Managing Big Data: A Big Problem for Brokerages


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Reliable mutual fund invoicing and analysis has been challenging the industry for years due to the regulatory environment and other factors, and in this report we explore key concerns, current approaches, and the way forward. Based on in-depth interviews with financial services executives, this paper uncovered the significance of a data management and analytical challenge facing brokerages, which has led to lost revenue, increased compliance and reputational risk, and lost sales opportunities.

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Managing Big Data: A Big Problem for Brokerages

  1. 1. ManagingBigData: ABigProblemforBrokerages Reliable Mutual Fund Invoicing and Analysis Challenges the Industry In association with Patpatia & Associates
  2. 2. ©2012 Broadridge Financial Solutions Page 1 BIG DATA: A BIG PROBLEM Introduction – Distributors Face Information Overload The mutual fund industry is one of the pillars of the U.S. investment industry, helping around 90 million U.S. retail investors invest over $13 trillion in a range of equity, debt and other markets. It is a structurally complex industry with hundreds of firms manufacturing large families of mutual funds and channeling them to investors through a diverse set of distributors including major brokerages, independent broker-dealers, retirement plan providers, banks and insurance companies. Distributors face some major challenges managing the mass of information created by these transactions – essentially an information overload that makes it difficult to derive critical business insights. The distribution business involves selling a large range of investment products – each mutual fund is available in multiple share classes – to thousands of customers, and then determining the compensation due from each mutual fund for each sale. This challenge extends beyond mutual fund sales to other investment products such as annuities and ETFs. To run their business and accurately calculate revenue due, each distributor needs to track its investment sales and positions across multiple internal business channels and apply hundreds of selling agreements negotiated with mutual funds for a variety of fee arrangements. These agreements determine the level of direct and indirect compensation due to the distributor from each relationship and drive key compliance and disclosure requirements. Distributors also use sales and position data to identify their firm’s most profitable brokers or advisors, products and customer relationships, as well as industry trends. Over the last two decades, many distributors have taken more direct control over the customer relationship by creating an investment account for each customer and using an “omnibus account” for each mutual fund to manage the net aggregate demand for each product. This trend has turned distributors into critical players in terms of information flow, and has added complexity for them as their mutual fund partners require distribution information to fulfill important compliance obligations and understand where their products are effectively selling. Three key trends are now working together to make these information-related challenges even tougher to solve and more critical to success: • Crisis-driven changes in markets and regulation: The 2007-2008 financial crises altered the financial services landscape. Firms saw the value of client assets shrink dramatically with a parallel fall in the number of financial advisors – their primary means of attracting new clients. With cash flow and margins under threat, firms have been forced to look for new ways to compete and to cut costs, though many indicate that they have already made the “easy” savings. At the same time, regulation is continually evolving to protect investors in a variety of ways (e.g., from preventing market timing, to suitability and “know your customer,” and through the disclosure of fees with retirement plans); all of which obliges distributors to analyze and report on new sets of information, or look at data collected across the firm and from external sources in new ways.
  3. 3. Page 2 ©2012 Broadridge Financial Solutions BIG DATA: A BIG PROBLEM • Changing distribution models and multiple platforms: The face of distribution has changed in terms of the type of firm and business model. Brokerage firms, insurance companies, banks and independent advisors all market investments through sales channels ranging from traditional paper applications to a variety of brokerage and plan accounts. The industry trend towards fee-based, rather than commission-based business, and new forms of revenue sharing agreements, have further complicated the picture. Firms may no longer have a single view into their business. • Product complexity: The number and type of investment products has proliferated as firms migrate further towards an “open architecture” business model, under which firms sell large ranges of non-proprietary products. Firms need to manage more fund families than ever before, while new share classes and new types of product (e.g., the trend for packaged mutual funds, annuities and ETF products) add to the operational and compliance challenge. These trends are accentuating a critical information challenge for most distributors – a challenge that runs the risk of significantly impeding business growth. Distributors need to improve enterprise-wide information on mutual fund sales if they are to drive down costs, improve cash flow and revenues, drive up sales and reduce compliance risks. In preparing this report, one of the few sources of information on the data management and analytical challenge that faces distributors of mutual fund investment products in the United States, Broadridge commissioned and worked with consultants, Patpatia Associates, to run in-depth interviews with 50 executives at 25 firms across the industry. These included large brokerages, banks, trusts and many medium-sized independent brokers, as well as retirement plan providers. Each firm discussed their current practices and main concerns regarding information management and their ability to derive critical insights from it to make effective business decisions. Throughout this paper we draw from this research to highlight the beliefs of industry participants and to build a series of brief, illustrative case studies. We look first at the information management challenge in three key distributor business functions, highlighting the gains to be made in each by improving data management. We then look at how firms are currently attempting to tackle the problem, before examining how firms can think through the critical issues and move toward a better set of solutions. Challenges and Opportunities in Three Key Business Functions The lack of enterprise-wide data and analytics at most distributors turns everyday activities into major business challenges: • Finance Operations teams find it difficult to predict, reconcile and collect all the fees due from funds in a timely fashion • Sales Marketing teams find themselves without the consolidated data they need to retain the best of their work force and drive up sales • Compliance officers cannot easily pull up the information they need from across the enterprise to report against new disclosure requirements or monitor sales practices
  4. 4. ©2012 Broadridge Financial Solutions Page 3 BIG DATA: A BIG PROBLEM Finance Operations In recent years, financial services firms have dramatically expanded the diversity of the fund families and products they offer as they position themselves to offer more choice to clients. In addition, institutions that recruit high-producing advisors from other firms often have to add their new advisors’ preferred fund families, as well as adding manufacturers of specialty fund products (e.g., long- short funds, managed futures). Offering more choice certainly fosters business growth, but it also creates unique challenges. Institutions need to negotiate selling agreements with every fund company, each with varying payment terms. As an indication of the scale of the exercise, one of the smaller independent broker-dealers on the West Coast that we interviewed told us they currently manage over 250 selling agreements. To add to the complexity, distributors also sell investments to clients using a range of different kinds of accounts, including traditional commission-driven brokerage accounts, fee-based managed accounts and retirement and 529 plans. This has led to a proliferation of share classes – each class offering a different way to price sales costs and other expenses into the product – and to a proliferation of varied incentive structures and payout arrangements. Each share class and account type must be separately tracked and then aggregated to allow the distributor to calculate and understand the sums it is due from each mutual fund. The increase in products and providers make it imperative for Finance Operations departments to efficiently manage their many different selling agreements. Fee calculations and invoicing are particularly challenging. Firms draw data from multiple systems and may have to add traditional applications (e.g., “check app” fund company reports) for each share class, entering the information into spreadsheets and manually applying revenue sharing agreements. They must then prepare and distribute invoices to each fund, and/or monitor collections against their reckoning of what is owed to the firm, and in turn to their brokers and advisors. A Midwestern broker-dealer with 1,800 financial advisors struggles to establish a fact-based product and sales strategy for its fund offerings. Without a unified view of the firm’s sales and positions, including sales through the firm’s commission-driven and fee-based platforms, management cannot identify the true scope of their entire fund holdings. This means they cannot negotiate more attractive revenue sharing and marketing support from the relevant fund manufacturers. They also lack the insight to identify underperforming branches or, conversely, top producers, so that they can optimize incentives and training programs. Even with several employees dedicated to analyzing their positions, they are unableto consistently meet the needs of their various departments. A leading insurance company with brokerage, variable annuity and defined contribution retirement plan businesses has found that the firm’s systems are unable to track the many ways in which it holds positions in funds. In several instances, the insurance company determined that it missed out on fund company payments as large as $400,000, with the firm failing to catch the errors for months after it would have been due this renumeration.
  5. 5. Page 4 ©2012 Broadridge Financial Solutions BIG DATA: A BIG PROBLEM Sales Marketing The increase in the number of products offered, combined with the rise in turnover rates for advisors across the industry, makes it difficult for Sales Marketing personnel to position their firms to retain brokers and advisors and to maximize revenues. Product managers and business analysts are unable to track sales across the variety of fund products and investment programs (e.g., brokerage accounts, mutual fund wrap, retirement plans). Where firms have built rudimentary macro analytics, they typically cannot drill down into key sales management details such as branch and representative. This impedes management’s ability to react to the evolving market in a number of critical ways: • Distributors cannot accurately evaluate which fund products are best sellers across the enterprise • Firms cannot design the best compensation plans for their advisors or negotiate optimal revenue sharing agreements with fund companies. This is important because advisors are now more mobile than ever, and their readiness to change firms, or even go independent, forces firms to identify and incentivize their top performers • Firms cannot easily identify where a different or new type of product is being adopted (e.g., alternative strategy mutual funds) or pinpoint where they can best leverage the efforts of fund company wholesalers to educate their advisors Firms agree that improving information and analytics will help them understand their overall market position and focus resources on their strongest producers and products. Compliance Compliance departments are struggling to keep up with an ever-changing regulatory environment. The SEC and FINRA continue to change regulations concerning market surveillance and disclosures in order to better protect investors. Distributors are finding they must constantly adjust their policies and procedures to comply with recent rules, such as SEC Rule 22c-2 and fee reporting requirements from the U.S. Department of Labor (DOL) 408(b)(2). To fulfill these new duties to investors and regulators, distributors must track and report on an ever-widening range of fund transactions and positions, across multiple platforms and account types. Advanced analytics enables resources to be focused on the strongest advisors and products A regional broker-dealer with over 1,500 financial advisors struggles to implement 408b-2 compliance reporting. Lacking the internal systems to compile and analyze the data automatically, they are forced to retain external legal counsel to prepare the reports, at significant cost to the organization. “It seems that every few months a new report comes out. Our IT staff can’t keep up, but the legal expenses of our manual approach are unsustainable.” An independent broker-dealer with 1,200 advisors uses an advisor-oriented data aggregation tool. However, the tool lacks the data elements and analytics required to support decisions on product management. When the firm tries to negotiate better revenue sharing agreements with funds, it finds it difficult to prove the value it can deliver and, in particular, to demonstrate the superior performance of its 25 strategic partner fund families relative to other offerings.
  6. 6. ©2012 Broadridge Financial Solutions Page 5 BIG DATA: A BIG PROBLEM Independent broker-dealers are increasingly held liable for intra-fund company exchanges that clients undertake without advisor input. A Southeastern firm with 800 advisors is particularly concerned about key weaknesses in its analytical abilities. “Since the trade doesn’t come through our systems, we don’t have the ability to know what our clients are buying and have no solution to track the direct business [with the fund], causing a nightmare for our compliance team.” Unnecessary staffing due to manual processes Lost revenues due to inaccurate invoicing or audit processes Ineffective sales revenue forecasting Financial reputational risk from compliance failures Difficulty negotiating favorable revenue agreements Failure to collect fees on a timely basis Inability to identify target top producers Cost of in-house analytics 80% 68% 68% 60% 52% 48% 48% 32% 0 10 20 30 40 50 60 70 80 90 The fact that customer activity can cascade across multiple internal product platforms and direct holdings means that firms often cannot readily access the full client ”picture,” which makes it challenging to monitor customer suitability and sales practices. Firms say that they need to meet this challenge in a cost-effective manner. This may require adaptable systems that can consolidate data from multiple sources and then provide actionable regulatory reports and surveillance alerts. Key Concerns Figure 1 illustrates the key concerns raised by our industry interviewees in relation to data management and analytics. We can see that 80% say that they worry about unnecessary staffing expenses from manual processes – across various corporate functions – and 68% cite concern that revenues may have been lost due to inaccurate invoicing or difficulty in auditing fund company payments to distributors. Figure 1 Top Executive Concerns - Resulting From Ineffective Mutual Fund Data Management (% of respondents indicating significant concern) Source: Patpatia Associates The same issues make it difficult for firms to conduct financial and business planning. Without a consolidated revenue forecasting platform, finance departments cannot provide the analytics that senior managers need to project revenues and test how revenue streams may respond to different business environments. This makes it difficult for firms to plan ahead, e.g., by creating contingency plans. Some 68% of the distributors we interviewed say this is a significant concern. New rules mean tracking and reporting an ever-widening range of transactions
  7. 7. Page 6 ©2012 Broadridge Financial Solutions BIG DATA: A BIG PROBLEM In summation, firms say they need improved aggregated data and analytics to invoice funds accurately and track payments with confidence, as well as for negotiating improved revenue sharing agreements and designing stronger business plans. Current Approaches One of the most striking findings from our research with industry participants is the degree to which each of the three functions — Finance Operations, Sales Marketing and Compliance — presently finds their own solution to what is, essentially, an enterprise-wide challenge. Many firms maintain separate data entry teams and different analytical protocols in each of the three corporate functions. This sharply limits the degree to which the firm can apply consistent organizational leverage to solving the common data and analytical issues. Without disciplined enterprise-level development initiatives and formal requirements-gathering processes, the various departments in the firm end up settling for rudimentary analytics. For example, their initiatives often lack the flexibility to segment data on the fly, which would allow the analyst to drill down into specific business drivers in a way that facilitates management decision making. The problems are compounded by the complexities of the distribution chain that we described in our Introduction. Firms have to consolidate many disparate sources of data, struggling to draw fund positions and transactions not only from their own brokerage platforms – e.g., self-clearing brokerage systems or clearing firm reports – but from a variety of third-party applications. They have to integrate mutual fund company records (e.g., fund company, NSCC and transfer agent reports), as well as those from manufacturers of other investment products (e.g., insurance companies in the case of variable annuities and alternative investment manufacturers). Adding to this complexity are the ever increasing needs of the distributors’ fund family partners. Broker-dealers receive a myriad of requests for data and detail from the funds in relation to the distribution of their products. This information is often not readily available, and it absorbs valuable time and resources to comply with the requests in a consistent fashion. A leading retirement plan provider with 800 retail representatives employs a retail account aggregation and reporting tool to support its invoice reconciliation processes. However, staff is obliged to extract all investment positions from the tool and manually re-key that information into spreadsheets, where the revenue-sharing calculations are stored. One individual is required to manually compare receipts against expectations and track discrepancies to discover if they result from problems with internal calculations or mispayment from fund companies. An independent broker-dealer with 700 advisors, based on the West Coast, employs a manual data management process that only focuses on the firm’s top 15 fund relationships. The firm has adopted this strategy because of the complexities of collecting fund statements and clearing firm reports, manually entering sales, categorizing positions, and applying revenue sharing formulas. For its remaining 245 fund company relationships, the firm must hope that the fund companies are paying the right amounts in a timely fashion.
  8. 8. ©2012 Broadridge Financial Solutions Page 7 BIG DATA: A BIG PROBLEM Manual Processing • Data is received in print and electronic data formats • Manual keying of data into firm’s preferred solution (e.g., spreadsheets) • Minimal generation of analytics • No definitive solution to ensure accuracy • Few firms report on Direct to Fund business due to data consolidation difficulties Vendor Components • Data consolidated via vendor solution • Produce rudimentary analytics • Often require additional manual input of data • Majority of firms use a combination of vendor and in-house solutions • Applications utilized by individual departments result in disparate efforts across the firm Proprietary Platforms • Develop in-house automated solution to capture/manage data • Proprietary systems do not capture all data • Scope of analytics incomplete • Majority of firms unable to execute due to complexity and resources required • Difficult to update systems The various business teams across the company then face the challenge of scrubbing and normalizing the data before they can begin to develop the analytics necessary to address the various needs of Finance Operations, Sales Marketing and Compliance. Our research suggests that the various teams at distributors, often independently of each other, attempt to meet the challenge in three distinct ways: Manual Processing, Vendor Components and Proprietary Platforms (Figure 2). Figure 2 Summary of Current Data Management Approaches Brokerages, Fund/Variable Annuity Systems and NSCC/Transfer Agency 6 6 6 Manual Processing Some 65% of firms attempt to accommodate some or all of their data and analytical needs by means of manual processing. This approach comes with a heavy price tag in the form of ongoing expenses. Firms employ dedicated full-time employees – typically 3-6 staff for a mid-sized firm with 1,500- 3,000 advisors – to enter data from printed reports into a spreadsheet application, or into a third-party or homegrown database tool. This process is error-prone because it involves manually keying in very large amounts of data. At present, the sales, finance and compliance functions often end up with different data sets and differently formatted data to manipulate and to interpret. The result is that the information created in one area may not be in complete alignment with the information held elsewhere in the firm. An independent broker-dealer with 700 advisors, based on the West Coast, employs a manual data management process that focuses on the firm’s top 15 fund families. The firm has adopted this strategy because of the complexities of collecting fund statements and clearing firm reports, manually entering sales, categorizing positions and applying revenue sharing formulas. For its remaining 245 fund company relationships, the firm must hope that the fund companies are paying the right amounts in a timely fashion. Some 65% of firms attempt to accommodate some or all of their data and analytical needs by means of manual processing.
  9. 9. Page 8 ©2012 Broadridge Financial Solutions BIG DATA: A BIG PROBLEM Vendor Components Some 20% of firms attempt to employ third-party vendor solutions. However, firms typically repurpose tools intended to aggregate data for retail reporting (e.g., consolidated statements and performance reports). Unfortunately, these tools fall short in providing analytical power and business insight to aid in forecasting and understanding key processes. For example, they may not be able to segment advisors by branch, region, term of service and production level, or, they may also be unable to incorporate the detailed information on share class data and revenue-sharing agreements that is critical to the task of reconciling fund company revenue due. Frequently, these vendor offerings are combined with in-house solutions and may still require the manual input of additional data sources. Sophisticated Proprietary Platforms Less than 15% of the firms that we interviewed have attempted to develop sophisticated proprietary platforms to automate the capture, normalization and analysis of their data (e.g., their sales and asset data for mutual funds, ETFs, or other packaged investment products). The firms that have attempted to do this have tended to build narrowly focused applications, as few have the resources to launch an enterprise-wide IT initiative specifically for fund sales. For instance, a mid-sized regional brokerage with 1,400 advisors told us that they have developed a tailored database to draw information from the firm’s brokerage system as well as from NSCC records. However, this system does not accurately capture information from the firm’s fee-based accounts, which must then be manually entered. Another example was provided by a leading independent broker, with over 1,000 advisors, in the midst of developing a platform to ensure the firm complied with DOL 408(b)(2). However, the original budget for the project expanded as the firm came to understand the actual system requirements, and exceeded $500,000. This led the firm to question the viability of continuing with internal development. The large brokerages, wirehouses and similarly well-resourced distributors tend to build their own platforms, as their business volumes increase and may justify in-house development. However, three of the five firms surveyed with systems that include functionality for comprehensive analytics face significant challenges, particularly in terms of keeping pace with new regulations and producing timely reports. These systems require dedicated resources to run them and continuing investment for upkeep and enhancements. Additionally, as internal business lines and platforms multiply within the firm over time, respondents say that one-off solutions are applied as stop-gaps, resulting in further disparate data sources. Less than 15% of firms interviewed have developed sophisticated proprietary platforms A wirehouse brokerage with 10,000 financial advisors has built its own platform. However, “I don’t have the ability to take my sales activities and my revenue activities and tie them together to provide a modeling tool.”
  10. 10. ©2012 Broadridge Financial Solutions Page 9 BIG DATA: A BIG PROBLEM The Way Forward – Building a Strategic Approach During our interviews with distributors, around 74% of the firms expressed a strong interest in changing the way they conduct business in relation to the revenue, data and analytical challenges we have just explored. Figure 3 highlights our findings in relation to each key corporate function. For example, around 64% of our interviewees said that they were interested in exploring a new approach in relation to Finance Operations. Their desire for change was driven by the need to improve invoice generation, payment tracking and reconciliation, and revenue forecasting and sensitivity testing. Figure 3 Requirements for Strategic Approach A similar number (60%) wanted to explore new approaches in Sales Marketing, driven by the need to improve revenue sharing. The vote for change was slightly lower in Compliance (44%), however, those compliance professionals in favor of change often cited immediate and urgent needs, including meeting fee disclosure regulations and the aggregation and access to data on assets held-away. What form should any new approach take? Perhaps the most important thing we learned as we listened to industry participants was that firms need to step back and look at the bigger picture. For example, management might choose to: • Adopt a holistic, enterprise-level perspective on the needs of the various managers and corporate functions across the firm • Recognize today’s opportunities but also look at where industry trends will lead their firm over the next year or two, e.g., in terms of increasing regulatory pressures for disclosure • View data as a valuable business asset and resource; not as a cost, but as a way to reduce operational expense and at the same time drive up revenue 74% of the firms say they want to change their approach Sales Marketing Toolset 60% of respondents • Stratify production • Optimize revenue-sharing agreements • Test product fee design Compliance Reporting Platform 44% of respondents • Transaction holding reports (22c-2, 408(b)(2), DOL 5500s) • Direct business monitoring Finance Operations Application 64% of respondents • Invoice generation • Payment tracking reconciliation • Revenue forecasting sensitivity testing
  11. 11. Page 10 ©2012 Broadridge Financial Solutions BIG DATA: A BIG PROBLEM At a more detailed level, it became clear during discussions with firms that several decision points were driving thinking about any possible new approach: • Who within the firm should assess the potential benefits of any approach that might help multiple corporate functions, e.g., executives in Finance, or a task force approach? • How can the firm factor in the specifics of its strategic vision and longer-term market positioning, e.g., the range of products it may need to manage in five years, or its strategies for building relationships with customers or funds? • How can firms structure a formal cost/benefit analysis across the three corporate functions to capture the pros and cons any new approach, e.g., unified data warehouse? • How granular should the new approach try to be? For example, does the firm need to be able to drill down to the level of individual producers, regions and product types? • Does the firm need to capture multiple types of business (e.g., direct to fund, managed accounts, retirement plans, variable annuities), or is it focused on standard brokerage accounts? Conclusion A common theme in our conversations with business managers at distributors was the frustration they felt at the never-ending task of gathering, aggregating and scrubbing data into a consistent data set to perform narrow (or one-off) analyses to support a particular corporate activity. The fundamental problem is that the clean data in each spreadsheet or niche application ends up as a by-product of the final report, rather than as a reusable centralized data resource that can be drawn upon by others across the organization. With each project and effort consuming so much energy and time, it is difficult to extend an analysis across the firm’s full set of mutual fund partners or its full range of products. Meanwhile, industry trends are making analytical tasks both more urgent and more difficult to achieve (e.g., through business model and product complexity). At present, reliable mutual fund invoicing and analysis challenges the industry, however, our interviews suggested that the answer may be to adopt an enterprise-wide perspective. Under this approach, a single store of aggregated, cleansed data would become a business asset that could be leveraged by each of the firm’s key functions including Finance Operations, Sales Marketing and Compliance. In this way, the problem of ”big data” in the mutual fund industry could be transformed into an opportunity to improve revenue management and grow sales as well as reduce operating costs and compliance risks.
  12. 12. No part of this document may be distributed, reproduced or posted without the express written permission of Broadridge Financial Solutions Inc. ©2012 Broadridge Financial Solutions, Inc. Broadridge and the Broadridge logo are registered trademarks of Broadridge Financial Solutions, Inc. Contact Us To further discuss the information in this report, please email us at or visit About Broadridge Broadridge is a technology services company focused on global capital markets. Broadridge is the market leader enabling secure and accurate processing of information for communications and securities transactions among issuers, investors and financial intermediaries. Broadridge builds the infrastructure that underpins proxy services for over 90% of public companies and mutual funds in North America; processes more than $4 trillion in fixed income and equity trades per day; and saves companies billions annually through its technology solutions. For more information about Broadridge, please visit About SalesVision Distribution Manager The SalesVision® Distribution Manager Platform is a powerful rules-based enterprise solution for brokers and financial intermediaries that aggregates, integrates and consolidates sales and asset data. This comprehensive solution, available to the marketplace for the first time, is designed to meet the needs of an ever-changing and challenging business environment, while transforming data into a valuable asset on behalf of the distributor community. About Patpatia Associates Patpatia Associates is a financial services consultancy dedicated to providing innovative, practical, and executable business strategies that enable leading financial firms to maintain competitive advantage and capitalize on evolving market trends and dynamics. Patpatia Associates provides a full spectrum of consulting services to provide strategic planning and clear, executable tactics to address the dynamic and challenging issues facing the financial services industry today. Our firm specializes in both: designing innovative strategies to streamline and grow new or existing businesses, and identifying and executing upon new business opportunities in across global markets. Learn more at or contact us at