Hurdles to Overcome
Even before fund admins were presented with this new opportunity to offer more services to their clients, they often had a hard time turning a profit for 10 basis points when just providing standard services such as maintaining a fund’s investment books and records. Historically, fund admins provided data on a fund’s books and records once a year. Now it’s assumed this service can be offered once a month, and admins are increasingly being asked to provide a daily offering as well. And don’t forget . . . the price is still 10 basis points. How can admins make a go of this? How can they reinvent themselves to take advantage of new opportunities? It is easier said than done.
Fund admins not only have to re-invent their services with more comprehensive offerings but they also have to change how they deliver these services. Instead of, say, building their own partnership accounting software as a way to cut costs and avoid third-party licensing fees, admins need to focus on what they do best. They need to stick to their core operational demands — customer service and supporting the fund’s management reporting, risk reporting and investor reporting needs. They should not endeavor to develop software code, maintain that software code and debug that software code, and last but not least have to create technology upgrades as regulations change.
They need to largely do away with their huge and expensive internal software development team and instead reinvent their IT department so that it co-sources IT services or even takes the minimalist form of being a vendor-selection committee. An example of co-sourcing is outsourcing part of software development or software maintenance activities to an external organization, while keeping part of the development in-house. Co-sourcing strives to increase capacity, alignment and transparency. That said, third-party software vendors live, eat and breathe software development. They are the experts at writing computer code. Fund admins are experts at providing middle and back-office services. Admins will be left in the dust by software companies who understand how to manage IT teams, how to motivate them and properly compensate them. The business models meant for managing software developers just don’t work for client-facing /customer service-oriented employees.
In theory, the argument to build software in-house (vs. buy) might seem like the right way to slash costs. However, admins just don’t have the same fundamental, nuts and bolts understanding of software; it’s always more complex and expensive than it seems.
George Michaels is the CEO of G2 FinTech and a frequently quoted authority on tax analysis of securities transactions. His firm provides tax compliance and regulatory software for the investment management community and his commentary has appeared in financial trade and major media publications. He regularly authors white papers and articles on complex tax issues and industry trends and proudly supports Hedge Funds Care.