Guest Contributor: Holly Miller, Partner & Founder, Stone House Consulting
In a few days’ time, Americans around the globe will gather together with family and friends to celebrate Thanksgiving. It is traditionally an occasion to reflect on the factors that contributed to our success, to speak of the people who helped us and to share some of our good fortune with others. This Thanksgiving, how will Wall Street’s buy side evaluate the contributions of others when considering our efforts to survive and prosper in the ‘new normal?’ I have a few thoughts.
Key service providers (KSPs) contribute to the success of traditional and alternative investment managers (IMs) in their individual ways. IMs with service-level agreements and key metrics around those agreements are far better positioned to evaluate the respective contributions of each KSP than those who have eschewed or neglected such structure.
For the safekeepers of assets, we hope IMs are maintaining scorecards on trade matching and fail rates, tracking the frequency of reconciliation breaks and monitoring the timeliness and accuracy of pricing, reporting and new account set-up. When breaks and mismatches occur, these scorecards pinpoint whether the safekeeper, the counterparty (CP) or the IM had inaccurate information. If IMs or their clients utilize multiple custodians or prime brokers, they can be benchmarked against one another—and the IM can share anonymous benchmarking information—to help these KSPs continuously improve their delivery capabilities. It is also useful to maintain similar measures on fund administrators as well. Like with other outsourcing providers, IMs should monitor their internal control mechanisms (using appropriate, agreed metrics), their responsiveness and their competence with managing and escalating the problems that inevitably arise from time to time?
For software vendors, consider their open/close rates on software bugs and ‘unwanted features,’ timely delivery of new releases and software testing quality. Do they release software in a timely manner to address industry and regulatory changes without issuing a constant stream of updates that creates a never-ending swirl of testing, data conversion and interface upgrades?
IMs rely on their trusted advisors—be they auditors, attorneys or consultants—for sound advice and timely information at a reasonable cost. Meeting deadlines (especially for audited financials!) is key. Helping IMs to make decisions and manage their day-to-day business independently without the need to call these advisors back in—running up the bill each time—is critical. Accordingly, IMs should evaluate and monitor the extent to which their advisors share information and provide education to foster independence.
Which of your KSPs has earned a second helping of cranberry sauce?
Likewise, every IM is challenged to judge which CPs consistently perform better than the others. Best execution tops the list for CP evaluation. We like to see IMs develop a formal CP scoring program with specific weights assigned to best execution, financial health, trade accuracy, and trade match and fail rates, to name a few. Formal scoring programs help IMs decide which CPs are like a dollop of whipped cream and which are turkeys. These records can be immensely helpful during regulatory exams as well.
While we all give thanks for our clients and investors, whose revenues help to support and grow our businesses, benchmarking them is a useful tool for IMs to identify the profitability of each relationship, to assist with future product pricing, evaluate the effectiveness of cross-selling and to assess client satisfaction. IMs should survey their clients periodically as well. Such research may even identify client relationships for which the IM really isn’t all that thankful.
Perhaps most important of all, as we hold hands with friends and family this Thursday, IMs need to remember their colleagues in the office—their corporate families. Bonus time will be upon us before we know it, and effective metrics can be valuable tools during the employee review process, reminding IMs of what workloads really were across the entire year (rather than what they felt like or focusing only on the recent past), reducing the impact of purely political factors, examining the resources available today against past levels and monitoring the quality of the services delivered internally and externally. During year-end budget season, these same metrics help IMs to identify, quantify and prioritize projects for the coming year. Simply apply the same principals you would use to evaluate the quantity of food cooked this year, the popularity of various dishes and whether need more help in the kitchen during meal preparation or clean-up would have been more useful.
For our part, Stone House Consulting thanks our clients for their faith in us, our staff for their hard work and our families for their incredible understanding and unwavering support during our first two years. In particular, we would like to thank our friends at FTF for another great year of conferences, training programs, surveys and sharing industry ideas. Pass the pumpkin pie, please!