Bye-Bye Spreadsheet: Best Practices for Tracking and Managing Payments to Distributors
November 7, 2011
In today's complex distribution environment, mutual funds have fee arrangements with hundreds of third-parties that vary by product, platform and services provided. Complicating matters further is the continued adoption of omnibus accounts at brokerages, obscuring the underlying client and sales data.
Today, mutual fund companies' back offices, as well as their distribution partners, largely process intermediary payments manually using numerous spreadsheets and documents, which is both time consuming and error-prone.
However, forward-thinking fund companies and distributors are beginning to embrace more sophisticated and automated processes for generating, receiving and processing invoices. They are also using advanced database management and analysis to improve expense and income forecasting.
Going even a step further, compensation management solutions are uncovering the value/cost ratio of each distributor-and helping fund complexes more successfully pursue their most profitable distribution partners.
Money Management Executive recently hosted a live webinar to explore the challenges fund companies face with current intermediary payment processes, what can be done to streamline invoice reconciliations and payments, and how they are overcoming the transparency obstacles of omnibus accounts.
Apperaing at the live webinar, "Bye-Bye Spreadsheet: Addressing the Challenges of Financial Intermediary Payment Processes", at SourceMedia's New York headquarters were:
* Carol Denny, Director, Legg Mason Global Fiduciary Platform, Legg Mason
* Michael Interrante, Director, Finance Asset Management, Deutsche Bank AG
* Chip Miller, Executive Vice President, Access Data, a Broadridge company
* Robert Rokose, Managing Director, Head of Financial Strategy, Allianz Global Investors
Access Data, a Broadridge company, sponsored the Oct. 20 event, which was moderated by Money Management Executive Editorial Director Tom Steinert-Threlkeld.
Tom Steinert-Threlkeld: Payments to distributors constitute the largest single expense to mutual funds and often account for 25% of the total management fee. Why don't fund companies have a better handle on this critical area?
Bob Rokose: The overall process is very complicated-for all of the fund groups. It's pretty safe to say that each fund group has determined their own unique way of coming up with invoice reconcilement and payment, which are very complex and very time consuming.
Each month, we have to accrue our intermediaries' expenses, reconcile the invoices, get them approved and generate the payment.
It's all very manual and time intensive-and it takes a lot of money to run those processes.
Steinert-Threlkeld: So, are there as many reconciliation systems as there are investment advisors?
Rokose: There are reconciliation systems that are starting to come out now, but I would say for the last several years, it's been elaborate Excel spreadsheets.
Carol Denny: Part of the issues that we've seen is getting proper invoicing from different intermediaries, being able to validate their data, and being able to ensure that the funds are paying the proper amount.
As Bob mentioned, right now, the industry is currently using very elaborate Excel spreadsheets.
Anytime you're doing anything manually, there are errors. It's also difficult to report from spreadsheets when you have multiple tables and to carve out the type of reporting that needs to be done.
Steinert-Threlkeld: What's the worst spreadsheet-based error you've ever seen?
Denny: I've seen invoices come with a different company's funds on them.
Steinert-Threlkeld: I have heard about invoices that have gone out with a zero total. I don't expect that goes over well. But when it's done properly, there's $25 billion worth of these invoices being paid every year, right, Chip?
Chip Miller: The invoices funds receive result from contracts negotiated with distributors, each outlining different terms of payment.
With so much of the process still handled manually, the boards and the management company now want to have the confidence that these invoices correctly represent the sales agreements.
There are some automated systems now available, and Broadridge's is certainly one of them. We offer comprehensive, operational oversight for fund companies to help them better understand their relationships, as well as opportunities, with intermediaries-including compliance and risk issues.
So, technology is now starting to play more and more of a role.
But the technology requirements must ensure that the system contains the rules of all the agreements, so that the program can audit the accuracy of each transaction.
Steinert-Threlkeld: How do spreadsheets figure into the payment process, and what kind of data manipulation does that allow?
Denny: We typically receive our invoices either in hard copy or electronically. Many of the invoices that come electronically will be set up on an Excel spreadsheet, which does make it easier for us to check the calculations and apply the proper amount to the funds.
However, when it comes in hard copy, we have to manually enter everything into a spreadsheet.
The next step is to manipulate the data, which means applying parameters and caps to the funds.
Furthermore, analysis of expenses can be applied.