Bryan DoriCEO, Archer

June 2015

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Gaining Perspective onIBOR Solutions

© 2015 Archer. All rights reserved.

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Gaining Perspective on IBOR Solutions

IBOR – Investment Book of Record – has gained acceptance in the investment management industry of late after having been around as a concept for some time.1 The benefit of having a transactional account of in-vestment activity is best realized when seen across an entire firm as a single view.2 However, buy-side man-agers are struggling with the complexities of IBOR support3 as they attempt to streamline internal processes while expanding product offerings and addressing ever-more-stringent compliance requirements.

Wholesale replacement of current operations – and the systems that support them – entails hefty up-front expense and can cause extreme business interruption. But the effort of using existing internal systems and processes to maintain the quality and efficiency of data can be debilitating as well. Execu-tives evaluating the requirements, risks, and costs associated with internal versus outsourcing IBOR support face difficult challenges.

This paper explores different methods of managing IBOR data and its support structure. Lessons learned during past evolution in the investment management industry are reviewed, different perspec-tives are considered, and current IBOR options are explored. Focusing on Core Competencies: A Historic Perspective

Banks, acting as service providers, have approached IBOR support with serious consideration and much discussion, fleshing out the details of what can be done, by whom, how and when. Non-bank service providers -- such as boutique service providers, managed service providers, business process outsourcers, and technology firms -- have been following this discussion, too. While a few of these

service providers have been offering outsourcing for a while, the others are poised to enter the fray. Those who are veteran to the industry may be reminded of discussions in the ‘70s and ‘80s that led to third party fund accountants and transfer agents springing up to fill needs from the mutual fund boon.

As the early 1980s approached, mutual fund products were predicted to grow exponentially as they became an integral part of institutions’ and individuals’ investment portfolios. This explosive growth, however, created challenging service issues, expenses and risks. Initially, asset managers internally staffed to strike NAVs and to perform transfer agency functions.

With the popularity of mutual funds growing, senior financial executives began to examine the accelerating cost of inter-nally supporting mutual fund operations. They were forced to acknowledge that the sheer volume of work was distracting their firms from creating value and enhancing ROI. Instead, firms

were increasing their operating expenses with no incremental revenue as armies of operations and technology support staff were hired to chase high-touch legacy operating processes. They were also outgrowing their physical office spaces and increasing their risk exposures.

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1 “IBOR Before It Was ‘IBOR’”, WallStreet & Technology, Bob Leaper, August 19, 2014 (http://www.wallstreetandtech.com/data-management/ibor-before-it-was--ibor-/a/d-id/1298123)2 “All Eyes on IBOR”, Markets Media, October 27, 2014 (http://marketsmedia.com/eyes-ibor/)3 “Are you ready to support IBOR?”, Rob Erman, June 19, 2014 (http://eagle-exchange.com/ready-support-ibor/)

Third-party service providers for transfer agency and fund accountancy then entered the market. This provided mutual fund executives with options: purchasing new technology to enable internal efficiency, or fully outsourcing their NAV-supporting technology and operations. Despite risk-sensitive executives being reluctant to relinquish control of their data and oversight of their operations, many believing the functions could not be successfully performed externally, third-party support was gradually accepted. Fast forward to 2000, and the mutual fund servicing business had evolved such that it was considered

unthinkable for an asset manager to strike an NAV or to perform trans-fer agency functions.

Sound familiar? Experience shows that senior financial executives are again taking a hard look at cost, efficiency and risk, seeking to better align costs with success and improve ROI through an exchange of vari-able expense for SG&A. This time, financial executives are viewing the challenge through the lens of non-core activities associated with IBOR support. Executives are seeking a single accounting engine/IBOR platform to support all business lines, thereby creating optimal effi-ciency, data integrity, risk mitigation and support-cost reductions -- all while seeking to implement a solution with minimal business interrup-tion. Concerns about potential solutions rightly exist at the firm-level regarding both cultural fit and a client-centric view of the investment

manager’s roles and responsibilities. Said another way, the answer to “what is non-core?” is partly de-pendent on a firm’s culture and their client expectations.

Gaining a Better Perspective

Investment managers seeking IBOR solutions have indicated that their main concerns are: risk mitigation; cost containment and predictability; and superior, accessible service. Mindful of these concerns, we caution managers actively pursuing a solution that:

• Scale cannot be achieved with bodies. Middle office process efficiency must be addressed by a marriage of subject matter expertise and technology solutions that facilitate the management of firm and client risk.

• No one vendor is an expert in every aspect of the business.• Compliance and vendor management are critical

components of investment operations outsourcing.• IBOR must be viewed as an integrated piece of an

overarching investment process.• Vendors who specialize in IBOR need to own the

technology for sure, but also to be experienced in its use, that is, to be investment management professionals themselves.

• The astute service provider understands that an integrated IBOR system is not a compilation of discreet systems, plugged together.

• Data integrity is critically important.

Taking together investment managers’ focus on IBOR and the aforementioned considerations and cautions, Archer is a strong proponent of “right-sourcing” investment managers’ IBOR support needs.

“Right-sourcing” is the process of identifying the core competencies of an investment management firm

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...Archer is a strong proponent of ‘right-sourcing’ investment managers’ IBOR support needs. ‘Right-sourcing’ is the process of identifying the core competencies of an investment management firm and the critical client-facing functions for each sales channel, then applying technology and operations solutions to enable operational ef ficiency and ef fectiveness.”

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3 and the critical client-facing functions for each sales channel, then applying technology and operations solutions to enable operational efficiency and effectiveness.

An appropriately right-sourced solution: • Provides a single and comprehensive accounting platform for all channels, • Streamlines technology in support of disaster recovery and business continuity, • Eliminates technology obsolescence, • Provides a transparent and flexible operations infrastructure capable of adding value,

compliance and efficiency to the investment management process.

Moreover, the solution provider acts in partnership with the investment management firm, integrating technology and services seamlessly into the manager’s framework in a manner that is respectful of the investment firm’s culture and client mix.

Right-sourcing moves the industry from parallel offerings of technology and service to the intersection of financial services, technology, and support that is emerging today.

IBOR Options: Finding the Right Path

As investment management firms have achieved growth by expanding product lines to include global securities, mutual fund shadow accounts, institutional separate accounts, private wealth and retail accounts, support infrastructures have become extremely complex and expensive. Consider too that requisite additional legal and compliance oversight along with increased trading risk further complicate the necessary support structure. This parallels the challenges of the past that fueled the shift from internal to external mutual fund servicing. Just as our predecessors may have done when considering the more traditional players and structures available, the following analysis is offered.

Frame the question• Define non-core: which functions are burdensomely manual, high risk, or non-productive from an

ROI perspective• Define potential solution-set: proprietary or third-party technology; proprietary, onshore-

outsourced, offshore-outsourced, or selectively-outsourced operations• Define preferred technology/service delivery: on-site technology installation; remote user (“cloud”)

access; unification of technology and services platform(s).

Evaluate solutions• Data warehouse: A data warehouse has a role to play -- but

when employing multiple accounting engines in conjunction with multiple databases, a data warehouse morphs into a super-system with reconciliation and data integrity nightmares. Resolving them adds operating expense, achieving the exact opposite of the original intention.

• Banks and hedge funds as service providers: Realistically, the days of large banks giving away thin margin, middle office services for relationship purposes in anticipation of future business revenues ended back in 2012. Competition among these providers continues and they advance and retract offerings, casting off lower-AUM clients, as margins shrink. Additionally, offshoring among these players has grown. Quality of service has slipped and client dissatisfaction is growing.

Right-sourcing moves the industry from parallel of ferings of technology and service to the intersection of financial services, technology, and support that is emerging today.”

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© 2015 Archer. All rights reserved.

• In-house, proprietary or third-party technology purchase and support: Function by function, developing or purchasing technology to deliver efficiency in IBOR support is achievable. However, integration of the functions with an accounting engine is complicated by ongoing systems support and integration issues. As a result, operational efficiency issues may potentially remain unaddressed.

• Outsourced services: While efficiency can be gained by outsourcing operations to an established and experienced boutique service provider or business process outsourcer, oversight responsibilities cannot be outsourced. Ever. Maintaining oversight with transparency and connectivity across business lines remains an issue.

Examine providers• Most of these solutions have been “structured” by respected financial industry players, and

continue to uphold the legacy of the firms that created them.• Larger providers tend to be less agile in making their services relevant to managers of all sizes.

For example, providing a high-quality, high-touch service model is eschewed for the efficiency of a one-size-fits-all offering. Additionally, these providers have somewhat outsourced themselves, strapping their business models with a lack of down-scalability and poor control over third-party platforms. Larger firms are “firing” clients who do not meet asset or revenue requirements while under-serving their larger clients with less experienced, less expensive operations staff.

• Business process outsourcers and managed service providers are categories where most non-bank, non-boutique players fall. These providers offer a wide array of services, quality, expertise and technology. Many can service investment managers of all sizes. Agility in this group is enabled through leaner organizations with efficient vertical integration. Most are capable of offering a high-touch, “white glove” service model, using the industry’s premier tools and protocols. However, seeking to contain their own operating costs, these providers tend to outsource offshore, subjecting themselves and their clients to high employee turnover and, often, political/socio-economic instability.

• Boutique providers are new micro participants and often specialize in one particular discipline, have minimal staff and resources, and generally aggregate information and research by polling the larger players and industry experts. Because of their lack of funding, these boutiques often move very slowly in their ability to address scale. Their ability to grow in lockstep with their clients is, in other words, suppressed.

• Traditional financial technology and software companies offer a broad range of products, from industry utility software to function-specific software. While these firms offer a good to excellent software product, they often lack understanding of the operational processes precedent and antecedent to the software capabilities. They have little appreciation for the challenges of building and equipping support teams.

Conclusion

A single, comprehensive IBOR is increasingly becoming a necessary component of successful investment management firms’ operations. When seeking to implement an IBOR solution, consider the benefits that outsourcing solutions can provide. These benefits include the ability for a firm to concentrate on core competencies while aligning costs with success. Gaining perspective on how IBOR should work within an investment management firm’s total business will help lead to a right-sourced solution where technology and service intersect. Right-sourcing enables flexible IBOR solutions and is the emergent answer to investment managers’ business efficiency challenge.

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