The "Butterfly Effect" in Client Reporting

Posted by Peter Ellis, Director, P.K. Consulting Ltd. on Behalf of BISAM on Sep 15, 2015 9:30:00 AM
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Butterfly_Effect_in_Client_ReportingThe butterfly effect is a term used in chaos theory to describe situations where there is a highly sensitive dependence between the internal components of a system, such that a small change in one part of the system results in significant and disproportionate consequences in the other. The term originates from the use of a metaphor to describe the effect, whereby the flapping of a butterfly's wings somewhere in (say) South America affects the nature of a typhoon somewhere in (say) the Pacific Ocean.

The butterfly effect is particularly relevant in the world of asset management. A simple mistake with a single item of data, such as an asset price, could result in an incorrect valuation for a commingled fund, which could result in an incorrect unit price, which would mean that units would be bought and sold at the wrong prices. If the error went unnoticed for a long time, those who bought and sold units at the wrong price would need to be compensated, performance fees might need to be recalculated, regulators might need to be informed, and the reputational damage could be severe.

And one area of asset management where the butterfly effect is particularly relevant is client reporting. When a client discovers an error in a client report they may be the only client affected by the issue and the error may be minor with no financial or regulatory consequences. However, the magnitude of the client’s reaction can be disproportionate to the nature of the error. This is because the client’s perspective is this: “If you can’t get a simple bit of data in my report correct, how do I know you are doing the difficult things well, like managing my investment portfolio correctly?” Once the trust and confidence of investors starts to be eroded, it can be very difficult to reverse the trend.

The Key to Client Reporting

And this is why ensuring the completeness and correctness of all the information in client reports is absolutely key for asset management organizations.

When we talk about a “client report” in asset management, it could refer to one of a number of different documents produced by organizations and sent to their clients. Different types of investors (institutional, retail, wealth) receive different types of reports. And the same investor will usually receive reports for the same portfolio from different organizations such as investment managers, custodians, and investment consultants/advisers.

But whatever the type of investor, and whatever the type of report, the aims of the client reporting process are the same:

  1. To provide information about where the client’s money is invested.
  2. To provide information about what the organization has done on the client’s behalf during the reporting period.
  3. To show the value that has been delivered by the organization during the reporting period and to explain the rationale behind any decisions and actions taken.

The performance of investments can vary over time; stock markets can fall as well as rise. Investors that have confidence in asset management organizations and trust them to make the right decisions are much more likely to stay with those organizations through periods of variable investment performance. So, client reporting is absolutely crucial in the relationships between asset management organizations and their clients because it plays a fundamental role in building, and retaining, trust and confidence.

And yet many asset management organizations still do not appear to fully appreciate the importance of client reporting. Individuals responsible for managing client relationships clearly do, but organizations as a whole do not. Client reporting is still too often seen as a ‘document production’ exercise rather than a key component of a continuous, integrated, end-to-end client management and communication business process.

This is a legacy issue, a residual mindset from a time when performance was king and client reporting platforms did not attract the same level of change budget as platforms in other areas, because they were not seen as contributing value in the same way that platforms in other areas were perceived to. When you look inside asset management organizations, you are likely to see client reporting platforms that are sub-optimal to a degree that you are unlikely to find anywhere else in the organization. And you are likely to find them disconnected from the enterprise operating platform, viewed as an appendix to the main operational infrastructure.

Client Reporting Platforms and Performance Systems in the Digital Age

It has always puzzled me as to why asset management organizations do not see the obvious synergies that exist between client reporting platforms and performance systems. Most of the data that needs to be included in client reports such as portfolio holdings, transactions, and benchmark composition are also needed by performance systems to calculate the performance and risk metrics that are also included in client reports. And the commentary that is included in client reports has to be based on these metrics. Why keep the same data that has to be mutually consistent and maintained at the same level of integrity in two separate places? Why not use the data in the performance system to feed the client reporting system? In fact, why not implement an integrated platform for performance and client reporting? Those asset management organizations that have done this will vouch for the operational synergies that result.

Asset management organizations have got some catching up to do when it comes to client reporting platforms. And with the increased pressure to enhance the client experience that has followed the financial crisis of 2008, there are signs that organizations are now directing some of the change budget towards their client reporting platforms.

But what concerns me is that the residual mindset is still dominant. Too many organizations are locked into a report book mentality when it comes to client reporting. Traditional client reports, which are structured like report books, will be required for many years to come, both in paper and PDF form. However, asset management is moving into a digital age and the client reporting process of the future also needs to leverage digital channels.

Any asset management organizations looking to upgrade their client reporting platform need to do more than catch up, they need to have a digital strategy for all aspects of client communications.  A digital strategy for client reporting means a lot more than putting a PDF of a report book on a website. It means reporting at the level of discrete information components through multiple channels, both direct and indirect. Think of it as reporting at the level of document “sections” as well as at the level of whole documents; and think of those sections as being available at different times via different channels, both traditional and digital.

And now try to imagine how you would accomplish this with a client reporting platform that is not an integral component of your enterprise operating platform, and that is not sharing golden copies of both source data and report content across the different distribution channels. Good luck, you’ll need it!

case_studySee for yourself how a global asset manager collaborated with BI-SAM to implement an automated, scalable solution for efficient, digital data distribution and improved client reporting. Download the customer success story for more: https://www.bi-sam.com/sites/default/files/global-asset-manager-2.pdf

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Topics: Data Management

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