Why funds need a digital edge

While certain parts of financial services are at the cutting edge of technology, the funds industry isn’t one of them – and it’s a situation that needs to change, fast

So, you’ve had a call from a distributor in Spain. They’re meeting investors and one’s asked for the prospectus of one of your funds. The distributor has checked through his inbox and he’s not sure which is the most recent version. He’s also struggling to check the registration status of that particular fund in the jurisdiction – he’s not sure if he’s looking at the right spreadsheet.

This is typical of the issues faced by asset managers and administrators on a daily basis, and the diagnosis is a simple one: being a technology laggard. 

While many areas of the financial services world have made dramatic strides in digitising over the past decade or so – think online banking apps on your smartphone, or retail investor portals – fund administration is only beginning to wake up to the potential benefits of digital technology. 

Innovate or die

But it’s more than just an opportunity. The fund world is ripe for disruption and there are multiple drivers that create an imperative for fund managers and administrators to innovate or be left behind.

These range from the threat of new competition from outsiders moving into the industry on the one hand, to the ever-increasing demands of regulators and distributors around the world for growing amounts of information on every fund.

Ben Honeywood, Director of the Private Equity Group at KPMG in the Channel Islands, says: “Private equity is a cottage industry in many senses. It’s small and it’s always thought itself special and unique, and so it does things differently. From a back-office perspective, they’ve always been pretty slow to innovate.” 

Many fund management set-ups – whether or not administration is outsourced – do indeed continue to use emails and spreadsheets at the heart of many processes. These may be used for calculating asset values or financial reporting, but such an approach is prone to human error, duplication of documents, restricted access and other shortcomings. 

Fund management companies are inherently risk-averse and therefore slow to innovate, points out Jensen Nixon, CEO of Jersey-based tech R&D company WARM. There are reasons for this conservatism. In the low-volume, high-value world of PE, for example, there’s a natural tendency to focus less on the back office and more on the deal-making front end of the business – there’s a sentiment that ‘if it ain’t broke, don’t fix it’. 

But that masks a more fundamental issue – their reluctance to re-engineer their business and processes in the way that digital transformation really demands.

Re-engineering your business for the digital world brings in innovations such as automatic generation of management information and financial reports; automated transactions; and autonomous service options through a digital dashboard. One glance at Amazon should be enough to alert fund administrators to the possibilities, says Nixon.

Tomorrow’s administration systems will need to be client-centric and portable, with any of the key parties – fund managers, administrators, investors – able to access the information they need from every kind of device anywhere in the world.

The possibilities are only just starting to be envisaged, as nascent technologies become reality. A recent report by KPMG – Alternative investments 3.0: digitise or jeopardise – includes survey results from the alternatives and PE industries worldwide on preparedness for a raft of new technologies: new digital platforms, social media, application programming interfaces, big data, robotic process automation, blockchain, robo-advisers, and machine learning. In every instance, the vast majority of respondents are no further than the level of ‘awareness’, with a small minority close to decision-making or implementation. 

Blockchain breakthrough

Nevertheless, there are some success stories. In one well-known example, Northern Trust, in conjunction with IBM, has developed the first commercial deployment of blockchain in the private equity field. 

Tom Carey, a Partner at law firm Carey Olsen, was involved in the project. He explains the potential of blockchain, highlighting the example of a capital call – in which investors are invited to participate in committing to fresh investment – as one of its successful early applications. 

“At the moment, that’s a very manual process. Notices are sent out, often by email, and there are maybe 20 days to respond – some do, some don’t – and moneys have to be wired via the banking system, which takes a couple of days to settle before it can be pushed to the right place and investments made. With blockchain, most of this can be done automatically and instantaneously, the record-keeping is irrefutable and indelible, and there’s no scope for human error.”

The fact that Guernsey was chosen as the test bed for this pioneering blockchain project reflects the quality of the island’s digital infrastructure and the fact that it’s a centre of excellence for professional funds administration, says Carey.

The legal side of fund administration is also ripe for technology innovation, says Arne Zeidler, Managing Director of European law firm Zeidler Legal Services, which specialises in cross-border services. A year ago, his company moved into software development.

Zeidler says: “Administrators are embracing the need for innovation, but at the moment, the challenge is that they can’t find enough technical solutions to change their service delivery. So for us, it’s pushing at an open door.”

One module developed by his firm enables fund managers to carry out due diligence on new distributors through a ‘self-service’ questionnaire. This has benefits for the fund manager, the regulator and the distributor – who avoids having to repeat all the same information the next time they’re asked to go through the due diligence process.

The company has also deployed a natural language bot, drawing on structured data to build a knowledge tool covering 25 jurisdictions. It explains how the regulatory process works in each market. When the bot can’t give the client the required answer, it hands off to a member of Zeidler’s legal team. 

The firm has also developed a peer-to-peer file system using IPFS (InterPlanetary File System), which ensures that the latest approved version of all regulatory documentation is available to all parties. 

Tech innovation in the funds administration world is already coming from several quarters – administrators, boutique service providers, big four accountancy firms, law firms and, increasingly, from fintech start-ups. 

Ben Honeywood says solutions will come from a combination of these sources, but start-ups have an advantage with talent. “Is working for a digital team in a bank as compelling an opportunity as a start-up, where staff are highly incentivised and the culture is aligned to make that business work?” he asks.

One thing is clear: there’s no going back. “There will be no way to avoid using more advanced technology for many of these processes in the future – continuing with email and spreadsheets simply won’t work,” says Zeidler. 

Administration will need to be faster, more efficient and more client-centric, and able to handle far greater volumes of data. Business as usual is not an option.