A Q&A with FundGuard’s Alan Schneider
2024 is under way and it’s time for the asset management industry to knock down its final data silos.
The middle office has become overrun with clunky, outdated technologies, creating unnecessary, inefficient redundancies, introducing errors, and still barely meeting the needs of the front office it supports.
It doesn’t have to be this way.
Investment accounting technology that manufactures accurate real-time data can pave the way to fully realize the value of cross-enterprise investment accounting data, particularly within middle office operations.
In this FundGuard Q&A, our Partnership Sales Director, Alan Schneider, discusses the impact of modern investment accounting technologies in the middle office from his perspective as a former investment accounting pro with over 30 years of industry experience.
Modern Investment Accounting and the Middle Office
FG: When we picture the traditional investment management workflow, it almost always involves front, middle, and back office teams running a spectrum of functions. Across that spectrum, investment accounting data has an undeniable impact, offering many advantages for those willing to embrace the value of new investment accounting technology — and major pitfalls for those who have not. Can you explain this with a view on middle office functions?
AS: Put simply, the middle office bridges the investment accounting gap between the front and back office functions – complementing both the portfolio decisions, trading, distribution, performance, risk, compliance and reporting activities of the front office and the record-keeping and reporting functions of the back office. The middle office does this by ensuring the integrity and accuracy of portfolio information. The fact that a middle office must exist to do this – at the scale found in today’s operations – is a key challenge. If the portfolio data and the associated data used in these processes were manufactured and maintained using modern tech, the manual, tedious efforts of the middle office will be significantly minimized.
The middle office was first created to separate the duties of, and avoid conflicts of interest between, the front office decisions and trading and those of trade confirmations and communications. But today, due to the inadequacies of the systems in the market, the middle office is supporting the front office’s quest for real-time, accurate, and complete information to drive decisions, drive trades, and manage portfolios more effectively. Meanwhile, the back office is tracking the accounting data to ensure an official overview of a portfolio is available at any given point in time for regulatory, compliance and investor reporting functions.
To support these front and back office functions, the middle office has (d)evolved into a sort of catch-all for redundant data-related tasks, including capturing, massaging, validating, normalizing, and transforming information – taking on an ever-growing workload of manual processes due to a previous lack of technology capable of facilitating these crucial front and back office deliverables.
So, while the middle office started out to simply serve as the middle layer to communicate investment accounting data between the front and back offices, the increased offloading of work to the middle office through the years has expanded middle office duties to what it is today.
Taking Away the Tedium of the Middle Office to Better Leverage Talent
FG: You noted the lack of technology to facilitate the investment accounting tasks typically performed by the middle office. How has this lack of tech influenced the role of the middle office and the heavy lift these teams often assume?
AS: All parts of the asset manager need their particular view of the investment accounting data.
In many ways, the middle office was primarily built as an extension of the front office. Portfolio managers and traders needed to separate from the trade processing and reporting functions and move their analysts to the middle office who ran the spreadsheets to give them the numbers they needed, or the compliance teams monitoring front office functions but working off middle office data. The same goes for those overseeing administrators for the funds. These oversight teams rely on the middle office data which they use to create a shadow NAV or approximations as checks against the admins.
As we can see, the middle office has become a rather laborious component within the investment accounting workflow. With the right tools, however, many of these middle office efforts can be automated and we can enable a far more efficient and less redundant operation.
What has changed in the last few years is the development of FundGuard. Thanks to cloud-native technology, NoSQL capabilities and artificial intelligence, all these different functions can now be driven from one investment accounting engine, enabling firms to complete all these different components of investment accounting within one system — eliminating a significant portion of the tactical burdens so often borne by the middle office. This is the FundGuard value proposition and no other existing investment accounting platform can offer this today.
So What Does this Mean for Middle Office Talent?
FG: Technological advancements have historically reshaped the office, repurposing some departments to focus on higher value tasks. If firms can now rely on modern investment accounting technology, how does middle office talent get reallocated?
AS: Firms across the globe will continuously strive to create more sustainable business models as the asset management industry grows larger and consolidating asset managers grow larger themselves each day. Deciding to leverage disruptive technologies will reshape the middle office, as it will reshape all functions across asset management workflows. These firms need to find ways to be more effective and efficient in how they manage assets if they are to adapt to the modern asset management environment.
For the middle offices that have been built as extensions of the front office, this presents an opportunity for them to become more directly supportive of front office teams making the investment decisions, rather than focusing on getting data where it needs to go.
As it stands, many firms are arguably wasting some of their best middle office talent on managing clunky investment accounting technology. With modern investment accounting technologies implemented in place of the traditional middle office, more of this talent can be reallocated to spend time on smarter business tasks in need of human innovation.
In turn, firms can not only boost efficiency and effectiveness in their investment accounting process, but also differentiate themselves by fully utilizing the talent at their disposal.
We are witnessing a true wake up moment for asset management firms to realize they’re spending a lot of money on grunt work, when they could be spending that money on innovation.
Manual Work is Error Prone: The Use Case for AI in the Middle Office
FG: You spoke about potential talent being “wasted” in the middle office — can you elaborate on how this talent is not only mis-used in this role but also contributing to inefficiencies and problems across the entire investment accounting process?
AS: Tedious, manual operations are highly prone to errors. This is a great risk across all functions, but particularly for required reporting.
Manual intervention is a breeding ground for inaccuracies, whereas advanced technologies like artificial intelligence (AI) and machine learning (ML) enable smart automation and significantly reduce the risk of costly errors.
AI and ML can essentially become the mind powering the more tedious middle office functions.
In one of our recent Tech Talk posts with Yaniv Zecharaya, Yaniv touches on the need to build smarter investment accounting systems and the role AI has to play in that goal. To quote Yaniv:
“A smart investment accounting system leverages AI and ML to enhance its processing capabilities. Ideally, a smart system should integrate both traditional statistics and machine learning models. This dual integration enables far greater efficiency and accuracy through a low- to no-touch process that reduces the amount of tedious, error-prone work that has traditionally been a hallmark of the very manual investment accounting process.”
Thinking back to the conundrum of how to re-allocate middle office talent as technology advances, remember that AI and ML are only as smart as the people training these models.
As organizations reallocate their talent away from redundant middle office tasks and toward business innovation — like training AI and ML algorithms — the middle office function will only become smarter while reducing the extra manual effort.
Modernize Your Investment Accounting Operations with FundGuard
The FundGuard platform is built on cloud-native, AI-powered, big data technology and is capable of manufacturing the high-quality, single source of investment accounting data required to power the entire enterprise across back, middle and front office functions.
Discover the possibilities of a modern investment accounting engine — contact FundGuard to get started.