Surfacing and Addressing the Hidden Risks of Omnibus Distribution
Topics:
- Risk Gap applied to omnibus distribution (review) - Manual invoice processing overview
- Primary documents: Contracts and Invoices - Operational Risks in manual invoice process
- Payment risk - Cash flow risk - Audit risk
- Preview of Financial Risk session
Session #2 – Operational Risks
Central Premise of Webinar Series
Every market innovation (behavior change) creates a gap between existing practice, and new practice required to
service the “new norm”.
The larger (and longer) the gap, the greater the risk.
Omnibus distribution is a major innovation in how the
market behaves.
Intermediary compensation trend
2008 2011 2013 (projected)
Direct
(Compensation IS visible through TA system)
Omnibus
(Compensation is NOT visible for B/D,
insurance, DC channels)
Where is SubTA expense going?
Closer look at operational risks of manual contract and
payment processes
Risk Gap of manual payment processes
Manual processes for:
• Contract management
• Invoice handling
• Expense allocation
• Reporting
Risk Gap
Time
Omnibus Distribution (intermediary proliferation)
Today
Today’s Invoice Processing
Distributor #3 Distributor #2
FundCo Distributor
Internal Invoicing System
Sub-TA Platform Extract Data Required for Invoice Calculations
Manually Read Invoice PDFs
Distributor Payment Receipt
Fund Invoice Processing, FundCo #1
Manually validate against TA data.
Manual Lookup Contracts
Manually validate invoice against contract
Manually track invoice history
Manually generate payments
• Distributor calculates invoices
• Sends to fund company
High level risk factors – Distribution Relationships
Distributor compensation relationships…
…are complex
– Each block of assets can have multiple fee agreements – Each fee agreement can have multiple terms
…change over time
– Relationship managers introduce new distributors – Distributors acquire assets from other distributors
– Fee agreements change over time (typically increasing)
– Each agreement change has an “effective date” that should be reflected in invoices
– Gap between agreement and invoice creates “undiscovered liability”
…grow in number
– Anywhere from 20-100 different intermediaries per mutual fund
• Fee agreements are complex and variable
– No standard for defining agreements
– Written terms mixed with fee parameters
• Agreements change over time
– Distributor renegotiations
• Result: Paper document with signature
– Hard to access during manual invoice validation – Which is the “correct” version?
– Gaps between agreement changes and invoices create “undiscovered liabilities”
High level risk factors – Fee agreements
• Invoices are complex and variable
– Each distributor sends invoice data in a different format – XLS, RTF, HTML, XLSX, …PDF
– Bill Quarterly, Monthly, or Quarterly/Monthly
– Number of invoice files can vary from month to month
– All different ways of reporting data (AUM, # of subaccounts, fee descriptions, amounts)
• The actual format of data can change from month to month
– even from the same distributor within the same invoice
• Distributors change billing platforms
– Same assets, completely different invoice format – Invoice format can change without notice
• Final result after processing
– Invoice data scattered in a variety of different formats across directories – Makes reporting difficult
High level risk factors – Invoices
• Invoice validation and payment process is complex
– Not linear, multiplicative:
(Number of intermediaries) X
(Number of agreements per intermediary) X (Number of parameters/agreement) X
(Number of products distributed through the intermediary) X (Number of invoices received) =
(Number of invoice items to validate)
• Significant distribution payments…
…amplify the impact of any processing errors.
High level risk factors – Multiplying complexity
• Excel is the only operations tool
– Spreadsheet risk
• Lack of cross reference between invoices and contract parameters
• Each manual data touch involves risk of error
– Example: 65 page invoice with manual validation of each line
• Audits are a challenge
– Large volume and variation of spreadsheet footprints – No means to automatically cross reference payments to
contracts
• Operational risk will multiply…
…with complexity and
…invoice processing volume
Operational risk summary
Today’s Invoice Processing
First you have to find the right document…sometimes
in a box somewhere…and parameters change
Hundreds of line items to recalc, multiple different
agreements, different invoice formats that change
from month to month…really hard to do!
Who defines the rules about where payments should be allocated? Where are rules
recorded? Do rules change?
Hundreds of manual (XL) calculations which affect important flows of payments
to funds or
corporate…really hard to do!
Who summarizes all this data? Where is it stored?
Does anybody know how to find it but the person who updates the spreadsheets?
“Operations people who process invoices are setup to fail”
– Operations Executive
• It’s not the people doing the work that are the problem
– Highly complex, frustrating work with little upside
– Turnover causes loss of valuable people and their knowledge – Compounds the risk problem
• The root problem is
– The industry has changed – Invoice processing has not
Risk factor – Invoice processing is not career friendly
What force will cause the change in processes?
Manual processes for:
• Contract management
• Invoice handling
• Expense allocation
• Reporting
Risk Gap
Time
Omnibus Distribution (intermediary proliferation)
Today
What force will cause the correction of business
processes to close risk gap?
Industry is now in
“Risk Gap”
Preview of Financial Risk Webinar
• Need clean data to analyze, monitor and manage SubTA expenses
• Uncovering risks buried in the invoices
– B/D as custodian for TPA assets. Getting billed twice for same assets?
• Need to control SubTA expense impact on fund performance and expense ratio
– The critical importance of consistent expense allocation – How to cap expenses going to the funds
– Closing the loop of financial risk
• Need to improve financial performance through continuous monitoring
– Identify underwater assets
– Evaluate intermediary performance (overall revenue generated vs. payments) – Evaluate contract effectivity (contract specific revenue vs payments)
