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Fund Research Governance: is ‘fine’ good enough?

Written by Laura Bampfylde, Director, Global Assets – Wealth, at Redington

One of the most enlightening books I’ve read was written by husband-and-wife psychologists, Alan and Barbara Pease, called Why Men Don’t Listen and Women Can’t Read Maps. It explores evolutionary differences between (neurotypical) male and female brains. There’s a section on language and, notably, the difference in perception of words like ‘fine’.

For example, ‘fine’ may have positive connotations in the context of ‘fine wine’, ‘fine dining’ or ‘fine art’, but less so if one says, “You look fine, darling!” or “I’m fine”.

So maybe it’s just my brain, but during conversations we have with wealth managers and financial advice firms about their fund selection processes, I’m always surprised when they say that the technology they use to aid research and oversight is ‘fine’.

In May, we worked with NextWealth on a study exploring the technology being used by firms within their investment propositions. This broad remit covered everything from platforms to quantitative fund data tools and order management systems. Technology was noted as one of the biggest challenges firms face while growing their businesses, maximising efficiencies and minimising risk – ultimately, they need to keep pace with client and industry expectations. So why was ‘spreadsheets’ one of the most frequently named technologies across the report?

Ctrl+F

When it comes to tracking investment decision-making, the report corroborated what I often hear in the market; the most used tools are still Excel, Word and Sharepoint. It’s a perfect example of ‘we’ve always done it this way’, coined the most dangerous phrase in our language by Rear Admiral Grace Hopper. It may appear sufficient in a BAU environment, but the flaws in an unevolved setup can really start to show when scrutiny is placed on the decisions themselves.

For example, let’s say a fund that’s on a firm’s approved list and held within client portfolios falls suddenly and publicly out of favour (it does happen!), the firm’s compliance department and boards will likely have questions: When did the research team first have concerns? What questions had they asked the fund manager? When did they take action?

If the records relating to the decision-making are stored unsystematically across emails, Word documents and Excel spreadsheets, collating a response could take weeks – weeks of “Ctrl+F”, trawling through notes to try and untangle years’ worth of dialogue and communications. And an internal review is one thing – but what if it’s a client or the FCA asking the questions?

Whatever the context, good governance and record-keeping always feed into a sense of trust, which is often cited as the number one reason clients value their financial adviser. And today, better data, powered by a specialist tech solution, can be a powerful tool for bolstering those processes.

The majority of firms we speak to do have robust fund research processes that could only be described as ‘excellent’. They screen a fund universe of thousands, narrow them down to a shortlist, meet and scrutinise the shortlisted fund managers and have investment committees debate and ratify the ultimate fund selection. Clients can have complete faith in the intellectual capital behind their portfolios.

However, the recordkeeping – capturing the qualitative reasoning behind how they got from a shortlist of 50 fund options down to the final one or two, the minutiae of the decision – is usually only ‘fine’.

The NextWealth study I mentioned earlier found that the most common place to store investment decisions is in the minutes of the investment committee meetings. Firms said that recommendations to change a holding or rating for a fund would need to be made by the investment committee, and the minutes are where decisions and their rationale are tracked. But whilst this might do the job, it’s not futureproofed. Why search through file after file because you can’t remember in which month’s meeting that particular discussion was had?

The technology exists to surface this information at the click of a button, track through to when changes were made in portfolios, and trace the impact on subsequent performance – so why aren’t firms using it?

Is ‘good enough’ good enough

I come back to the meaning of ‘fine’. The Oxford dictionary offers two definitions: of very high quality – adjective; or, in a satisfactory manner – adverb. What does it mean to you?

The wealth management industry is going through a state of change, with consolidation, a new generation of investors to engage and an ever-changing regulatory landscape among the key factors. New technologies exist to help with many of these, but which should you choose, and in what order?

Many processes within firms’ investment propositions need wholesale change to keep pace with client expectations and growth ambitions, but many are are ‘good enough’. I argue that these are the ones you should tackle first, making improvements to, and systematising, an existing well-oiled process.

Workarounds and ‘it’ll do’ when it comes to the governance and record-keeping of fund selection, one day, won’t do. And the opportunity exists today to capture better data with purpose-built technology, and to use it to power more efficient research, audit-quality oversight and more informed decision-making. Let’s stop using ‘fine’ in this context, and strive for better.

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