By Simon Cornwell, a director at Saffron IOS:

The onboarding of individual private wealth customers is an area where significant advances have been made – mainly due to improvements in technology. The automation of once archaic, paper-based processes has increased accuracy and speed, and generally made the whole onboarding experience for the private client far less painful. The software industry has responded to the challenge and developed a plethora of highly effective systems. It must be borne in mind, however, that this is a different process, primarily associated with identity, money laundering and the avoidance of mis-selling.

Transpose that activity into the institutional world and a very different picture emerges. For most institutional asset managers, the whole onboarding process fills entire teams with a heady cocktail of dread and frustration. Onboarding mandates from pension funds and life assurance firms is still reliant on spreadsheets, manual processes and duplication of effort. The avoidance of costly errors is maintained by a small number of highly skilled, specialist staff with many years of experience in the onboarding field. Given that forms of automation have been successfully introduced into so many functions within investment management, why is this area of onboarding institutional mandates still so labour-intensive and fraught with risk?

The answer is complexity. If one studies a typical, high-level project map from an agency that places pension fund money, it begins with an RFP process before moving on to the IMA (the Investment Management Agreement - covering investment objectives, risk measures to be monitored etc).

This agreement is then signed off and the next item on the roadmap is ‘planning’ – one simple word that does an injustice to a great swathe of very intricate, sequential tasks that must take place before trading can commence.

Most medium to large asset managers (from £30-60 billion Assets Under Management (AUM) and over £100 billion AUM respectively) will have staff that deal with this ‘planning’ activity, drawn from the front office and operations, sales personnel (and product managers when the task involves launching funds).

The vast majority of this post-IMA work is conducted on multiple spreadsheets - and even some of the tasks handled during the RFP and IMA construction stages. There is therefore sometimes a problem with the information flow stemming from tasks associated with negotiating the IMA.

Product teams, sales and fund managers are all part of the process, but sales teams tend to be less interested once the mandate has been won, fund managers just want to get on with running the fund and the product teams will not necessarily have the full picture of the project.

Despite having an onboarding team, larger asset managers will nevertheless always rely on operations and other functional departments to complete their share of the tasks. In a heavily siloed organisation, this creates multiple points of failure. For smaller asset managers or hedge funds, there is generally better communication and clearer delineation of task ownership.

A lot of problems occur because information does not always flow down the organisation from the people who know. Compliance and risk rules might be put into the system incorrectly through miscommunication, as different people interpret the rules in different ways. Management fees is another area where interpretation can vary. For example, when bringing on mandates, is the asset manager

calculating the fees based on the value at the end of each month, or six months, or the average of those six months?

Asset managers also have to consider which markets they are trading in and which brokers (because the firm has to be authorised for every fund for each broker in order to trade with it).

Launching new funds

A similar problem exists in the area of fund launches. There are many different product types to consider, such as Irish, Luxemburg, US and UK Fund structures. Imagine a scenario whereby an asset manager is transitioning from UK fund structures to CCFs (an institutional tax-efficient fund structure) in Ireland, as part of the UCITS programme.

The first stage is to get regulatory approval for the business proposition. Then at the point of launch the asset manager may have multiple underlying funds being tracked on Microsoft Project as well as the main fund being managed by the product team on spreadsheets. A project manager has to list all of the tasks that need to be completed to ensure the fund is launched on time, including every department of the asset management firm within the plan just in case that team has a task to undertake. In a situation where the asset manager is outsourcing, the process gets even more complex.

This kind of confusion around who is responsible for which tasks is very common within large firms especially. There are usually weekly conference calls with the fund administrator and other third parties coming up to launch date, and daily calls to manage the overall project. Events and actions are being monitored on multiple spreadsheets by numerous individuals, who are also having to participate in all of these progress calls. Setting up funds also involves internal compliance systems, risk systems and so on – taking up valuable time for staff that still have to get on with their day job.

The major issue with this situation is workflow. Each individual breaks the project down into smaller tasks that reflect their own input but does not necessarily provide the detail in their project plans so that everyone involved can understand it. Fund launches can therefore be very elaborate, involving multiple parties (both internal and external) which then introduces a significant keyman risk and duplication of effort associated with all of the hand-offs in the process. The launch of an individual asset class alone might comprise between 70 and 100 different tasks, involving multiple recipients.

Complexities associated with outsourcing

Large organisations will often have outsourced as well as inhouse processes to control. Many asset managers will have an outsourced back and middle office and utilise an enterprise system for their trading and middle office. There might be several third parties assisting the asset manager with onboarding as well as a team dedicated to onboarding and fund launches.

During a fund launch, due to the fact that it is a customer of the custodian or fund administrator, the asset manager has some leverage or control over what is being done and when. When bringing in a mandate, however, the relationship is between the fund administrator and the asset owner; the asset manager has no control over timescales. There are huge communication issues surrounding when tasks are being completed, accounts being set up and so on.

From an audit perspective, in 2016 a new form of the AAF Assurance control reports for outsourced activities was introduced. This is an FCA requirement that acts as a control for monitoring an outsourcer or fund administrator. Running off spreadsheets makes this reporting very difficult because the asset manager has to compile every email, event or action concerned with the process and be able to evidence that they have control over that process with the third party.

Improving the onboarding and fund launch processes

How can the fund launch and onboarding process for institutions be improved? The first requirement is for a workflow management system that captures all of the tasks down to a low level of granularity. For example, in the area of documents, a draft IMA could be uploaded as an event and communicated with a third-party or internally. Similarly, fund supplements, prospectuses, KIIDs and so on would be in a central store with all of the other documentation related to that fund or mandate, with the associated security permissions. In this way the sharing of information would be vastly improved and controlled.

Within each task or event, holding the relevant metadata would be invaluable. This might cover data such as fees associated with various asset classes. For example, for UK equities, the asset manager could reveal the performance management fees and secure client approval or otherwise, via an automated, traceable email. Similarly, compliance rules could be captured so that they are easily understood and retrievable.

Messaging capabilities could be integrated between all parties, so that, for example, a third-party would receive an email saying ‘click on this link’ to enable the third-party to update the task without the need for a conference call. All the organisations involved (investment manager, client, fund administrator, custodian, broker, depository) could be set up in distinct communication groups by department, for the transmission of reference and other data. The correct legal names, LEIs and SWIFT BICS could be available for all to view in one location, avoiding the risk of new identifiers being introduced incorrectly.

Data from investment management and CRM systems could be drawn into the onboarding ecosystem via APIs. Metadata could be available so that the asset manager could set up the fund automatically via an API, along with the compliance rules and trading route.

Once the mandate sales process has passed (where access to certain data and documents are restricted as it could affect the share price), a top-down dashboard of all tasks could be viewable by all parties so that each department knows what it needs to do and the corresponding deadline. The use of templates would mean that different activities could follow the same basic procedure.

An automated onboarding process might help asset managers to win mandates. Firms have certainly lost institutional mandates due to their inability to onboard effectively and a bad reputation in this area travels far. Automated onboarding could therefore provide asset managers with more operational and audit control, less risk of missing regulatory requirements and help them to secure new business. It would also improve profitability: delivering the onboarding of a $100 million mandate by just one month could increase revenues significantly.

It's a heady cocktail of benefits.