What Keeps Alternative Investment Professionals Up at Night?

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The profile of alternative investments like hedge funds, private equity funds and real estate funds has risen dramatically in just the past five years, with a growing number of investors dipping their toes into this particular category. And this interest has pushed this once obscure class to become the fastest growing category of investments, with $18 trillion projected to flow into it by 2020.

This elevated importance has raised the stakes and pressure for key industry stakeholders, with the most obvious being the private fund managers that run the aforementioned alternative investments. However, our perspective is that the stakeholder most strongly feeling this pressure is the fund administrator that services both the private fund manager and the investor.

We find that fund administrators are under-appreciated and under-estimated for the critically important role that they play in the alternative investment industry. They are often the primary source of information and operations for the fund manager, and they are typically the conduit for the investor to be able to see and receive key information about the fund.

As these pressures continue to mount, fund administrators in particular are faced with the daunting task of keeping up with the rapidly changing landscape of the alternative investment industry, and then figuring out what they can do to succeed.

Let’s break this dynamic down into two areas:

Key Challenge
Regulatory and operational concerns have skyrocketed from being nearly non-existent just a few years ago to becoming the primary concern and challenge for both fund administrators and private fund managers. It is literally keeping these stakeholders up at night.

Multiple industry reports point to this, but here is a chart that comes from Linedata’s 2016 Global Asset Management & Administration Survey, which shows just how serious these concerns are:

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Just to reaffirm the impact of regulatory and operational concerns, notice that regulation and operations were considered more important than other seemingly critical concerns like fund performance and investor/client relations!

What can fund administrators do to succeed?

  1. Attack Regulatory and Operational Concerns: Fund administrators should look to technology to help them tackle the regulatory and operational concerns that are keeping them up at night. Begin by attacking regulatory and operational concerns. Technology can help a fund administrator better adapt and more quickly comply with new regulatory and compliance requirements. Progressive software solutions can help a fund administrator “project-ize” regulatory compliance by providing intuitive and transparent workflows that help them better collaborate with clients and investors, assigning a particular task to a particular person, and tracking the completion of each step in a way that is visible to all participants. Email notifications at appropriate moments along the way prompt the assigned person to know that an action needs to be taken. This type of digital collaboration greatly reduces operational efficiencies, including the back-and-forth communication that currently happens via email, electronic file folder systems and phone calls.
  2. Differentiate Themselves Through Client Service: Technology can also help a fund administrator dramatically improve its service to both its fund manager clients, as well as to the investors of its clients. Intuitive portals for both clients and investors that provide useful performance dashboards, as well as easy-to-use digital document storage and sharing, go a long way towards improving the fund administrator’s quality of service.

What’s keeping fund administrators up at night? It’s the fear of the unknown with the ever-increasing regulatory and operational pressures, as well as the fear of losing their clients and investors as a result of poor service.

Using modern technology can be the answer to a good night’s sleep for fund administrators. There’s a quote from the Linedata report that put it best: “Now is the time to embrace digitization to gain competitive advantage in this dynamic market.”

A Fear of Missing Out

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Recently, I had the opportunity to spend time with some of Deloitte’s most senior team in both New York City and at the White House Fintech Summit in Washington, D.C. Together, we explored issues on the minds of many bank executives today; namely, how banks should approach corporate innovation and work with fintech companies. Certainly, collaboration between technology companies and traditional financial institutions has increased — think proofs of concept, partnerships and strategic investments — but much still needs to be done.

From my perspective, the evolution of the banking world is first and foremost a business issue. Historically, banks organize themselves along a line of products. There are banks such as Umpqua Bank, BankMobile (a division of Customers Bank) and Live Oak Bank that have oriented their operations around customer needs and expectations. However, these are more exceptions then the rule.

Consequently, as new technology players emerge and traditional participants begin to transform their business models, there is growing sentiment that successful institutions need to enable financial services for life’s needs through collaboration and partnerships with the very fintech companies that once threatened to displace them.

As Joe Guastella, global and U.S. managing director for financial services at Deloitte Consulting, shared, “incumbents can indeed thrive in a disrupted world. They can learn from history and be proactive in managing the change instead of being passive participants. But first they need to understand how fintech affects them before taking advantage of all the potential benefits fintech offers.”

Accordingly, here are three questions that I posed to Guastella and his colleagues that anyone responsible with growing and changing a bank needs to address.

Q: What do banks need to do so as not to be left behind?

Michael Tang, a partner and head of global digital transformation and innovation at Deloitte, believes institutions must “experiment with intent and purpose… avoid the Fear Of Missing Out (#FOMO) syndrome and investing and dabbling for the sake of it.” He is of the opinion that banks need to “take greater interest in the customer needs analysis from ethnographic research and behavioral economics.”

Thomas Jankovich, a principal in Deloitte and the innovation leader for the U.S. Financial Services Practice, echoed this. He opines that banks should work towards becoming platform based, data rich and capital light — with an infinite ability to scale. He challenges those senior-most bankers to re-think how their executives are educated, immersed and motivated to make bold decisions and take hold of the concept of “Platform as a Service.”

Q: How are some of the more successful financial institutions developing corporate and/or business-unit strategies to take advantage of digital opportunities?

Tang and Jankovich shared that the more progressive and successful banks are taking advantage of emerging opportunities in nuanced ways. For instance, they are:

  • Using a combination of supportive leadership providing the mindset, right incentives and performance metrics to truly support a digital business model;
  • Curating the right talent_ while leveraging the “buy, build, partner” model for capability; and
  • Retaining customers by providing an experience that includes usability, data analytics and competitor awareness.

Q: Should banks become more like tech companies?

Cathy Bessant, the chief operations and technology officer of Bank of America, recently opined that banks shouldn’t see themselves as fintech companies. She reasons that a bank’s customers have such high expectations in terms of reliability and security, that the “fail fast” mindset of many technology firms doesn’t jive with customer expectations. As she made clear, “the potential cost of failure at scale is something to be avoided.”

So with most everything technology-oriented coming back to continuity, security and third parties, one must balance the need for exceptional service with the push for change. According to Michael Tang, one needs “a portfolio approach and clear expectations on the purpose and roles between run and change.” By extension, in terms of corporate innovation, Thomas Jankovich believes that banks need to move beyond the concept of “Run the Bank / Change the Bank” to actually “innovating the bank” in order to disrupt itself.

Yes, banks will be challenged to meet the future expectations of their customers as well as to assess the additional risks, costs, resources and supervisory concerns associated with providing new financial services and products in a highly regulated environment.

Size and scale doesn’t have to be a drawback. It can, however, be an advantage in this environment.

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As a starting point for such an internal discussion, take a look at “Disaggregating Fintech: Brighter shades of disruption,” a report that looks at the the impact of fintech in six areas within financial services and across six business dimensions. Questions or comment? Email meat [email protected]