Intermediary fees make up a significant amount of a mutual fund company’s annual expenses, with some totaling as high as 40%. Maintaining such a major part of a Profit & Loss Statement isn’t something firms take lightly, so as the complexity and volume of the fees have increased, operations teams are looking for new ways to streamline the invoice validation process and shift from the outdated, manual nature of Excel spreadsheets.
Whether it be on a monthly or quarterly basis, asset managers are consistently inundated with fee invoices, and operations teams must parse through each and everyone to validate that the invoice is correct and that it aligns with the intermediary’s particular agreement. Additionally, they need to be able to allocate the payments correctly and to be able to prove that to regulators as well as their own firm’s board of directors.
There are two main factors contributing to increased invoice processing complexity: Distribution in Guise and omnibus trading. In 2013, the SEC launched its Distribution in Guise initiative to inspect fee arrangements between fund companies and their intermediaries. In addition, the SEC is looking at how fund companies allocate the various fee payments. Under the rule, firms need to be able to prove to the SEC where the payments are coming from, in addition to completing TA-2 reporting that states, in aggregate, the amount of fees paid by the fund. While the guidance is straightforward in what it’s asking firms to report (12b-1 and sub-TA payments go to the funds, while revenue share is allocated to the fund distributor), the challenge with drawing these distinctions has become more difficult with omnibus trading. And while the rise of omnibus provided many benefits to the industry, the opacity that comes along with it makes it more difficult to separate out the fees and keep the process transparent for compliance teams, regulators and boards alike.
Aside from regulatory and industry pressures, it simply makes good business sense to ensure payments to broker-dealers and distribution teams are consistently accurate. Like power bills, these payments vary from month to month. Rather than blindly paying the invoiced amount, fund companies should ensure that these fluctuations are accounted for in their statements so they are not overcharged. Even a small variance makes a difference, and a mistake can result in a substantial fine in addition to the loss of revenue due to paying out unnecessary costs.
Elements of an Effective Fee Management Program
Three key processes make up the foundation of an effective fee management program. The first is running calculations to validate that the invoice is correct and matches with the assets on which they’re billing. In order to do this first step, the mutual fund company requires omni transparency data, which isn’t easy to analyze in Excel files. Since many still manually crunch these numbers, there is certainly an opportunity for optimizing this part of the process through automation.
The second is to conduct reasonability checks to affirm that the payment aligns with the intermediary agreement and prospectus. Not an overly complicated task in a vacuum, but when you consider that fund companies work sometimes with dozens of broker-dealers and distribution teams, the time required to manually pore through these adds up quickly.
Payment funding allocation and reporting is the third, and most critical, component of an effective fee management program. At the end of the day, fund companies have to prove to regulators and their boards of directors that the payments made to intermediaries are accurate and compliant. As fund companies work through omnibus accounts to distinguish between the intertwined 12b-1 fees, revenue shares, and sub-TA fees, the lack of transparency and manual processes make reporting correctly and consistently a major challenge and leaves the firm open to financial and regulatory risk.
Fee Management Demands a Robust Solution
At Delta Data, we’re seeing clients put fee management at the forefront of their operational efficiency initiatives now more than ever before. Fee management is worth getting right and was ripe for a technology overhaul driven by automation and smart workflows.
There are other solutions in the market that automate certain components of the fee management process. However, in order to effectively manage the countless invoices and improve operational efficiency, firms need to have a robust system in place that automates every step of the process. That is why we built Fee Manager and have committed to providing the level of automation necessary to help our fund clients stay ahead of the constantly changing nature of fee management.