WHITE PAPER ASSET MANAGEMENT MAKE OR BREAK FOR BOUTIQUES: TACKLING COMPLIANCE WITH TECHNOLOGY

WHITE PAPER ASSET MANAGEMENT MAKE OR BREAK FOR BOUTIQUES: TACKLING COMPLIANCE WITH TECHNOLOGY

Contents 2 Introduction entrepreneurialism under pressure 3 Compliance challenges for today s boutiques 4 Help is at hand the critical role of technology 5 Conclusion take a partnership approach to compliance and growth

Make or break for boutiques: Tackling compliance with technology 1 Is your operating model meeting your compliance needs? While boutiques remained most concerned about the Dodd-Frank Act in terms of overall impact, new regulations such as anti-money laundering regulations and the financial transaction tax were highlighted across the globe as growing areas of concern for boutique firms. Commission management is already a laborious process, however the process is likely to become more onerous from January 3, 2017 Changes to how commissions are both generated and paid for will require the buy side to account for what they choose to purchase and why, as well as manage the process efficiently. Again, larger firms will survive probably by employing their own analysts and by their ability to pay for research with hard dollars but the ability for small boutique asset managers to survive will be struck another blow. SOURCE: TABB GROUP: THE NEW BOUTIQUE ASSET MANAGER TRANSPARENT, EFFICIENT AND ACCOUNTABLE.

2 Make or break for boutiques: Tackling compliance with technology Introduction entrepreneurialism under pressure As regulatory change continues to sweep the global investment landscape, compliance is now the biggest make or break factor for boutique asset managers. With due diligence demands from investors also escalating, can the entrepreneurial spirit of boutiques survive and how might technology help? Boutiques are, by their own definition, highly entrepreneurial organizations. In a recent survey 1 of boutique asset managers around the world, entrepreneurialism emerged as the most popular way for firms to describe their activities, if not their raison d être. And with good reason: less encumbered by bureaucracy than larger players, they are able to act more quickly and exploit niche opportunities. By way of example, the analyst TABB Group has referred in research to an incident where One fund switched their entire Asian assets out to invest in US equities in one hit, something an institutional manager can only wistfully dream of. 2 Regulation, however, is putting boutiques agility and niche focus under threat and its impact is only intensifying. When asked by TABB Group, in 2014, what are the main factors that could make or break a boutique, 42% of firms named regulation, the burden of due diligence and compliance, compared to just 17% a year earlier. In the same survey, burdensome regulation was also cited as the main reason to pull out of investing in a certain product or region by five times more respondents than decreased investor appetite. 3 Concurrently, boutiques are under increased pressure to meet the specific due diligence requirements of investors. To attract assets and inspire investor confidence, it is critical for firms to demonstrate they are a sound investment opportunity, through stable infrastructure and transparent operations. In combination with the growing number of regulatory obligations, the rising need to achieve institutional credibility with investors ultimately makes it more expensive and difficult to launch and run an asset management business today. This, in effect, discourages the very entrepreneurialism that defines boutiques. The real cost of compliance Q. What do you see as the main factors that could make or break boutique firms in the next 12 months? MEETING COMPLIANCE REQUIREMENTS 2014 2013 To attract assets and inspire investor confidence, it is critical for firms to demonstrate they are a sound investment opportunity, through stable infrastructure and transparent operations. In combination with the growing number of regulatory obligations, the rising need to achieve institutional credibility with investors ultimately makes it more expensive and difficult to launch and run an asset management business today. Regulation, burden of due diligence Cost of operations Investor focus on historic returns Local or regional regulation related (administration) 17% 17% 15% 11% 14% 6% 9% 42% Ability to show institutional grade control systems 14% IT investment set up and development 6% 9% Staffing constraints Local or regional regulation (distribution/ asset raising) Managing fragmented global regulation in raising assets globally Other option 6% 2% 7% 7% 1 SOURCE 1: TABB GROUP: BOUTIQUE BUSINESS MODEL UNDER ATTACK BRUISED BY REGULATION, CRIPPLED BY COSTS? 2-3 SOURCE 2-3: TABB GROUP: THE NEW BOUTIQUE ASSET MANAGER TRANSPARENT, EFFICIENT AND ACCOUNTABLE

Make or break for boutiques: Tackling compliance with technology 3 Compliance challenges for today s boutiques While large asset managers must meet the same regulatory requirements as smaller firms, their scale makes it easier to absorb the inevitable costs. Solutions, nevertheless, are now emerging for boutiques. With innovative partnerships being formed between firms and their technology providers, how can new operating models help level the playing field and manage the following key compliance challenges? 1. Compliance across borders: keeping boutiques in their place One of the most negative impacts of regulation is on boutiques ability to move into new markets and extend their global footprint. In the aforementioned 2014 survey, compliance was named as by far the greatest challenge for expansion, by 40% of respondents followed by just 25% for raising assets. As a result, firms are tending to focus either on their home market or more accessible U.S. markets. 4 However, while this ostensibly safe, stay-at-home attitude may reduce the complexities and costs of compliance, it also ironically increases risk for boutiques. As TABB Group explains: The lack of diversification places more weight on risk management systems and their ability to pursue effective hedging strategies, keeping managers more exposed to central bank strategies, as well as raising the performance bar required to retain the initial investment. Lower volatility strategies are safer but also run the risk of lower alpha, making standout performances harder to achieve. 5 According to a recent TABB Group survey, compliance was named as by far the greatest challenge for expansion, by 42% of respondents followed by just 25% for raising assets. SOURCE: TABB GROUP THE NEW BOUTIQUE ASSET MANAGER: TRANSPARENT, EFFICIENT AND ACCOUNTABLE. Staying at home Q. What challenges are you now facing if you are expanding your footprint and product base?/ Staying at home Q. What regions do you currently trade in globally? 40% 84% 67% 25% 20% 20% 54% 47% 42% 42% 25% 8% 1 Reputation/ compliance Distribution/ raising assets Reputation of larger firms/ competition Other Technology U.S. Western Europe APAC Canada Emerging Europe Latin America MENA Other 4-5 SOURCE 4-5: TABB GROUP: THE NEW BOUTIQUE ASSET MANAGER TRANSPARENT, EFFICIENT AND ACCOUNTABLE

4 Make or break for boutiques: Tackling compliance with technology 2. Regional complexity: the cost of compliance in Europe Wherever they are located, boutiques are finding Europe an especially challenging market to navigate from a compliance perspective. In 2013 research, the Dodd-Frank Act was seen to have the biggest impact on business for 29% of firms. 6 Just a year later, the US regulation had been overtaken by Europe s Financial Transaction Tax (FTT) and Markets in Financial Instruments Directive II as primary concerns, for 24% and 22% of surveyed boutiques respectively. 7 With a multitude of exemptions and different rates, the proposed FTT in particular could be costly for funds to administrate and make the trading of European products a less appealing prospect for firms in other territories. Further challenges are also emerging in the form of forthcoming U.K. regulation on the use of dealing commissions to pay for research. TABB Group says: Commission management is already a laborious process, however the process is likely to become more onerous from January 3, 2017 Changes to how commissions are both generated and paid for will require the buy side to account for what they choose to purchase and why, as well as manage the process efficiently. Again, larger firms will survive probably by employing their own analysts and by their ability to pay for research with hard dollars but the ability for small boutique asset managers to survive will be struck another blow. 8 3. Faster settlement cycles: making time of the essence Compounding the compliance challenge is the fact that trade settlement cycles are moving gradually from T+3 to T+2, in Europe and beyond. With the aim of reducing the counterparty risk of unsettled transactions, 12 European countries switched to a T+2 settlement cycle in October 2014. Japan has been operating on a T+2 basis since 2012, and both Australia and the US are reviewing the possibility of shortening settlement times. China, meanwhile, has already implemented a T+1 cycle: an optimal solution in the eyes of many regulators. As settlement cycles continue to gather speed, so a wide range of supporting processes will need to occur in a faster timeframe from trade confirmations to corporate actions. Manual processes are therefore becoming less viable, and highly integrated operations a necessity. According to TABB Group: With multiple source systems capturing differing information for any firm (trade booking systems, valuation systems and collateral management systems), the ability to efficiently collate, link and report multiple strands of information will be critical to deliver the right information to the correct location at the requisite time. 9 Help is at hand the critical role of technology As many boutiques are already clearly aware, technology can provide an important solution for achieving compliance and managing risk. In a recent Tabb Group report, more than half of surveyed firms say they rely on technology to expand their product offering in terms of both assets and geography. However, the majority also feel that more could be done to automate processes in the form of one fully integrated, cost-effective solution. 10 A single technology platform for the whole investment life cycle is a critical first step towards supporting a more diversified range of investments within a complex, global regulatory framework. This in turn will make a defining contribution towards the operational stability, transparency and accountability that both investors and regulators ask of today s fund managers. For boutique asset managers, however, forward-thinking technology providers now offer more than automated straight-through processing: an operating model that directly addresses smaller firms need for cost-effective compliance. By outsourcing application management, infrastructure requirements and the handling of non-core business processes to an industry expert, boutiques can both streamline their operations and achieve scale, while concentrating on their own strengths as investment managers. More than half of surveyed boutique asset management firms stated they rely on technology to expand their product offering in terms of both assets and geography. However, the majority also feel that more could be done to automate processes in the form of one fully integrated, cost-effective solution. SOURCE: TABB GROUP THE NEW BOUTIQUE ASSET MANAGER: TRANSPARENT, EFFICIENT AND ACCOUNTABLE. 6-10 SOURCE 6-10: TABB GROUP: THE NEW BOUTIQUE ASSET MANAGER TRANSPARENT, EFFICIENT AND ACCOUNTABLE

Make or break for boutiques: Tackling compliance with technology 5 As TABB Group elaborates: Historically, the once proverbial asset management Goliaths held a significant advantage in being able to spread increased compliance costs across a large revenue base. Greater scrutiny of asset management firms, together with the growing complexity of compliance, due diligence and regulation, continue to burden smaller players to a greater extent due to their lack of people, processes and administrative firepower. However, the ability to outsource creates an opportunity to circumvent these obstacles, provided third-party providers focus on flexible and cost-effective technological solutions to level the playing field. Achieving critical mass may still be essential for the long-term viability of funds, but technical solutions have the potential to offer smaller firms the ability to punch above their weight in terms of geographic reach and product scope. 11 Conclusion take a partnership approach to compliance and growth In the new, more complex and regulated world of asset management, partnership is key to the continued success of smaller firms. Today, the evolving relationship between boutiques and technology providers is driving more market players towards alternative deployment models such as business process outsourcing and managed services. Through a technology partner, a firm can now access a core investment platform as a turn-key solution, covering a full range of asset classes and front- and middle-office functions. This empowers it to focus on generating returns and expanding its business rather than managing and maintaining technology. Such services and technology partnerships are not only becoming more mainstream but also more affordable. What is more, their scope is broadening to embrace more sophisticated capabilities, including advanced risk modeling and business intelligence solutions. As a result, boutiques can more easily gain the institutional-grade, highly automated, wholly transparent operations they need to support diverse portfolios and profitable growth while consistently ensuring regulatory compliance. Historically, the once proverbial asset management Goliaths held a significant advantage in being able to spread increased compliance costs across a large revenue base. Greater scrutiny of asset management firms, together with the growing complexity of compliance, due diligence and regulation, continue to burden smaller players to a greater extent due to their lack of people, processes and administrative firepower. However, the ability to outsource creates an opportunity to circumvent these obstacles to level the playing field. Achieving critical mass may still be essential for the long-term viability of funds, but technical solutions have the potential to offer smaller firms the ability to punch above their weight in terms of geographic reach and product scope. SOURCE: TABB GROUP THE NEW BOUTIQUE ASSET MANAGER: TRANSPARENT, EFFICIENT AND ACCOUNTABLE. 11 SOURCE 11: TABB GROUP: THE NEW BOUTIQUE ASSET MANAGER TRANSPARENT, EFFICIENT AND ACCOUNTABLE

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