The Rising Voice of Transparency and Control in Fund Operations


Geoff Hodge, CEO, Milestone Group

By John Herlihy and Geoff Hodge, Milestone Group

Boards, auditors, management and shareholders have been making their voices heard: among the alphabet soup of new fund management regulations, transparency and control are the common themes. We are now indisputably at the point where they are a required core competency among fund managers and operators.

On a day-to-day basis, transparency and control are about achieving certainty. It is about being sure that the fund is managed in a compliant fashion (the control), and that stakeholders are able to look at any level of detail, and see that compliance in action (the transparency). Transparency has become, in fact, an important pre-requisite for holding fund managers accountable, and that accountability in turn is a key building block for an effective control environment. The trouble is addressing it looks like an overwhelming amount of work with an equally overwhelming price tag.

However, there is a smart and cost-effective way of dealing with these issues, provided the industry can modify its thinking on how problems can be solved. It is time to introduce and actively cultivate innovative approaches to problem-solving, including a more aggressive adoption of production management techniques in fund operations.

John Herilhy, Senior Vice President - Business Solutions, Milestone Group

John Herlihy, Senior Vice President – Business Solutions, Milestone Group

The first step is to recognise that although fund management is a dynamic industry, the number of moving parts within the operational side that need to be controlled is finite. Once it is understood which of the core business characteristics are dynamic, they can be embedded into the business architecture: the operating models and their supporting technology. This will enable businesses to deal more simply, and more holistically, with the common regulatory themes coming down the track.

This means changing the approach to technology-based projects and the traditional delivery of functionally-focused, incremental change, where external drivers build up pressure for change and a project is devised and implemented to deliver appropriate improvements to the business, before the cycle repeats itself on a seemingly endless loop.

Consider the difference in a world where innovation is an embedded cultural and practical aspect of the change process. First, the cycle is much shorter and pressure does not build to the same extent for constructive change to occur. Instead the business is actively looking for better ways to manage operations – regardless of external drivers. What’s more, in addition to the analytical framework that characterises the traditional change cycle, imagination, abstract thinking and discovery all feature heavily. New possibilities, including those with very different outcomes than initially envisioned, can be achieved.

This new model is less about looking at projects or pieces of regulation in isolation and more about exploring how a whole range of change initiatives and potential future challenges can be assessed and prepared for as a whole. This is why the current regulatory meme is critical: thought about in terms of a broad-based initiative to introduce transparency and control, constant regulatory change seems far more manageable than when new laws are seen as a series of discrete challenges to be met.

In practice, a fund manager should be able to look across their operations in totality, make any reasonable query and be confident that the answer is timely and complete – whether the query is made under RDR or UCITS V, Dodd-Frank or Form PF. Achieving this means moving away from conducting a string of reactive, resource-heavy and single-function projects, towards a culture of delivering theme-based, universally applicable transparency and control projects. The supporting business architecture required will be much more suitable for the pace of change in the industry, and will enable businesses to deal with the operational aspects of regulatory challenges more efficiently.

The efficiencies gained and resultant risk reduction that are the by-product of such a shift in culture, ensure that such projects become self-funding – giving extra weight to an already strong business case for change, and helping demonstrate that transparency, control and compliance are more than mere cost centres.

Instead they become a seamless part of an operation that can provide the level of agility and flexibility needed to deal with evolving requirements for reporting, product innovation and competitive differentiation. This is what will enable successful firms to distinguish themselves in the future.

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One Response to The Rising Voice of Transparency and Control in Fund Operations

  1. William Brune says:

    From my experience, regulatory bodies, Fed or State, rarely enact new laws that are not sweeping, i.e. we still don’t know the impact of Frank-Dodd. Nor are all the proposed regulations even finalized. So with that in mind, the transparency necessary may require a series of single function projects to remain compliant, especially at the Transfer Agent level. The concept of continual improvement of a process/system goes back to Dr. William Demmings’ Total Quality Management concepts, 50 years ago. The first step would be to adopt a culture of continuing improvement. Since the 1980’s, when I was exposed to these ideas, they seem to be ignored unless there is a quantitative profit incentive. Although in recent years, since the rapid improvements in technology, service providers are being forced to continually improve their products just to stay competitive. To quote one of the senior managers I have worked for, “Where’s the money in that?”.

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