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By the Numbers - The AUM Challenge

AUM DefinitionsWe’ve all been in a situation where asking the same, seemingly straightforward question to five people has produced five different answers. Similarly, asking associates in various departments at an asset manager for AUM numbers or asset flow data, will likely elicit many varied answers. Why is that?

Asset Under Management (AUM) is a fundamental metric indicating the market value of all assets managed by an investment management firm. Flows can be characterized as the investor-directed movement of assets in and out of investment products. These definitions are mature and widely used.

So, where do the challenges in reporting accurate and consistent AUM and flows lie? We’ve identified five critical bottlenecks that can hinder a firm’s ability to get the information easily.

Multiple Sources

Having a litany of source systems where AUM and flows data originates translates to additional steps to synchronize and consolidate the data. Oftentimes, because the data lives in multiple places there is no business ownership of AUM. Along with the additional governance required, this might create the need for a dedicated middle (staging) ground for reconciliation and cleansing before the data can be used downstream.

Multiple Definitions, Calculations, and Uses

If you ask marketing, finance, and sales groups for AUM or flows data, you’re likely to get three different answers, corresponding to the way each group defines, calculates, and uses the data.

Sales teams would be interested in inflows as a metric of sales effectiveness. Outflows would be irrelevant to the sales team unless they were also responsible for client retention. Marketing might define flows more simply as net flows (inflows less outflows). For these and related reasons, it’s not feasible for an investment manager to establish firmwide definitions and calculations for the internal or external reporting of AUM and flows.

When calculating AUM, asset managers must factor in not only traditional contributions into and withdrawals out of investment vehicles, but also internal transfers of money between two investment products within the firm, and external transfers of money between an investment product internal to the firm and a competitor’s investment product on the same platform. To make matters more complicated, asset managers must also calculate the effects of internal and external transfers on total flows, and as we’ve seen, AUM and flows calculations vary from group to group.

Calculations Required at Multiple Levels

For asset managers, AUM is probably reported at more levels than any other data point, which adds to the complexity of slicing and dicing the data for different views. So, asset managers need flexibility to calculate AUM at multiple levels, which could include the following:

  • Account
  • Client Firm
  • Client Type
  • Composite
  • Investment Strategy
  • Investment Vehicle
  • Legal Entity
  • Mandate
  • Plan/Platform
  • Portfolio Manager
  • Product
  • Salesperson
  • Tax Status
  • Territory
 

Calculations Required for Multiple Periods

AUM and occasionally flows data are needed for external reporting in many types of client and marketing
communications, as well as regulatory filings such as ADVs, and each type of communication has its own
requirements for periodicity.

Client and marketing materials that use AUM and flows data include the following:

Numbers
  • Client Account Reviews
  • Client Reports
  • Consultant Databases
  • Due Diligence Questionnaires
  • Factsheets
  • Management Reporting
  • Pitchbooks
  • Public Websites
  • RFPs
  • Sales Reporting
 

Complex Requirements for Joining Data

It is also critical to tag AUM and flows data for sales, products, and clients based on the disparate end consumer requirement, and hence, computation methodology. When coupled with having multiple sources of origination for the data, there must be a concerted effort to prevent double counting of the assets for all computations. All too often we see calculations being done in spreadsheets and the results can be prone to errors.

Toward More Accurate, Consistent AUM and Flows Reporting

To achieve more accurate and consistent reporting on AUM and flows data, investment managers must take an enterprise approach to truly understand how each group of data consumers defines and uses the data. Remember, while people may refer to data using the same naming convention (e.g. Small Cap, Institutional) they may mean different things to different groups. It’s important to drill into the nomenclature and define the data. Doing so will allow the firm to lay out a foundation of requirements. Then, clearly document all data sources and data elements related to AUM and flows, as this will ensure any solution is comprehensive and fitting for the entire organization. Also, make sure to fully define all the client, account, and product reference data while applying agile methods to tag and join the data. This will allow for ultimate consumer flexibility in slicing and dicing the data. Finally, use technology solutions such as a data mart and business intelligence tool to calculate and report on AUM and flows data, providing business users an intuitive platform to fulfill their requirements of today and the future. Ideally, you will also want to define those responsible for overall data ownership and governance for AUM. The owners will have ultimate responsibility and be a central point of contact when questions about or discrepancies in the data arise.

“With multiple levels of AUM reporting and numerous channels for sharing AUM numbers, it’s easy to see how complex AUM reporting becomes.”

Source: Participant from Reporting AUM and Asset Flows CutterCast, August 2018

This is no small undertaking. As a Cutter member noted on a recent webcast, “The process took about one year. Much of the work was identifying fields that needed to be brought into the system, and LOTS of reconciliation.” But the effort can be rewarding. Providing a clear audit trail and one centralized source means end-users will have faith in the numbers. The firm can meet reporting deadlines with ease. Consistent data on a firm’s Web site, fact sheets, and third-party sources of Product data helps improve operational and reputational risk factors. Compliance and legal can report regulatory AUM consistently. Marketing can track the effectiveness of their campaigns by reviewing asset flows into products. Senior Management can evaluate overall firm and product numbers for reporting and review.

The professionals at Cutter Associates have helped many investment management firms achieve more accurate and consistent AUM and flows reporting. We can help you identify your data sources and define client, account, and product data so you can report with ease. Contact us to find out more.

 

About the Author

Philip (Phil) Orlando is a Consultant at Cutter Associates and brings over 11 years of consulting, organizational strategy, client service, operations, accounting, and IT experience to Cutter clients. Phil has been involved with multiple strategy engagements helping institutional asset management firms formulate a business vision for their client-facing, marketing, and sales experiences, many of which have included capabilities assessments and/or formal search and selections for client reporting, CRM, presentation production, CAP data, unstructured data, RFP/DDQ, BI tools, web portals, and document management. Prior to joining Cutter Associates, Phil was an Organizational Strategy Business Analyst at State Street Bank where he worked on several large-scale projects including the implementation of an enterprise workflow tool and a new inquiry management system. He also guided a program purposed to transition complex cash, reconciliation, and trade tasks from the business units to centers of excellence (COEs). Previously, Phil was an ETF Client Operations Account Manager at State Street Bank. He launched new ETFs and on-boarded new clients, managed relationships with several ETF sponsors, and crafted specifications for IT resources to continuously improve the accuracy, reliability, and efficiency of ETF processes. Phil holds a B.S. in Finance from Stonehill College and is also a CFA charterholder.