In a time where transparency is crucial for both investors and regulators, buy-side firms need to take a hard look at their client service models and be mindful of complying with best practices. Bob Miller, ceo of CorrectNet explains how buy-side firms can keep clients happy and attract new ones despite these turbulent times.
Q: Why is client reporting so essential in the current market?
In today’s market, there is a heightened sense of awareness and a desire among institutional investors to understand in significantly more detail what is going on with their assets and with their money managers. And to better understand the risks associated with their positions and portfolios, investors require transparent, in-depth client reporting.
There are two trends driving this need for better client reporting services and transparency. First of all, investors are nervous and in need of information and tools to keep confidence at a healthy level during these turbulent market conditions. Secondly, institutional investors have replaced high-net worth individual investors as the main client investing in hedge funds and fund of funds today and in the future.
With the shift to mostly institutional investors, buy-side firms are now dealing with a more sophisticated client. Institutional investors are expanding internal risk management procedures and implementing systems to better manage assets to become smarter and more informed investors. As a consequence, buy-side firms must aggregate data differently to provide a consolidated data set and a more comprehensive view of risk that these clients require.
And the type of data they need is changing too. Historically, client reports have provided the statistics and analytical data but now, with the current market environment, the focus has shifted to include non-statistical data, such as operational information. Investors want to know about all activities a money manager engages in, even those which may not directly relate to a portfolio but could ultimately affect an investor’s assets.
Client reporting is really the area in which most buy-side firms will be investing in 2009. From a buy-side firm’s perspective, there is a lot of competition shaping up among these asset managers to compete for the institutional investor and they are keeping up by investing in their infrastructure to satisfy the reporting and data demands of these more sophisticated clients.
Q: What are institutional clients now expecting in terms of transparency and reporting? What type of information and content are they seeking?
This relates to the transparency comments I made earlier. Institutional investors want not only the basic data, but they want a more complete set of information both in depth and breadth, and they want it delivered more frequently. For valuations for example, the new standard for delivering data is daily (even for complex instruments types such as OTC derivatives).
There is also much more scrutiny on the quality of data included in client reports today. Institutional clients want clear proof that the figures provided, such as a product valuation, are accurate. Part of this demand is due to institutional investors relying on better internal risk management processes, which means they require transparent and accurate data to feed into their own risk analysis systems. For example, an institutional investor today may have modeling systems so it can make sure the estimate actually comes close to what final value was.
Investors are adopting a more sophisticated way of thinking of what ‘accuracy’ is. Specifically, clients also require data to be qualified so it is more traceable and transparent. For example, if a valuation of a particular investment product cannot be determined when creating a client report, the buy-side firm must instead qualify the given figure so the client is aware that the figure is based on yesterday’s value and was not updated that day. Investors today can no longer afford to (nor do they want to) wait for information so they’d rather have it every day, even if it is qualified.
Another trend is a growing demand for ‘peripheral’ or ‘soft’ data to be included in client reports, such as information pertaining to counter party risks. It makes sense that an investor in a multi-manage strategy or fund of funds investment structure would demand more transparency and data on the underlying structures because of the counterparty risks associated within the various levels of a multi-layered investment vehicle. When a client initially selects a manager they follow a due diligence process whereby these peripheral processes and relationships are monitored to ensure there are good controls, systems in place, but now clients want to monitor these relationships and process more frequently and on an ongoing basis. Clearly, market circumstances and recent events are driving this need for an expanded set of data.
Q: From an operational standpoint, what can buy-side firms do to regain investor confidence?
To provide the improved transparency in client reporting investors demand, buy-side firms need to empower the front line of their businesses (investor services, client services departments etc), by providing them with the tools required to bring client information together in a single place so data can be converted more quickly and accurately and customized in a way that responds to the clients need for information.
Q: And what role does data aggregation play in information delivery to customers?
To manage data intelligently you have to first bring the data together in one place and then aggregate it accordingly. Previously, the industry trend was to build large data warehouses or traditional data consolidation infrastructures, but mapping multiple systems into one single view is very difficult, costly and hasn’t worked out for some firms.
For us, data aggregation today is really about bringing the data together ‘dynamically.’ By dynamically, I mean we don’t use a single data model for all clients, but instead we automate and manage the differences in data from various data sources and systems (600 different data portals in total). We do this by providing a Meta data layer of on top of the data sources to manage the slicing and dicing of the data in the various ways required. On top of this data aggregation solution we provide presentation tools to enable formatting of information for delivery to clients.
Q: What is the biggest operational ‘fix’ a firm needs to make when improving client reporting?
There is a clear data/information management and infrastructural problem within buy-side firms. Very few have put together a strategy or done the heavy lifting required to institutionalize those fragmented infrastructures for gathering the information and providing the traceability, quality and workflow required to execute client services functions such as the opening of client leads and responding to client inquiries.
Q: What are the consequences of not ‘fixing’ existing operations?
Efficiency and accuracy of client reporting and related functions, such as data aggregation, varies greatly from firm to firm. I’ve seen some pretty horrific processes in my career which relate to both data inaccuracies but also inefficiency in managing client confidentiality. Firms need to address both issues.
In dealing with clients, CorrectNet estimates that from a data standpoint a lack of appropriate data management can lead to about 30% of client reports being late, 25% of these reports containing inaccuracies, and about 5% of these reports delivered to the wrong person.
In terms of confidentiality, people are more aware of potential problems. For instance, we have seen recently multiple domiciles such as Switzerland and Luxembourg clamping down on confidentiality and pricing issues which means firms are more and more aware of what are the best practices required to protect a person’s identity. The widespread casualness of correspondence is gone – people now know that emailing a PDF around the globe is a pretty bad idea if you’re trying to protect someone’s identity!
The other obvious consequence of poor operational support and functions is an inability to provide the high quality client reporting, especially the depth of data which requires easy retrieval and use of data, that investors are beginning to demand.
Q: What other operational issues are you seeing among buy side firms?
In these times, there are so little resources in many of these firms and obviously their mindset is very much trapped in ‘survival mode,’ so firms are really looking at operational projects which keep them on the forefront and surviving in the market. This means the focus is on client centricity and building customer confidence and ultimately preparing to recapture assets as the market improves.
Q: If better information can help a firm retain clients, how can it be leveraged to attract new assets?
As I stated before, institutional investors will really be the sole investor in hedge funds in the future and so this means fund managers will be dealing with sophisticated investors who have select their managers based an excruciating due diligence processes (150-page questionnaires sometimes!).
Given this trend, the ability for fund managers to respond quickly and perform in the due diligence process will be a key differentiator for funds in attracting institutional assets. For firms, this means they have to be able to service the investors in the way they require, but also have to PROVE that they can do so and in a way that delivers the transparency and in-depth reporting and communication services required.
Best Practices in Client Reporting
According to CorrectNet, there are six best practices firms should follow to ensure that reports are accurate, detailed, complete and current.
1. First and foremost, deal with the data issue. Aggregate once, enrich one, store once and verify once.
2. Focus on quality and control. Automate exception processing, build in workflow, implement quality checks and benchmarks
3. Build in publishing flexibility to customize the client experience.
4. Know that clients need information in different forms. Implement data service architectures that integrate useful formats, such as Web, paper, email or data feed delivery.
5. Assure availability and security. Don’t short the need for robust infrastructure, adequate disaster recovery and disciplined security and entitlement functions.
6. Provide operational transparency. Develop a culture and tools which provide end clients with the ability to measure the quality of your service and adherence to your service level agreements.
* Bob Miller is the ceo of CorrectNet, a provider of managed service-based information delivery and client reporting for many of the world’s largest investment management firms.
