow existing accounts, as customer acquisition costs and competition from mainstream and non-traditional competitors continue to rise. Against this backdrop, client reporting is becoming increasingly critical to enhance investor satisfaction across the fund industry. In fact, a joint study published in 2010 by Chatham Partners and Investment Metrics 1 found that 40% of institutional investors' endorsement of their portfolio managers could be attributed to client service. The study noted that factors such as timeliness and clarity of investment reports play a significant role in driving client satisfaction. While asset managers can t always predict portfolio performance accurately, consistently delivering superior client reports can help them delink, at least partially, their fortunes from broader market volatility. Client reporting: A distinct function Client reporting is no longer an activity confined to supplementing the asset building exercise; rather, it is being positioned by buyside firms as a differentiating element of their value proposition. According to research on the reporting function by Cutter Associates, fund houses are 2 witnessing a growing demand for information compared to The task of creating and modifying report templates, the Cutter study highlighted, has shifted from companies information technology units to dedicated client reporting teams, usually housed within the operations or client service departments. Emerging reporting trends It is no longer sufficient for investment managers to provide their customers with basic access to statements, transaction and history reports, and performance summaries. Digitally empowered clients both individual and institutional now want visibility into portfolio strategies on a near real-time basis. Apart from convenient, unified, on-demand access to account, market data, and analysis, investors are seeking personalized reports involving user-specified parameters. Fund houses face growing calls to customize reports based on clients' unique portfolios, related product type and strategy, and risk appetite. Investors are also asking for increased frequency and breadth of reports, as well as for more control over the look and feel of displayed information, without data accuracy being compromised. Another emerging dynamic on the distribution side is clients' desire for buyside firms to enable information download across a variety of formats and tools, for further analysis. Other than rapidly evolving customer needs, the reporting function is being disrupted by stricter regulations mandating greater transparency and governance, with regard to transaction processing and data reporting. [1] Chatham Partners, Survey: Customer Service Key Driver Of Investment Satisfaction, November 2010, accessed October , [2] Cutter Associates, Cutter Associates' Benchmarking Study Reveals Changes in the Client Reporting Landscape, July 2014, accessed October 6, 2015, ape-6&newsyear=2014

2 The common gaps in reporting Even as clients demand personalized and granular reports on a near real-time basis, most asset managers are struggling to overhaul their existing systems and processes. The issues include: Inflexible timelines Limited flexibility in generating and distributing reports on a near real-time basis remains a major challenge for asset managers, most of whom continue to operate on pre-defined timelines. Business technology professionals at buyside firms recognize the need to provide timely responses to client data requests. Investment companies need to address customers' growing demand for faster reporting, without sacrificing quality. This is vital for asset managers to enable their clients to capitalize on investment opportunities arising from sudden market volatility. Limited customization Another shortfall in the existing reporting landscape is the lack of adequate personalization for strategy-based reporting, with many fund houses facing difficulty in producing custom reports. Fund companies customize reports based on the capabilities of their in-house IT systems, while clients expect tailored performance analysis reports reflecting different investment strategies. For instance, corporate action reporting in case of a long-only equity fund helps clients in asset servicing, while the same function in the context of an event-driven fund enables decision-making for trading. Moreover, the legacy systems at many asset management firms constrain the latter's ability to incorporate new reporting metrics that have gained credence in recent years, amid stricter regulation mandating increased investor protection. Suboptimal transparency Drawing from their painful experiences on the liquidity front during the 2008 financial crisis, fund investors have mounted a concerted campaign for enhanced portfolio transparency. Also, cost-conscious clients are increasingly asking both mainstream and alternative asset managers to ensure transparency on valuation procedures concerning management and performance fees. But the standardized report templates adopted by fund houses typically do not provide a detailed breakdown of the value of a given transaction. This, in turn, leads to skeptical clients questioning the reports, in terms of accuracy of performance data and other figures. Vendor system silos Clients of big, global asset managers expect integrated reports conveying relevant information from the fund houses' various IT systems across different jurisdictions. However, many of these systems operate in silos, resulting in incomplete provisioning of data across different strategies, and thereby, casting a shadow over the accuracy and reliability of reports. Suboptimal analysis Discerning clients today want reports that provide guidance on different portfolio strategies, based on the underlying asset classes, as well as on specific potential investment opportunities. As a case in point, investors in a global macro hedge fund would be keen to get the management's thoughts on the likely course of interest rates and currency movements. On the other hand, those subscribed to special situations over an event-driven fund would seek insights on impending or anticipated corporate actions such as mergers, acquisitions, and restructuring. The reports delivered by most asset managers, though, are characterized by standardized, tool-driven analysis, where some basic data is fed or linked to an analytical tool, or data is aggregated on spreadsheets underpinned by self-populated formulae. The way forward When it comes to reporting systems, fund houses must reimagine their design and implementation approach to meet client expectations. Enterprises could adopt the following practices in achieving this objective: Cloud computing For buyside firms to realize their strategic goals of boosting customer retention rates through relevant reporting, asset management companies must undertake significant investments in technology. In this regard, cloud computing can be used for integrating data across various financial markets and counterparties, and for distributing the same through multiple channels. In case of data overflow, financial institutions can look at implementing a cloud bursting application deployment model. Under such a setup, an application would run in a private cloud or data center, and burst into a public cloud in the event of a surge in computing demand. The 2

3 significant advantage of a hybrid cloud deployment like this is that investment firms would only pay for extra computing resources as needed. Firewalls with encrypted messages can be built, to ensure secure distribution of client data and reports over the cloud. Alignment with clients' business needs For their reports to deliver real value to clients, asset managers should build specific use cases around how their portfolio data and analysis would be interpreted and integrated with investors' daily processes. The buyside firm must clearly understand different scenarios such as tax and estate planning under which clients use reports for interactions with various upstream and downstream users. For example, if a hedge fund is generating client reports concerning trade capture, execution, and settlements facilitated by a prime brokerage, then the intermediary should assess the administrator's needs first. Similarly, a custody bank needs to harmonize client-specific transaction details with its core systems pertaining to data services, pricing, trading, risk, and fund accounting, before creating a report. Enabling customization Delivering personalized reports can help investors optimize their upstream and downstream workflows on multiple fronts, including fund accounting and administration, tax planning, and regulatory compliance. Accordingly, asset managers should expand their range of report types, to include multi-account performance dashboards, as well as portfolio, trade, and tax reports across different timeframes. For retail investors, performance reports can be benchmarked against individual goals based on life stage and investment targets. Simultaneously, buyside institutions need to offer reports in multiple formats, encompassing the various asset classes and associated investing strategies they deal with. Apart from Microsoft Word and PDF the two most popular reporting formats fund houses should address 3 clients' demands for specialized file formats and raw data. Audit assistance Keeping in mind the onerous regulations concerning transaction reporting and fee disclosures, asset managers should embrace high standards of corporate governance, to ensure full information transparency. In tandem, industry players could look at providing audit assistance to clients in the form of add-on services at a reasonable price. For such an exercise to be successful, portfolio managers would have to partner effectively with custody banks, given the latter's unique role in asset safekeeping and servicing, trade settlement, and investor reporting. Conclusion Over the last two decades, the asset management industry has undergone significant structural shifts, driven by market cycles, product innovation, regulation, and a broadening of its customer base. Supply-side factors, such as the introduction of exchange-traded funds in conjunction with growing investor demand for alternative products, have contributed significantly to the sector's rapid growth during this period. However, prospects of new mandates at the same pace as we have seen since the 1990s remain unclear, even as cost and pricing pressures are set to rise further. Add to this dynamic the steadily eroding revenue margins, and the imperative for investment firms to aggressively focus on customer retention becomes quite clear. Therefore, fund companies must aim to position their client reporting function as a differentiator in the marketplace, by providing near realtime access to customized portfolio details, and ensuring full transparency around transaction processing and data reporting. Empowering clients with self-service tools for performance analysis, based on their unique business requirements, would help asset managers gain critical mindshare, thus enhancing their customer centricity. [3] Cutter Associates, Cutter Associates' Benchmarking Study Reveals Changes in the Client Reporting Landscape, July 2014, accessed October 6, 2015, ape-6&newsyear=2014 3

4 About the Author Satish Rajakrishnan Satish Rajakrishnan is a member of the capital markets and hedge fund accounting group at Tata Consultancy Services' (TCS) Business Process Services (BPS) unit. He has nine years of experience in both capital markets and customer service. 4

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