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Meeting the Needs of an Industry via Innovative Software Products: Mandates versus Evolution – Part 2

Meeting the Needs of an Industry via Innovative Software Products: Mandates versus Evolution – Part 2

This is the second part of a two part posts concerning risks associated with developing new software products under two different scenarios: mandates and evolution. In the first part we discussed developing products due to mandates; in this second part we’ll explore developing products due to industry evolution. This discussion will be supported with examples of actual Delta Data Software products.

The Product Based on Industry Evolution

Sometimes new product opportunities arise as the industry evolves. These opportunities are more problematic as there is no deadline to have a system in place.

Unless you have been living under a rock the past decade, you are aware of the move from fully disclosed, networked mutual fund accounts to omnibus accounts at the fund. In the last 10 plus years, there has been a movement by the broker dealers, as well as bank trusts, to trading in omnibus accounts. Even 401(k) recordkeepers have moved many plan level accounts to super omnibus accounts at fund, where plan level accounts are rolled into a single account. The move to omnibus accounts has changed the way business is done and has also brought on some new challenges for both the funds and the distributors of those funds. One of those challenges for fund companies concerns oversight of their distribution partners.

Before omnibus, funds could see the detailed transactions for purchases and redemptions coming in to their TA systems. They knew how many accounts held positions in their funds. They knew what states the transactions were taking place in. They could even calculate and pay out the 12b-1 fees and revenue sharing fees based on their TA positions and transactions. With omnibus accounts, everything became very opaque. This required new approaches to making sure the firms distributing their funds were complying with prospectus rules and that the firms were correctly billing the various fees the funds owed the distribution firms.

The movement to omnibus has been gradual, and has occurred over a number of years, one large brokerage firm after another falling like a series of dominos. Now most all the large brokerage firms and large bank trusts are trading in omnibus accounts at the fund. Fund companies initially used Excel spreadsheets to help manage the various data sets and responses to questionnaires they were receiving from the firms. Then some of the more advanced funds moved the data to relational databases and created new reports to help manage the process.

At the end of the day however, most fund companies ended up with a hodge podge of spreadsheets, databases and documents scattered around the company. This approach became increasingly difficult to update and utilize effectively. Consequently some fund companies began the search for a product that could bring all this data under one roof. They sought a solution that provided a centralized view of both the quantitative data as well as the qualitative data that when combined together, gave the funds what they needed to assess the risk levels of their distribution partners and map out their current and future roadmaps for monitoring their distribution partners.

Delta Data was fortunate (Lady Luck) in timing the development of our Oversight product, Deal Manager. If we had developed it when the ICI first published version 1.0 of the Financial Intermediary Controls and Compliance Assessment (FICCA) in 2008, we would have been too early. It took the industry a few years to adopt the FICCA framework, and the release of Version 2.0 of the FICCA in 2014 really helped the industry move forward in the defining of a good oversight program. Our July, 2015 release of our Oversight application turned out to be excellent timing, as it coincided with the SEC’s release of the results of their “fee sweeps,” something no one could have predicted.

So the real risk in building a product designed to meet the needs of evolving changes in the industry has to do with the timing. At what point do you make the decision to build? Remember that a new product build out can take anywhere from 18 to 36 months to develop and rollout, depending on the complexity of the application. Build too early, and you get no takers. Build too late, and someone beats you to the market and captures the all-important market share. Don’t build at all and after a few opportunities pass you by, and you become irrelevant as an innovative software products company.

As I referenced in the part 1 of this post, the risk of being a software products company is similar to that of a riverboat gambler. But when you time it right and bring real solutions that help solve real problems, it delivers a thrill that has kept us in the game for 30 years and constantly looking out for that next opportunity.

Burton Keller

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