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Fund Accounting Efficiency - Interview, Geoff Hodge, Milestone

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ISC Chronicle Interview with Geoff Hodge, CEO of Milestone Group

Milestone Group pControl Funds Processing

In this article we interview Geoff Hodge, the CEO of Milestone Group and discuss some of the challenges facing the fund accounting and funds processing industry. Milestone Group specialises in the application of advanced investment technology to support clients globally in the automation of complex and business critical functions relating to fund accounting, process control and investment analytics. Geoff Hodge is the CEO of Milestone Group and has 25 years experience in the financial industry with specific focus on automation of complex tasks across traded instruments, fund accounting, custody and transfer agencies.

We have focussed on Milestone Group’s pControl™ product that provides an enterprise level Funds Processing solution and gives clients the opportunity to automate complex fund accounting and investment related functions.

What are the main functions provided by pControl and how do these functions compliment the Investment Managers operating model?

The key functions of pControl include NAV production, validation, control and dissemination, unit pricing, cash allocation and rebalancing across unitised fund structures, reconciliation, management of unitised orders and income distributions. Traditional fund accounting and processing solutions typically expect calculation and reporting to be undertaken by fund accountants and supported by traditional fund accounting systems. pControl represents a shift to a fully automated end-to- end fund process, where specialist fund accounting skills are able to be leveraged to deal with exceptions and new product related tasks instead of being consumed in day-to-day activities.

pControl can operate in conjunction with existing operating models and compliments existing core platforms and externally provided services.

Investment Managers and Third Party Administrators (TPA’s) are continually looking to improve efficiency and reduce operational risk. How does pControl assist Operations Management achieve efficiency gains and reduced risk?

In our view, pControl represents the first real application of production management science to this area of the investment management industry. It is popular for investment organisations to look to traditional workflow or BPM concepts to make incremental improvements to efficiency. This is tantamount to early stage automation in the manufacturing industry based on the concept of specialisation of labour with assistance from automation via a ‘conveyer belt’ mentality supported by a labour force.

pControl embraces modern production management techniques based on a design where the automated production line produces units of output in an efficient and controlled manner, and where labour is notified and engaged only where there are exception conditions that require manual intervention.

Milestone Group understands that bolting together transaction management, investment accounting and fund accounting applications leads to inevitable duplication of functionality, process inefficiencies and increased operational risk. The pControl approach addresses these issues at a very fundamental level.

Apart from the usual set of functional questions, RFPs are asking more and more searching questions with regard to the Total Cost of Ownership, how software helps reduce risk and increase transparency. How would Milestone approach and answer such questions?

This is a very key concept and one which is attracting an increasing level of interest in the investment market. Operational efficiency is key to unlocking economic benefit that can ultimately be passed on to the end investor. The ability to deliver a lower total cost of ownership to our clients is an absolute pre-condition to clients’ ability to maintain margins and to pass a lower cost of ownership, or cost of investment administration, to the end investor. One key efficiency ratio we focus on is the number of funds or NAV’s/unit prices calculated per fund accountant. Benchmark figures for this ratio have historically been around 10 funds per accountant for a typical manager, and higher than this for simpler fund structures. Evidence from recent client case studies suggests that pControl can challenge these ratios, dramatically improving NAV’s/unit prices per fund accountant. In addition, pControl directly addresses reduction of operational risk via simplification of the operating model and supporting application architecture. This can be measured in terms of failure point analysis focussing on metrics around the number of data movements, reconciliations and manual hand-offs. Transparency is also directly addressed from a design perspective by providing direct drill through to process status, audit history and underlying data and algorithms used to calculate outputs.

The successful software providers have understood that their applications must provide a solution to the Investment Managers requirements. This has developed into the concept of the Middle Office Utility. To what degree does pControl offer the management oversight and dashboard views typical of the controls found in such utilities?

In embracing the broader set of production management principles, pControl provides native support for comprehensive production control through the use of dashboards that are able to represent process status, output status and quality and also a prioritised view of items requiring supervisory or management attention. It is often the case that ‘workflow’ solutions provide a partial picture of process status, but are unable to provide a comprehensive and integrated view directly into the production world. pControl provides powerful visualisation and escalation of process exceptions that are not abstract from underlying processing systems. This presents a transparent view enabling users to focus on exceptions and timely escalation and resolution of issues.

Proactive Exception Notification & Escalation Diagram

What benefits does pControl bring to the TPA who has to provide a truly multi-client operating model for its clients?

Client feedback suggests that it is unusual for a process control system to have been specifically designed to support TPAs with a native multi-company and true global operating capability. pControl is designed to provide direct benefit to clients of any size or operating model. The economic benefit of using pControl generally increases in proportion to the scale of the business and is therefore very relevant to TPAs. It is significant that third party administrators feature heavily amongst Milestone Group’s clients alongside asset managers, life companies and investment platforms.

A recurring issue for Fund Accountants is how to manage fund-of-fund hierarchies for unitised pricing structures and associated look-through valuations. How does pControl assist the Fund Accountant in this regard?

This is a core capability of pControl. Transparency through the fund hierarchy is becoming more and more important. Regulation is demanding increasing detail regarding investment relationships, the granularity of holdings and related processing activities. pControl can represent fund structures with any number of levels or indeed, classes per fund; each fund entity within the pControl product hierarchy has knowledge of its asset and liability relationships and supports the ability to ‘look through’ the fund structure from any level. This provides a powerful and highly simplified mechanism for managing fund hierarchies and the ability to support multiple business functions across geographies and jurisdictions. pControl is specifically designed to deal with complex interfunded structures and is not a technology designed from either accounting or transfer agency perspectives that is being ‘stretched’ into the complex area of product management. pControl supports any interfunded product structure including life company, fund of fund, hedge fund of fund, multi-manager, product platform or other forms of fund hierarchy.

The NAV and fund pricing process should be and is littered with control processes and tolerance checks. Does pControl provide an automated solution for these checks and balances?

pControl delivers an holistic approach to managing the end to end NAV process. This includes asset level validations, day on day price NAV movement analysis and automated authorisation and dissemination of NAVs and related data within target SLAs.

It was our goal to provide an application that unified core fund accounting and transactional capabilities integrated with a holistic end-to-end process capability. pControl provides the ability to undertake a ‘deep integration’ with upstream processes including trade capture, corporate actions, reconciliations and price scrubbing to support ‘one-touch’ fund accounting, where enquiries can be serviced out of a single pControl user interface. We believe this approach has the capacity to replace multiple projects that are typically undertaken to deal with work-flow, validations, dissemination and other elements of the end-to-end process and discrete activities.

The methodology behind the construction of NAVs and fund prices is not a constant science. Different tax and fee structures between fund types and across geographies re- quire a great deal of flexibility in these calculations. Does pControl provide this flexibility?

pControl’s architecture recognises the fundamental constant of change in both products and processes within investment markets. It is important to understand that pControl is specifically designed to be indifferent to variances in product structure across markets and geography. The consequence of this is that pControl’s rules capability generally deals with all market specific nuances and provides clients with the ability to add product or jurisdiction specific logic where required without the need to amend the underlying system.

The nightmare scenario for any Fund Accountant and COO is the realisation that there has been a material pricing error. Horror stories abound of late nights, extensive use of spreadsheets and a need to protect the reputation of the Manager. pControl offers an automated solution to the challenge of reworking a misprice, how is this achieved and can you relate any success stories?

pControl clients benefit not only from efficiency and control improvements in day to day processing, but also from the flexibility to address extreme events when they occur. pControl provides the ability to rerun and recreate unit prices based on a range of scenarios including amended data inputs and is able to do this multiple times per day. Rerunning pControl creates additional pricing runs that create and retain audit trails for original and replacement prices, supporting decisions and adjustments relating to public pricing information. Anecdotally, we have had clients identify pricing errors in incumbent systems and processes when utilising pControl in UAT or during the parallel run phase of an implementation – improving control before the system is even in production!

The tide of regulation continues to sweep in. The two most prevalent issues we as consultants experience at the moment are, Solvency II and UCITs IV. Do these two pieces of legislation provide challenges for Milestone Group, or opportunities for pControl?

Typically, regulatory calls for transparency arise where there is a concern about the ability to understand in detail what rules are being applied in investment structures that could ultimately impact the end investor. A core design principle of pControl is to make visible not only fund prices and related information, but also the data, business rules and algorithms that were used to construct these outputs. It is a natural extension of pControl’s current functionality to capture UCITs related Compliance rules and apply them to data that may already be held in pControl where it is undertaking other fund processing activities.

In our experience, this principle will continue to support the requirement for transparency of underlying data calculations with regard to solvency rules, and support issues relating to anticipated fund consolidations as a result of UCITs IV.

What are the future functional challenges that you see pControl facing and how will Mile- stone address these challenges?

Milestone Group’s philosophy is to deliver additional pControl functionality into areas that clients perceive to be of value. From a functional perspective, Milestone Group is currently rounding out fund related processing functionality relevant to our target markets including fees and rebates processing, income distributions, accounting and reporting. We are also looking at further reporting and compliance initiatives, as well as direct instrument processing. pControl has been specifically designed to provide a holistic framework that does not need to be re-engineered as we add core functionality.

Our view is that current fund accounting business models and supporting solutions are not fundamentally scalable (in terms of unit cost). Milestone Group will continue to pursue an approach that delivers new market standards of efficiency and control, and which progressively address the full integration of investment accounting, fund accounting and middle office capabilities into an integrated platform.

This will have material unit cost implications and change the ground rules for operational risk, integration effort and service agility from an end client perspective.




Interviewee:

Geoff Hodge Portrait Geoff Hodge
Chief Executive
Milestone Group

Geoff has over 20 years of experience in Australia and internationally in the development and management of operations and technology for large financial services businesses. Geoff is responsible for ensuring that Milestone Group is correctly positioned to deliver applied innovation to clients through its technology offerings. He was previously Director of Operations and Technology and a Board Member of Rothschild Australia Asset Management with responsibility for company-wide technology support.

Prior to that Geoff had global responsibility for operations and technology delivery as an Executive Director and Board Member of a leading global bank in London, and as Head of Regional Operations based in Tokyo.

Geoff’s career has been spent pioneering and delivering major change in Regional Processing Hubs, Straight through Processing, Production and Risk Management, Service Improvement and Decision Support.

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