Deloitte survey reflects advanced state of preparations in Ireland for AIFMD
Regulatory change, cost containment, implementing of new technology, maintaining service quality and downward pressure on fees are the five key challenges facing the fund administration industry according to Deloitte’s Global Fund Administration Survey survey, writes BRIAN FORRESTER. To protect profits one in three administrators will look to charge for 'add–on' services while 60 per cent are looking to cut costs by at least 6 per cent.
According to the results of the fourth Deloitte Global Fund Administration Survey- regulatory change has come first in a list of five key challenges facing fund administrators globally. The survey was the first of its kind to include hedge administrators from North America and the Caribbean as well as Europe.
Other key challenges identified by fund administrators were: cost containment, the implementation of new technology, maintaining service quality and the pressure on fees. Trailing these urgent topics are others that come as no surprise, including: managing growth, the ability to support more complex asset classes and fund structures, and juggling the increasing client demands.
No matter the geographical location or size of the respondent’s organisation, the single biggest issue facing the industry as a whole is regulatory change. In fact, 65 percent of respondents identified regulatory change as their greatest challenge. Given the breadth of new regulations - and prospective regulations - it comes as no surprise that this has been identified as the greatest challenge.
The EU Alternative Investment Fund Managers Directive (AIFMD) generated significant debate from its publication in April 2009 to political agreement in late 2010.The industry now awaits finalisation of the Level 2 measures expected in November 2011.
'Offshore' survey respondents - those based in Cayman, Guernsey, Jersey, Bermuda, and the Isle of Man - were twice as likely to see the AIFMD having a significant impact on their business when compared to the 'onshore' jurisdictions.
Irish respondents were significantly more positive about the impact of the AIFMD. This perhaps reflects the advanced state of preparations for the AIFMD in Ireland and the fact that the Qualifying Investor Fund (QIF) provides a regulated solution under the new regime.
The rollout of other regulations, specifically UCITS IV and the Securities and Exchange Commission (SEC) Custody Rule, are not seen as significant developments for the administration community even though they are undoubtedly high priority for asset managers. Administrators will need to stay on top of changes in their clients’ requirements and meet new data delivery and reporting requirements under these regimes. This is particularly true for FATCA, which presents significant challenges for all parties.
Although regulation is the number one issue facing administrators today, Figure 1 illustrates that several other pressures are squeezing administrators and are seen as significant for more than 40 percent of respondents. All of these issues are linked.
Service quality and technology
When the markets crashed in 2008 and 2009, many administrators felt the impact quite starkly. As assets under administration fell so too did administration fees, which were largely based on a percentage of those assets. Administrators had developed infrastructures and staffed their organizations to service higher levels of assets.
The new asset levels did not support the increased cost structures and some difficult decisions had to be made. In many cases, headcount had to be reduced and planned technology capital spend was deferred; for administrators however, the workload increased. These challenges required administrators to quickly adapt their operations to maximise efficiency and take an innovate approach to expanding their service offering. These new models often involved more streamlined processes and the efficient use of information technology.
The services that clients request from administrators are also changing with the new investor model. Today’s clients demand middle-office services, risk reporting, and an increased level of transparency. These services will, in time, become core services; therefore, administrators must become more innovative and provide these additional services to maintain their client levels.
Hedge fund administrators still face pressure to deliver more services for lower fees. In the alternatives area, Hedge Fund Research recently reported the global hedge fund industry exceeded $2 trillion for the first time in its history.
The administration market remains very competitive and while only one in five administrators in our survey view increased competition as a major issue, a similar number see industry consolidation as a significant concern. For every merger of administrators, there is disruption in an already fiercely competitive market.
To address the issue of fee pressure, we asked administrators if they saw any changes to fee models in the future. One in three responded that they would look to charge separately for 'add–on' services.
Furthermore, we have seen a move to more detailed service level agreements setting out what constitutes core administration services. Twenty percent of respondents plan to increase minimum fees charged - no doubt preceded by challenging conversations with their clients.
Notwithstanding fee pressure, 95 percent of respondents predicted positive revenue growth in their business in 2011, which is a reflection of the anticipated growth in assets under administration and positive endorsement of the asset servicing industry’s prospects moving forward.
If fees continue to be squeezed, administrators must continue to look at their cost base - our survey shows some ambitious cost-management programs being implemented in 2011:
- 40 percent of administrators are looking to take 6 to 10 percent off their cost base
- 20 percent are looking for greater than 10 percent
- 5 percent are looking for in excess of 20 percent
To achieve this, we have seen an increased use of offshore resources as well as consolidation of complex processes to onshore centres of excellence. What other initiatives are administrators employing to reach these goals?
A majority of administrators have made significant progress in the areas of staff development and process standardization. However, more than 45 percent of respondents intend to invest significantly in enhanced data integration and connectivity, the automation of manual processes in an attempt to drive down cost, manage operational risk and provide the enhanced services their clients expect.
The demands on fund administrators have increased over the past two years. As the marketplace continues to evolve, a new regulatory environment takes shape and investors demand more transparency and the timely delivery of information.
The challenges facing the fund administration industry today are likely just a precursor to the long-term challenges many experts anticipate. Administrators will be forced to continue developing innovative service offerings to address their clients’ needs and to meet the new regulatory regimes as they come into force. They will do so in the face of ongoing pressure on fees, although some flexibility in fee charges is anticipated, alongside some growth in assets under administration.
That 95 percent of respondents expect revenue growth in 2011 is a positive statement of intent from the administration industry to meet these new challenges head on and to continue to evolve to meet the new demands placed on them.
We received responses from 70 administrators, based in 11 countries. Although all respondents provide third-party fund administration services, the profile of respondents’ businesses varies:
- Fifty two percent work with more than $10 billion of assets under administration
- Thirty five percent administer between $1 billion and $10 billion
- Thirteen percent of respondents administer less than $1 billion of assets
Brian Forrester, partner, Deloitte.
This article appeared in the October 2011 issue of Finance Dublin.