Asset Management Technology & Operations Survey Results. February 2007

Asset Management Technology & Operations Survey Results February 2007

Table Of Contents Introduction................................................................ 2 Conclusion................................................................. 3 Survey Findings and Analysis.................................................... 4 Business Strategy............................................................ 4 Personnel.................................................................. 5 Information Technology Budget.................................................. 7 Website.................................................................... 9 Investment Operations Budget.................................................. 10 Investment Operations Outsourcing.............................................. 10 Investment Operations Systems................................................. 12 Trading, Brokerage, and Custody................................................ 13 Performance Measurement.................................................... 14 Legal and Regulatory Issues................................................... 14 Background............................................................... 15 Methodology............................................................... 15 Universe.................................................................. 15 About the Sponsors.......................................................... 17 Table Of Figures Figure 1: Measures of Success.................................................. 4 Figure 2: Determinants of Success................................................ 5 Figure 3: Number of Employees per $100 million AUM................................ 6 Figure 4: Average Headcount by Function.......................................... 6 Figure 5: Focus of IT Spending in 2006............................................ 7 Figure 6: Percentage Change in IT Spending........................................ 8 Figure 7: Expected Changes to IT Expenditures...................................... 8 Figure 8: Website Features Offered or Under Development.............................. 9 Figure 9: Percentage Change in Investment Operations Expenditures..................... 10 Figure 10: Systems Developed and Maintained In-House or Outsourced................... 11 Figure 11: Functions Performed In-House or Outsourced.............................. 11 Figure 12: Portfolio Accounting System(s) Used and Satisfaction Level.................... 12 Figure 13: Trade Order Management System(s) Used and Satisfaction Level................ 13 Figure 14: Initiatives Undertaken in Response to Legal and Regulatory Requirements......... 14 Figure 15: Investment Products Offered........................................... 16 Figure 16: Client Types Serviced................................................ 16 Figure 17: Account Types Serviced.............................................. 16 Investment Adviser Association and SEI 1

Introduction The Investment Adviser Association (IAA) and SEI are pleased to present results of the first annual IAA/SEI Asset Management Technology and Operations Survey. The IAA, a nonprofit industry association with about 500 members, and SEI, a leading global provider of outsourced asset management, investment processing, and investment operations solutions, have jointly created this ongoing survey program to highlight and track the growing importance of technology to asset management organizations. This initial edition of our survey covered a diverse group of traditional mutual fund and separate account managers with an average of $3.8 billion in assets under management (see page 18 for more details). Not so long ago, asset managers saw technology primarily as an enabler of core operating functions a way to increase operational productivity and efficiency. Now technology has also become a means to improve investment performance, build relationships with clients, deliver a customized and differentiated client experience, expand the range of products provided, tailor product packaging and distribution to fit changing demand, and manage compliance. In short, technology provides a critical lever for improving overall business economics and increasing quality across nearly all functional areas. Moreover, we at the IAA and SEI believe the role and impact of technology in our industry can only continue to grow. At a time when investment products are becoming increasingly commoditized and size and scale are no longer prime factors in success, asset managers need to update the ways they think about competitiveness. They must recognize that an asset management business is much more than just a collection of functions; it is a set of business processes orchestrated to create capabilities in service of a strategic vision. In the future, the ability to compete on capabilities will be a key driver of competitive advantage. entering an era in which technology will be the focus of even greater attention and investment than in the past. Our survey, which was conducted at the end of 2006, is our initial effort to capture these trends, and will provide a baseline for similar efforts in the future. In order to elicit candid and accurate responses, the survey was conducted online and respondents were anonymous. The questionnaire was designed to identify key trends, show how organizations are allocating resources, and highlight best practices. Our thanks to all of the investment management organizations and individual respondents who participated. Their contribution of time, effort, and data is greatly appreciated. Thanks are also due to those who participated in designing and conducting the survey, analyzing responses, and presenting results: David Tittsworth, Executive Director, Investment Adviser Association Paul Schaeffer, Managing Director for Strategy and Innovation, Investment Manager Services division, SEI Steven Unzicker, Director, Langham Capital Ltd. Ava Lala, Marketing Director, Investment Manager Services division, SEI Erika McDaniel, Marketing Associate, Investment Manager Services division, SEI We hope this survey will spark further discussion of technology trends and issues, and we look forward to the next update commencing in late 2007. This notion of competing on capabilities is both the context for this survey program and a motivating force behind this survey program. Clearly, asset managers cannot develop their competitive capabilities without first building the necessary infrastructure. For that reason, we believe the industry is 2 Asset Management Technology and Operations Survey Results

Conclusion Survey results paint a picture of an asset management industry that is increasingly reliant on operational and technology capabilities. Because respondents have come to see these capabilities as critical to their success, they are continuing to increase their investment in technology and are willing to deal with the complexities accompanying technological advancement. Operational and technology capabilities are viewed as important enablers, rather than indicators, of business success. Survey respondents rank client service capability a function highly dependent on operational quality and technology infrastructure as the number one determinant of success, followed by investment performance and employee retention. Interestingly, operational and IT capabilities are seen as more important success factors than sales, marketing, or distribution. Not surprisingly, the top-ranked measures of success focused on financial results, asset growth, and employee retention. Most respondents say their IT budgets are currently focused on maintaining and upgrading existing systems and operating infrastructure. Only 13% report a focus on developing new systems. This illustrates how deeply ingrained technology has become in the operations of the average firm. Whereas IT used to be seen as a cost of doing business, it is now simply the way business is done. IT spending continues to grow, with 60% of firms expecting to increase their 2007 budgets over 2006 amounts. Key factors driving higher spending include: Regulatory and compliance concerns. Increasingly complex accounting and reporting resulting from growing product diversity and demands for customization. Rising compensation for IT professionals as the competition for talent heats up once again. All of these present significant operational challenges to managers. Asset managers are dealing with growing operational complexities. Survey responses indicate that: Many managers are struggling to manage proliferating outsourcing relationships. Outsourcing of systems development and maintenance is ubiquitous, but many managers still perform some functions in-house, most notably portfolio accounting, trading/order management, and client reporting. This is particularly true outside of the mutual fund arena. Managers are generally satisfied with the quality of their outsourced products and services. Forty percent of managers report using more than one portfolio accounting system. It is not uncommon for a manager to deal with eight or more external data vendors, presenting a multitude of integration and budgetary challenges. Trading environments are also subject to complications and inefficiencies, including the use of multiple brokers and custodians, use of multiple trade order management systems (reported by 38% of respondents), and the persistence of manual communication methods (e-mail, fax, phone). Legal, regulatory, and compliance concerns continue to drive IT spending higher; 84% of firms said such issues have had an impact on technology spending. The most commonly cited initiatives undertaken in response to legal and regulatory requirements include e-mail retention, disaster recovery, and best execution monitoring. Responses point to continued growth in IT spending, due to continued demands by customers and intermediaries for new and more customized products, as well as ongoing compliance demands. In the absence of any external shocks such as Y2K or the Era of Spitzer, however, IT spending may grow more slowly than in the past. Asset managers nevertheless expect technology and operations to represent a growing share of overall budgets as they aim to differentiate themselves in an increasingly crowded and competitive marketplace. Investment Adviser Association and SEI 3

Survey Findings and Analysis Business strategy When survey participants were asked to name their three primary long-term business objectives, asset growth was most commonly cited as the top priority. Improving client service was a close second, and improving operational efficiency through the use of technology was also named by a number of firms as an important goal. When asked how they measured the success of their firms, financial considerations led the way, with shareholder return most commonly cited as being very important. The only measures commonly seen as unimportant are firm size and market share. (See Figure 1) There is little debate over what determines success. Asset managers unanimously say that client service capability is either important or, more commonly, very important. Investment performance and employee satisfaction also rank highly. Less importance is attached to technology and operations capability, although these are viewed as more critical than sales and marketing in determining overall firm success. (See Figure 2, next page) Figure 1: Measures of Success Very Important Important Not Important Shareholder Return Profitability Net Asset Growth Employee Retention Productivity Capability Operational Capability Technology Capability Firm Size Overall Market Share 0% 20% 40% 60% 80% 100% 4 Asset Management Technology and Operations Survey Results

Figure 2: Determinants of Success Very Important Important Not Important Client Service Capability Investment Performance Employee Satisfaction / Retention Operations Capability IT Capability Sales Capability Marketing & Distribution Capability Investment Product Diversity 0% 20% 40% 60% 80% 100% Personnel Total firm headcount is very closely correlated to AUM size (See Figure 3, next page. AUM on the Y axis is shown on a logarithmic scale in order to better illustrate the correlation). There are some scale efficiencies when it comes to personnel, with larger firms requiring less than one FTE per $100 million under management, while smaller firms typically require two to five. Only 39% of firms have an employee whose primary responsibility is overseeing firm-wide systems and technology. Among those that do, this employee most often reports to the CEO / President and sits on the management committee more than half of the time (58%). Most firms with over $1 billion AUM have at least one full time employee dedicated to systems and technology. Smaller firms generally utilize someone on a part time basis or (in the case of the smallest firms) do without. The average number of systems and technology employees is 3.3 (see Figure 4, next page). Much more unusual are employees dedicated to web-related and e-commerce activities. Only one participating firm reported having such a person employed. Investment Adviser Association and SEI 5

Figure 3: Number of Full Time Employees (FTEs) per $100 million AUM 100,000 FTEs per $100 million AUM AUM (logarithmic scale) 10,000 1,000 100 10 0 1 2 3 4 5 (number of FTEs) Figure 4: Average Headcount by Function Investment Mgmt 10.8 Sales & Marketing Client Service Investment Ops and Portfolio Acct System & Technology Trading Positions Administrative Legal & Compliance Executive Management Finance & Accounting Strategic Planning Human Resources.4.6 3.3 2.6 2.7 2.3 2.1 1.6 4.6 5.2 5.0 (number of FTEs) 6 Asset Management Technology and Operations Survey Results

Information technology budget Information technology (IT) expenses account for a significant portion of overall costs at the typical asset management firm. IT spending as a percentage of total expenses Average: 13.6% Median: 4.8% IT spending per employee Average: $11,900 Median: $7,300 Given the time, complexity, and expense of evaluating, purchasing, and installing new systems, it is not surprising that many companies (45%) are focused on maintenance. Another third are focused on upgrading existing systems. Only 13% of respondents are focused on buying new systems. (See Figure 5) Figure 5: Focus of IT Spending in 2006 100.0% (number of firms) 80.0% 60.0% 40.0% 45.2% 35.5% 20.0% 0.0% Maintain existing systems and operating infrastructure Upgrading existing system and operating infrastructure 12.9% Buy new systems and expand existing operating infrastructure 6.5% Other A growing number of managers are enlarging their technology budgets (see Figure 6). Average annual IT spending in 2005 (including personnel, hardware, software, systems and outsourcing) totaled $652,000. This rose to an average of $657,000 in 2006. Median spending rose from $135,000 to $148,000. Just over half of the managers surveyed increased IT spending during 2006, while 60% expect to do so in 2007. The increased investment cannot be attributed to any one area, but regulatory and compliance management is leading the way (see Figure 7). Investment Adviser Association and SEI 7

Figure 6: Percentage Change in IT Spending Change in IT Spending in 2006 Lower than 2005 16.7% Expected Change in IT Spending in 2007 Lower than 2006 3.3% Greater than 2005 53.3% Same as 2005 30.0% Greater than 2006 60.0% Same as 2006 36.7% Figure 7: Expected Changes to IT Expenditures Increase No Change Decrease Regulatory / compliance management Portfolio accounting and client reporting IT salaries and bonuses Client service contact management / database Network / LAN / WAN hardware Website software, development, maintenance Marketing / sales contact management / database Disaster recovery Consulting / outsourcing Investment research / database Network / systems security Remote access / VPN Workgroup and knowledge mgmt. Call center technology 0% 20% 40% 60% 80% 100% 8 Asset Management Technology and Operations Survey Results

Website The vast majority (84%) of firms have websites. The few exceptions tend to be smaller firms. Many websites could be characterized as brochure-ware, offering little more than general firm information and marketing material. Not surprisingly, websites are seen as an important platform to showcase a firm s personnel in the form of biographies. Few managers offer client reporting via their websites, and even fewer (12%) offer transactional capability. (See Figure 8) Targeted content for specific client or intermediary segments is very rare, with only three firms reporting that they offer this type of content on their sites. Websites are often works in progress. Among firms that do not currently offer extensive online features, a number are focused on making product performance data, client account information, and original research available. Figure 8: Website Features Offered or Under Development Currently Available Under Development Biographies of key professionals Product performance Client account info. ADV and other filings Prospectuses Job openings Original research Calculators (retirement, college, etc.) Real-time account / fund info. Portfolio allocation tools Web conferencing 0% 20% 40% 60% 80% 100% Investment Adviser Association and SEI 9

Investment operations budget When asked to name the top operational issues facing their firms, managers listed a wide range of priorities. Common threads included: Compliance Customized reporting Managing and integrating outsourced relationships Improving resource allocation and efficiency Improving reconciliation process Recruiting and training Cross-functional coordination Spending on investment operations is accelerating. Not a single manager plans to decrease spending in this area next year. (See Figure 9) The average spending increase on operations is higher than IT generally. Figure 9: Percentage Change in Investment Operations Expenditures Change in Spending on Operations in 2006 Lower than 2005 3.6% Expected Change in Spending on Operations in 2007 Lower than 2006 0.0% Greater than 2005 50.0% Same as 2005 46.4% Greater than 2006 60.0% Same as 2006 40.0% Investment operations outsourcing Outsourcing in investment operations continues to grow. The development of fund accounting and custody systems, for example, is outsourced by all companies in the survey. Systems developed in-house continue to be used in potentially idiosyncratic areas with more customized features such as client reporting and partnership accounting. (See Figure 10, next page) When it comes to actually performing investment operations, managers are generally comfortable outsourcing functions such as transfer agency and fund accounting. Outsourcing is viewed as more difficult or less desirable for other functions such as portfolio accounting and trade order management. (See Figure 11, next page) 10 Asset Management Technology and Operations Survey Results

Figure 10: Systems Developed and Maintained In-House or Outsourced Outsourced In-house Fund accounting Custody Shareholder services Portfolio accounting Partnership accounting Client statement & reporting Trading / Order Mgmt. 0% 20% 40% 60% 80% 100% Figure 11: Functions Performed In-House or Outsourced Outsourced In-house Custody Transfer agency Fund accounting Fund administration Shareholder services Trust accounting & admin. Tax preparation & compliance Partnership accounting Email retention Client statement & reporting Trading / order management Portfolio accounting / reconciliation 0% 20% 40% 60% 80% 100% Investment Adviser Association and SEI 11

Investment operations systems Most firms use a single portfolio accounting system for all accounts, though several reported using multiple systems. The use of multiple systems is positively correlated to firm size and in all cases reflected distribution platform requirements associated with offering separately managed accounts. Half of all firms have portfolio accounting systems that feed data to their front-office application s risk and/or portfolio attribution tools. Sixty-eight percent utilize a portfolio management system of some type to create and review proposed changes to a portfolio. Sixty percent of firms report using a single portfolio management system across all products. Most others use two systems, although one firm reported using four. Shadowing is very common, with 83% of firms reporting that they complete all back-office processing for all accounts for which investment decisions or recommendations are made. The use of third-party data vendors (for pricing, corporate actions, security master, index returns, etc.) varies considerably from one firm to the next. The average firm relies on four data vendors (median = 3), though the use of eight or ten is not uncommon. When it comes to clients receiving third-party data, half are supplied directly from the firm while the other half receives it from the portfolio accounting partner. Less than half of all firms (46%) said that the third-party data process is managed by their investment accounting system vendor. Advent Axys is the most commonly used system, followed by SunGard and Checkfree APL. Among the commercially available systems in use, Schwab Centerpiece provided the most satisfaction, followed by CheckFree APL and Advent Axys. (See Figure 12) Figure 12: Portfolio Accounting System(s) Used and Satisfaction Level System Used Meets Needs / Satisfied Advent Axys 52% 71% SunGard 29% 67% CheckFree APL 23% 83% Other 13% 100% Schwab Centerpiece 10% 100% Thomson Portia 10% 67% In-house developed 10% 67% Note: Other systems given as answer option but not reported being used include Eagle Starr, FMC Pacer, and Princeton Financial PAM 12 Asset Management Technology and Operations Survey Results

Trading, brokerage, and custody Managers use a variety of trade order management systems, and no single vendor claims a dominant market share. Some firms (38%) use multiple systems (usually two but occasionally as many as four). Satisfaction levels are generally higher than is the case with portfolio management systems: most systems received 100% satisfaction ratings. (See Figure 13) Figure 13: Trade Order Management System(s) Used and Satisfaction Level System Used Meets Needs / Satisfied Advent Moxy 42% 75% Bloomberg 29% 100% CheckFree APL 21% 75% Customized system 21% 100% Other 21% 100% Charles River 13% 100% Eze Castle 4% 100% Linedata Longview 4% 100% Note: Other system given as answer option but not reported being used included Macgregor XIP Used by three quarters of firms, trading applications remain the most common way to notify brokers of allocations. Firms often use multiple modes of communication, with more than a third relying on faxes, phones, and emails to some extent. Notifying custodians is different. While 65% rely on trading systems, faxes are still used by 61% of firms and emails by 45%. Phones are not used often. Faxes are most commonly used when notifying brokers of settlement instructions for held away accounts. Trading systems are rarely employed for this purpose. Other findings related to trading and custody: 55% of firms report that some trades are not executed electronically. Among these firms, an average of 38% of trades are executed manually (median = 30%). Directed brokerage is becoming more rare: only 23% of firms reported that they choose to direct their trades to brokers. The number of trades executed on a monthly basis varies wildly, but the median is 325 trades, with an average of 33% of these being block trades (median = 10%). Among firms on wrap platforms the average number of platforms used is 4.6 (median = 3.5). The median number of brokerage houses dealt with regularly is 10. The median number of custodians dealt with regularly is 6. Investment Adviser Association and SEI 13

Performance measurement Less than half of all participating firms (45%) state that they are AIMR/GIPS compliant. Most (87%) utilize a single performance system for all accounts and account types and 77% of the time it is a component of the firm s existing accounting system. The vast majority (93%) of firms surveyed calculate performance for individual accounts. A third of them also calculate sector performance. Performance is calculated daily by two thirds of firms, with the remainder calculating monthly. A small minority (16%) also review performance calculations daily, although the majority (84%) prefers to review monthly. Very few firms (6%) utilize a data warehouse for data management. Four out of five companies have a periodic reconciliation process to verify the accuracy of performance data against internal systems. Legal and regulatory issues Legal, regulatory, and compliance concerns drive organizational change and increased spending (See Figure 14). When asked whether recent legal, regulatory and compliance requirements had impacted technology spending: 83.9% said YES 16.1% said NO Reported increases in spending range from 5% to 40%. Average increase: 17.6% Median increase: 20.0% Figure 14: Initiatives Undertaken in Response to Legal and Regulatory Requirements Email retention Disaster recovery Best execution monitoring Personal trading monitoring Compliance training 74.2% 71.0% 67.7% 93.5% 100.0% Customer data security Proxy voting 54.8% 54.8% Anti-money laundering 41.9% 0% 20% 40% 60% 80% 100% 14 Asset Management Technology and Operations Survey Results

Background Methodology Investment advisory firms filled out an online survey consisting of 98 questions about technology and operations. The survey data was validated and outliers removed as necessary. The quantitative analysis and written report were each reviewed extensively prior to publication. The resulting report is believed to be a fair reflection of the survey responses provided by IAA members, but neither SEI nor the IAA can claim responsibility for the accuracy or reliability of the data provided. Universe Following are some key characteristics of the survey universe (see also Figures 15-17, next page): 31 managers with AUM ranging from under $100 million to almost $40 billion Average AUM: $3.8 billion Median AUM: $937 million Total firm headcount ranging from low single digits to almost 200 Average headcount: 29 Median headcount: 15 Assets per employee ranging from $22 million to $250 million Average AUM per employee: $76 million Median AUM per employee: $67 million Revenue per employee ranging from $115,000 to $840,000 Average revenue per employee: $334,000 Median revenue per employee: $249,000 Fee realization ranging from approximately 20 bps to more than 110 bps Average fee realization: 54.7 bps Median fee realization: 51.0 bps Investment Adviser Association and SEI 15

Figure 15: Investment Products Offered Domestic Equity Domestic Fixed Income Balanced International Equity Alternative and Hedge 26% 39% 58% 74% 94% International Fixed 19% Other 10% 0% 20% 40% 60% 80% 100% Figure 16: Client Types Serviced Individual HNW 90% Institutions DC / 401k 35% 68% Individual Retail 23% 0% 20% 40% 60% 80% 100% Figure 17: Account Types Serviced Individual HNW SMAs Institutional Sep. Accts. 62% 72% Mutual Funds 47% ETFs Partnerships 23% 23% Retail Sep. Acct. Common & Collective Funds 10% 19% 0% 20% 40% 60% 80% 100% 16 Asset Management Technology and Operations Survey Results

About the Sponsors Investment Adviser Association The Investment Adviser Association is a national not-for-profit organization that exclusively represents the interests of federally registered investment adviser firms. The Association was founded in 1937 and played a major role in the enactment of the Investment Advisers Act of 1940. The IAA consists of about 500 investment adviser firms that collectively manage in excess of $8 trillion for a variety of institutional and individual clients. SEI SEI (NASDAQ: SEIC) is a leading global provider of outsourced asset management, investment processing and investment operations solutions. The company s innovative solutions help corporations, financial institutions, financial advisors, and affluent families create and manage wealth. As of the period ending December 31, 2006, through its subsidiaries and partnerships in which the company has a significant interest, SEI administers $366.6 billion in mutual fund and pooled assets and manages $181.5 billion in assets. SEI serves clients, conducts or is registered to conduct business and/or operations, from more than 20 offices in over a dozen countries. SEI s Investment Manager Services division provides total operations outsourcing solutions to investment managers focused on mutual funds, hedge and private equity funds, separately managed accounts and institutional client services. The division applies operating services, technologies, and business and regulatory knowledge to each client s business objectives. Its resources enable clients to meet the demands of the marketplace and sharpen business strategies by focusing on their core competencies. For more information on this report, please contact: David Tittsworth Paul Schaeffer Investment Adviser Association SEI 1050 17th Street, N.W., Suite 725 343 Sansome St., Suite 425 Washington, D.C. 20036-5503 San Francisco, CA 94104 (202) 293-4222 415-293-6507 david.tittsworth@investmentadviser.org pschaeffer@seic.com This information is provided for educational purposes only and is not intended to provide legal advice. Neither SEI nor the Investment Adviser Association claim responsibility for the accuracy or reliability of the data provided. Information provided by SEI Global Services, Inc. 2007 SEI Investments Developments, Inc. Investment Adviser Association and SEI 17