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Q: How can investment managers cut middle and back office costs by 25%?

November 2, 2011

A: By streamlining processes – eliminating redundancies and increasing coordination –according to panelists from Beacon Consulting, Citi Fund Services and Milestone Group, speaking on a NICSA webinar last week.

Panelists Michael DiScipio, Sugata Gupta and John Herlihy reviewed the challenges and the opportunities for investment managers looking to increase operational efficiencies. Here are the highlights from their remarks:

  • It’s only getting tougher for middle and back offices: Investment instruments are increasingly complex, regulation is constantly changing, demands for transparency are growing and processing windows are ever narrower – and firms are moving faster and faster to stay competitive.
  •  While accuracy has to be extremely high: At Citi — which is responsible for the administration of over 8,000 funds — an error rate of just 0.1% means 7 or 8 errors every day.
  • The internal processing environment reflects the external complexity: Take the core transfer agent and investment accounting systems – add function-specific systems to handle tasks like trade settlement and fee computation – then layer on manual processes using spreadsheets for particularly complex items. Make sure that none of the components communicate automatically – and you have the recipe for today’s investment middle and back office. The result is an inefficient system where adding volume means adding headcount.
  • Startling statistics: The average middle- or back-office process (such as NAV calculation) involves 10 or more systems. Manual processes involve 40% of middle and back office labor and 70% of the risk.
  • Adding to the chaos: Many firms have moved some of their operations offshore, because of the increasingly global nature of the investment process and to take advantage of lower-cost locations. It’s not unusual these days for investment decisions to be made on the West Coast, trade settlement to be handled in Singapore, reconciliations to be done in India, valuation to be completed in Ireland, while NAV is struck in Luxembourg.
  • There’s hope, however: Technology now gives investment managers and service providers the ability to streamline processes – by replacing fragmented architecture with an integrated system. A redesigned system can process a complex transaction from beginning to end. For example, an exception management system would not just identify errors in a dashboard report, but also facilitate both the validation and the repair of the problems.
  • But change requires an honest assessment: Firms need to review and prioritize their current system of checks. While they may be able to stop doing some – especially the ones designed to prevent yesterday’s problems – they may also need to design new controls for emerging or particularly tricky issues.
  • Technology can also help communication: If information is stored centrally and accessible to all, hand-offs between units – whether within the same building or across time zones – can be handled more smoothly.
  • The benefits: Not just cost savings, though those can be substantial, ranging from 10% to 50%. Redesign can also have people benefits — helping to retain top performers by focusing their jobs on value-added functions, thereby making them more enriching. Most importantly, increased integration and interaction generate an environment that encourages innovation — planting the seeds for future success.

If you’re interested in hearing more, an archive of the complete webinar — The Evolution of Operational Efficiency for Middle and Back Office Processes — is available free to NICSA members.

News Bites | The changing ETF market

October 21, 2011
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News Bites is an occasional column in NICSA News that collects memorable facts, quotes and insights from our recent reading.

This edition of News Bites looks at recent surveys from the BNY Mellon Asset Servicing (in conjunction with Strategic Insight) and from McKinsey & Company. Both look at the second phase of growth in the ETF market. These were our takeaways:


1. ETF sales are gathering momentum in North America and Europe. Asset gains from 2008 to 2010 were spectacular — over 80% — which was more than 3x the rate of growth in total fund assets in those regions over the same period. These gains come off an already substantial base. (McKinsey & Company)

2. This growth has encouraged fund managers to enter the market. There are now 20 firms with a significant presence in ETFs. In 2007, there were just 14 firms with measurable market share. (BNY Mellon – Strategic Insight)

3. This vibrant marketplace has supported a rush of fund introductions. While some of the new funds have been in core categories (e.g., S&P 500), most have been in less traditional areas, notably commodities and emerging markets. (BNY Mellon – Strategic Insight) Here’s a quick look at the largest U.S. ETF introductions for the year ended March 2011:

4. But for every successful new ETF, there were 3 that failed. (McKinsey & Company)

To learn more about ETFs, check out the NICSA webinar archives. NICSA members have unlimited access to replays.


Links to the surveys discussed in this post:

Facing a complex/non-complex situation

October 18, 2011

Complex formula on blackboardIf a fund uses derivatives heavily, does it become too complex for the average retail investor? That’s the question facing the European fund industry right now. Regulators in the European Union have proposed that UCITS funds* using derivatives extensively should be designated as “complex” — and subject to more stringent rules on sales and marketing.

The prospect of a divided UCITS brand was a hot topic of discussion at the ALFI Global Distribution Conference held in Luxembourg in late September in association with NICSA and the Hong Kong Investment Funds Association. Here’s an overview of the conversation.

UCITS have grown more complex. . .

When UCITS funds were first introduced in 1984, they were “plain vanilla” investment vehicles: long-only with limited ability to use derivatives.  This simplicity helped UCITS funds to become accepted not just in Europe, but throughout the world. Investors looking for more sophisticated approaches had to look elsewhere – generally to unregistered hedge funds.

At least that was the case until the middle of the last decade, when the list of permissible investments for UCITS funds was expanded to include credit default swaps, index futures and asset-backed securities, among other instruments. UCITS were also permitted to use these derivatives to create leverage up to twice the value of the underlying assets.

Funds using the new capabilities – known as “sophisticated UCITS” or, more familiarly, as “NewCITS” — quickly became popular with investors looking for more aggressive approaches. According FINalternatives, there are now over 1,000 of these funds registered in Europe.

. . . prompting regulatory scrutiny in Europe. . .

But while the new UCITS funds were popular with certain investors, they raised red flags with regulators, who worried that these funds were being sold to individuals who didn’t fully appreciate their risks.

To stave off futures problems, the European Securities and Markets Authority or ESMA – the European equivalent of the SEC – made a radical proposal this summer. They suggested dividing UCITS funds into two categories: complex and non-complex. While non-complex funds could continue to be widely distributed, complex funds would be subject to suitability requirements.

European fund managers have generally responded to the proposal with less than enthusiasm. They’re concerned that it will be difficult to define complex versus non-complex precisely. Will categorization be determined by notional value of derivatives contracts, by value at risk or some other measure? And they’re worried that splitting the UCITS brand into two subcategories will lessen its appeal around the world.

That’s not a universal opinion, however. At least one major fund manager – Fidelity Investments – has argued that dividing the brand will actually strengthen UCITS’ position of UCITS in Asia.

Simple formula on blackboard. . . and in Asia. . .

In its comment letter on the proposed rule, Fidelity explains that Asia is critical for investment managers. Over 5,000 UCITS funds are already being sold in Asia – and prospects for growth in assets under management are among the best in the world. Countries in the region are experiencing steady economic gains – meaning that they have more money to invest. At the same time, many of these countries have established mandatory savings programs – like Hong Kong’s Central Provident Fund – that automatically direct some of that new wealth into long-term investments, which are often UCITS funds.

Asian regulators worry that there’s the potential for a mismatch – sophisticated UCITS fund with unsophisticated investor in a mandatory savings program. (For a U.S. equivalent, think leveraged ETF in a 401(k) plan.) They’re often not willing to wait for ESMA to act: Hong Kong and Singapore have already imposed controls on offerings of more complex funds – effectively requiring a visa in addition to a UCITS passport before funds can be sold locally.

. . . while U.S. regulators pursue a similar line of inquiry.

In a parallel universe, similar issues are being discussed here in the United States — just substitute the leveraged ETFs for complex UCITS. Instead of an ESMA consultation, we have an SEC concept release: “Use of Derivatives by Investment Companies under the Investment Company Act of 1940.” Do you see other similarities?


*UCITS funds in brief: The UCITS directives approved by the European Council and Parliament establish rules for the registration and sales of mutual funds within the European Union. A fund registered in one EU country that complies with all the UCITS regulations can be sold in all other EU countries merely by filing a notice with regulators in those countries under a “passport” system. This passport has also been accepted by many countries outside the European Union as well. In fact, UCITS funds account for a significant proportion of fund investments in Chile, Hong Kong, Singapore and Taiwan. UCITS stands for “Undertaking for Collective Investment in Transferable Securities.”

Catch up on NICSA’s General Membership Meeting

October 12, 2011
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GMM logoDid you miss last week’s NICSA General Membership Meeting and Best Practices Symposium? Catch up on the discussion through the coverage of the event.  . . . But make sure you join us in Boston next year so that you can participate in the conversation.

Susan B. Weiner blog

Citisoft blog

Twitter coverage

And check out the conference coverage on Fund Industry IntelligenceIgnites, Money Management Executive and MutualFundWire.com (subscriptions required).

What’s in a Like? | A story of Facebook woe

September 14, 2011

What’s in a Like? What does it mean when a Facebook user becomes a fan of an organization by clicking the Like button on their page?

The Facebook FAQs say that choosing to Like something is “making a connection.” So a Like would seem to be a natural fit for NICSA, since we’re all about connections. For fifty years, we’ve been in the business of connecting individuals and firms across the industry with each other — and with the information they need to excel at their jobs.

But – and it’s a big “but” — financial industry regulator FINRA views a Like as an “adoption,” which is much more significant than a mere connection. Under the FINRA interpretation, securities industry representatives who become fans of a page adopt it as their own and become “entangled” in its content – and that could mean trouble for them and their employers if they knowingly adopt a page that contains false or misleading information. In other words, in FINRA’s eyes, a Like is pretty close to a recommendation.

Our story of Facebook woe

From FINRA’s position stems our story of Facebook woe. NICSA established a Facebook presence in April and, since then, we’ve gathered a grand total of 28 Likes. Even BP’s Tony Hayward is doing better than that!

We don’t think it’s our marketing. We promote our Facebook presence in the usual ways, with icons and links on our website, blog, marketing material and email signatures.

We don’t think it’s our content, either — which is full of snappy headlines, eye-grabbing visuals, penetrating insights and timely updates. (Or, at least, we try hard to make sure it’s filled with those things!)

No, the problem is that our members are afraid that they’ll lose their jobs if they become fans. They generally work for firms that are subject to FINRA rules – which apply to all business-related communication by the firm and its associates. To avoid any violations of the regulations, most of the firms have policies that completely preclude staff from using social media for business in any way – policies which have been very effective in making our members reluctant to Like us.

Why FINRA should care

If our members don’t Like us, our posts don’t automatically appear in the news feed on their home page, which means that they have to actively seek out our Facebook page in order to read what we have to say – not something that most people will do often.

They’re also less likely to spread the word about us to the colleagues. A recent study shows that Facebook users are more likely to recommend something that they’ve become a fan of.

We’ll put ourselves on the side of the angels and say that’s a loss for the financial industry – since NICSA’s mission is to provide investment industry professionals with the information they need to do their jobs well. It’s even something that FINRA should worry about – since so much of that information is related to regulatory compliance.

At the same time, if we should ever say something false and misleading (not that we ever would), there are fewer industry experts watching to call us on it and stop misinformation from spreading.

What do Facebook users mean by a Like?

It’s a particular shame because there’s not a lot of evidence that Facebook users take Likes as seriously as FINRA does. A survey by Exact Target shows that consumers become fans mainly to receive something: discounts, freebies and information. This word cloud provides a quick look at the survey responses.

Yes, “show my support” appears in the list – but Facebook users cast many more votes overall for updates, entertainment, exclusive content, further information or education as reasons to Like an organization. Interestingly, users seem to come to their own conclusions about whether a Like is warranted; fewer than 1 in 4 became a fan on the basis of a recommendation.

A Like by any other name – or, are you listening Mark Zuckerberg?

Which raises an interesting question: If the button were a “Get More Information” button, rather than a Like button, would FINRA be more comfortable with it? I’m extremely glad that Facebook didn’t name it the “Awesome” button, as they originally planned to do.

I suppose it’s too much to hope that Facebook will take a lesson from Twitter and use “Follow” or from LinkedIn and use “Connect” or “Join”. . . I can dream, can’t I?


If you like this blog post – and if your company’s policies permit – please Like our Facebook page.

We’d feel a lot less lonely.

The global fund industry in 3 charts

September 7, 2011
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What determines the size of a country’s fund industry? Here are three graphs that look at key determining factors.

For more on the global fund industry, join us at the

ALFI Global Distribution Conference
in partnership with NICSA and the Hong Kong Investment Funds Association


Tuesday, September 27th, and Wednesday, September 28th
Centre de Conférences, Kirchberg, Luxembourg

16 sessions with over 50 speakers from 8 countries on 3 continents

For complete program information and to register, visit the ALFI website

1. Not surprisingly, wealthier countries have larger fund industries. This chart shows how fund assets rise steadily with gross domestic product. The sheer size of the U.S. market — and its importance to fund marketers — is apparent here. The international financial centers of Ireland, Liechtenstein and Luxembourg are noteworthy outliers, with a high level of funds to GDP. Click on the chart to see it full screen.

2. The gap between the developed and the emerging markets is apparent when per capita figures are used.  This graph plots fund assets per capita against GDP per capita. The United States stands out less in this chart. Instead, it’s Australia that leads the world in fund assets per capita. India and China have a long way to go before they catch up.

3. Fund industry size also tends to increase as populations age.  Fund assets per capita tend to grow as the proportion of the population aged 55 and up increases, as this last chart shows. One notable outlier here is Japan, which has a low level of fund assets per capita given its aging population. (Total industry assets are indicated by the size of the circles.)

For more views of the global fund industry, take a look at this visualization of 2010 World Mutual Fund Assets or at this NICSA News blog post of August 12th, Mutual fund hot spots | Maps that tell the story.

News Bites | Middle-income Boomers prepare for retirement

August 30, 2011

News Bites is an occasional column in NICSA News that collects memorable facts, quotes and insights from our recent reading.

This edition of News Bites looks at recent surveys from the Insured Retirement Institute (IRI) and the Center for a Secure Retirement (CSR). Both focus on middle-income Baby Boomers and their retirement planning. These were our takeaways:


1. The middle class makes up 60% of the U.S. population and earns 47% of total income. Those in the broad middle are likely to own homes (70%) and have health insurance coverage (75%+). (IRI)

2. When it comes to retirement planning, middle-income Boomers are particularly interested in security. This group owns 73% of all annuities, and the majority (60%) envy the retirement security enjoyed by prior generations. (CSR) Principal protection and steady income are key investment goals. Here’s a quick look at their top responses when asked to name the most important traits of retirement investing by IRI:

3. For most, finances will determine when they retire. (CSR) And how will they fund retirement? Roughly 3 in 4 say that they’ll continue to work. (CSR) Outside of employment, they’ll draw on Social Security and employer-provided retirement plans. Only 1 in 5 expect personal investments to play a major role (IRI) — but that’s probably because savings levels are modest.

And — Baby Boomers are increasingly likely to be caring for their parents, according to a recent MetLife survey. It’s estimated these caregivers will lose nearly $3 trillion in wages, pension, and Social Security benefits because of their responsibilities at home — making planning for retirement that much tougher.

Links to the surveys discussed in this post: