Trends in Fund Administration: Consolidation, Fee Alignment and Market Transformation
The fund administration business is undergoing a significant transformation. Merger and acquisition activity among fund administrators is expected to continue, as is the shift away from bank-owned administration businesses. Increased focus on fee alignment, a volatile regulatory landscape and the overall digital evolution of the financial services market are signifiers that fund administrators must adapt to meet rising expectations in order to succeed.
The fund administration business has witnessed quite a bit of consolidation over the past few years, especially due to the decision of many large banks to exit the space, including Citi Bank, Wells Fargo and Credit Suisse, just to name a few. Banks have understandably been reluctant to keep investing in an activity that is on the fringe of their core business, so it is likely that the industry will continue to undergo even more consolidation as banks realign priorities. As the fund administration business continues to experience a digital transformation, banks have also realized that they don’t want to sink resources into software development for their fund administration businesses. The transition from banks to independent fund administrators is a logical one, as it allows banks to re-focus on the more profitable parts of their business and provides a higher level of service for funds that only an independent administrator can deliver.
Investing in new technologies and staying abreast of market trends, investor needs for transparency and the regulatory environment is essential to running a successful administration business. Free from the red tape that’s often tied to banking, independent fund administrators can be more agile and scalable, and place a larger emphasis on technology development. The benefits of using a truly independent fund administrator are plenty, but most importantly, an independent provider is focused on providing the highest quality of service. Many funds have either moved away or are currently exploring moving from bank-owned administrators to seek better service provided by specialist fund administration companies.
Funds Seek Greater Value
Another emerging trend is the pressure brought on by general underperformance of hedge funds over the past couple of years. There’s little question that fund managers expect more from their fund administrators than they did in the past. Managers that still perform their fund administration in-house may likely explore third-party enterprise solutions for the first time, but they will be very conscious of cost. As funds are feeling a squeeze on profitability, administrators are feeling some pressure to make sure their fees are in alignment with their clients’ needs and expectations. This may mean taking a variable fee approach, while simultaneously ensuring that managers are delivering services as efficiently and cost-effectively as possible.
In addition to greater cost value, investors expect more value from their reporting. Asset managers are calling for increased transparency and are holding administrators to the highest standard of regulatory reporting. The complexity of evolving regulatory standards, such as FATCA, means that the operational burden facing managers is substantial. While larger managers might be better equipped operationally, meeting compliance standards such as FATCA present a massive operational challenge for most firms. To ensure efficient regulatory reporting and continued client success, fund administrators need to take a centralized approach to data management. By finding ways to create measurable efficiencies, administrators will be able to produce greater value for their clients.
A Transforming Market
Much has been written lately about the trend toward quantitative strategies, especially on the part of larger funds. While the expectation might be that this would drive higher trading volume, administrators won’t feel a large impact from an operations or technology point of view. Instead, the more disruptive trend is demand from traditional asset managers as they seek to pursue alternative strategies. As the lines between these businesses become more and more blurred and asset classes continue to expand, asset managers are looking at how to improve their middle office processing capabilities to handle the volume and level of complexity they have not been accustomed to. For administrators that can deliver middle office expertise underpinned by a solid technology backbone, this segment of the market is likely to be a strong growth area in the near term.
As client needs evolve, so too do the services and capabilities fund administrators must deliver. Flexibility and an adaptable technology infrastructure are critical to success. The primary goal of any fund administrator is to retain clients and ensure they’re receiving what they need, including timely and accurate regulatory filings. It’s vital to invest in technology to accommodate the changing demands of fund managers. Administrators that are diversifying their offerings and implementing new technologies while maintaining a consistent level of quality service stand to succeed in this environment.
Eamonn Greaves is managing director, head of business development at SS&C GlobeOp.
Asset Management Intelligence – Q3 2017
- The Risk of Hedge Fund Herding and its Role in Today's Financial Markets
- Trends in Fund Administration: Consolidation, Fee Alignment and Market Transformation
- Loan Origination as an Asset Class – What Tax Issues Do I Need To Be Aware of?
- The Operational and Compliance Benefits that Establishing an Irish Fund May Have for U.S. Managers
- Alternative Investment Industry Outlook for Q3 and Beyond in 2017
- Focus on Private Funds: SEC Enforcement Priorities