By Robert Proctor, head of product at Milestone Group
The $120 trillion global fund management industry has witnessed a dramatic surge in costs after a challenging years, outpacing revenues by over 20 times in 2023
Asset managers are now caught in a dilemma – balancing the need to curb costs while simultaneously boosting revenues. In this environment, no aspect of their operations can be overlooked, particularly those that remain heavily manual and under-automated, such as fair valuation pricing.
As a result, fund managers face an urgent need to rethink how they validate the prices of assets within their portfolios. And several market trends are poised to further elevate the cost of this process in the near future.
One of the most significant factors is the global shift toward tighter regulatory scrutiny of the fair value determination process and its associated risks. For instance, the SEC’s Rule 2a-5 mandates that investment companies report their fair value determinations, methodologies, and risks to their boards of directors at least quarterly.
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Furthermore, any material matters that could affect the fund’s fair value or net asset value (NAV) must be communicated in writing within five business days to ensure the board can provide proper oversight.
Similar regulations have been adopted or circulars published by several other market authorities, increasing the burden on firms, especially those operating across multiple jurisdictions. For instance, in Luxembourg the Commission de Surveillance du Secteur Financier (CSSF) earlier this year published a circular related to its valuation rules warned asset managers to up their game on asset valuation oversight.
Additionally, Australian Prudential Regulation Authority (APRA) has conducted reviews on the valuation of unlisted assets as part of its focus on financial stability.
All of this points to a growing concern of the valuation of private assets adding to the complexity of this already intricate process.
These regulatory pressures have exposed a critical weakness in the fund management industry – the lack of sufficient technological support and automation in fair valuation processes.
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Many firms still rely on disparate systems, spreadsheets, and manual processing to handle these tasks, leading to poor auditability and transparency. This makes it challenging to meet the rigorous standards outlined in regulations like Rule 2a-5.
A recent Deloitte survey sheds light on the extent of this issue. A staggering 95% of the 100+ fund management firms surveyed reported using spreadsheets with macros, queries, and pivot tables for most of their fair value oversight tasks.
Even more concerning is that only 31% of respondents reported using smart workflow management tools, which can streamline operations, reduce human error, and increase efficiency.
Without automation and centralized data systems, compiling, normalizing, and formatting the necessary reports for regulatory oversight becomes a costly and error-prone endeavour.
Fortunately, the emergence of innovative fair value technology solutions offers fund managers an opportunity to revamp this increasingly complex area of their business.
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By implementing more intelligent technology, firms can enhance efficiency, automate process management, and provide detailed audit trails to support compliance and reduced costs. This transition not only alleviates the workload on staff responsible for overseeing securities valuations and reporting but also significantly reduces the risk of errors.
As these technologies evolve, they are becoming a crucial tool for fund managers looking to reduce costs and improve profitability.
Moreover, automation facilitates better data centralization and integration, ensuring that all regulatory requirements are met with ease and accuracy.
Beyond compliance, these technological advancements offer the potential to streamline cross-border operations, simplify audits and regulator exams, as well as enable real-time decision-making based on accurate, up-to-date data.
As market trends continue to push costs higher, the firms that successfully adopt these fair value solutions will be better positioned to thrive in an increasingly competitive and regulated landscape.
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Additionally, these technologies offer fund managers a scalable solution for future growth. As funds diversify and the complexity of assets continues to rise—particularly in areas like private assets and alternative investments—managing valuation processes manually will become even more unsustainable and risk laden.
Automating fair value pricing and oversight helps firms stay ahead of industry challenges and respond more effectively to regulatory changes.
While the regulatory environment around fair value determinations has become more demanding, innovative technologies are emerging as essential tools for fund managers.
By leveraging these advancements, firms can not only meet the growing compliance requirements but also drive significant cost savings, increase operational transparency, and improve overall business performance.
As costs continue to bite, now is the time for asset managers to embrace these solutions and future-proof their operations.
