Does a Fair Expense Allocation Model Exist for Market Data?

Steven Longo

Senior Director, Consulting

Steven Longo is a senior technology and operations professional with over 20 years of experience in the financial services industry. He provides consulting on technology management, execution and change management, data management and operational practices, investment tools, technology architecture, IT infrastructure, IT controls, and business strategy. Steven’s experience includes leading operations and IT groups within asset management firms and media companies. He has led strategic and target operating model reviews, data management and operations reviews, systems implementations, infrastructure projects, cost and efficiency programs, team restructures, risk management efforts, IT due diligence assessments, and other activities to support investment teams. Prior to joining Cutter Associates, Steven was Head of Information Technology at Pendal Group Limited. Prior to Pendal, he was General Manager of Group IT Services for Seven Network Limited. He also held numerous technical and management roles at Schroder Investment Management, including Director and COO, and CIO in Australia, Head of IT for Schroder’s North American business in New York, and technical hands-on roles on implementations of portfolio management, unit registry, order management, and trading systems.

Steven holds a Bachelor of Science in Applied Physics and post graduate qualifications in Data Processing, Applied Finance & Investment, and Business Management.

Lisa Masten

Consulting Principal – Data and Performance

Lisa Masten has more than 20 years of experience in the investment management industry, leading projects and designing solutions in the areas of performance and attribution, data management, market data administration, portfolio analytics, and investment accounting. Lisa leads Cutter Associates’ Data and Performance practice, where she advises and designs operating models, selects systems, and implements business and technology solutions. She also organizes the Implementation practice for Cutter, including leading development of its adaptable delivery framework and project toolkit.

Prior to joining Cutter, Lisa was a Senior Manager at Invesco, where she managed a global team responsible for designing and implementing data, performance, and accounting solutions. She has held roles implementing and supporting processes and technology across the front, middle and back office at multiple asset management firms. Lisa holds a Bachelor of Arts in finance and computer science from North Central College in Illinois.

Nov 03, 2021

During Cutter’s recent Market Data Administration survey, we discovered that investment management firms use a range of expense allocation models ─ from basic centralized budgets to allocation based on usage. Some even employ multiple models based on different data sets. In some instances, firms seem to be more motivated to adopt a model around “What can be done” as opposed to “How we would like it to be allocated.” And this, we believe, is limiting.

So, what is a fair model? In a perfect world without constraints, it’s difficult to objectively argue against a consumption-based approach as the fairest. However, even with the constantly maturing data lineage capabilities available in today’s enterprise data management (EDM) and market data administration (MDA) tools, firms still find it difficult to adopt a fair “user pays” allocation approach.

That said, the asset management industry is less than perfect. Each firm is dealing with its own unique set of business and operational constraints. And firms may have perfectly valid commercial business reasons at times not to directly allocate market data expenses by consumption in every case.

From an MDA perspective, perhaps “fair” means the ability to allocate market data expenses that align with business and finance teams’ expense allocation directives and requirements. After all, isn’t it about providing the expense allocation information to the relevant business functions in a timely, accurate, and required format, just like the provision of any other data set to a consumer?

Posing the following questions internally might help kick-start the conversation and drive engagement within your firm around the suitability of your existing allocation model for market data expenses:

Is your market data expense allocation model a somewhat subjective compromise limited by “What can be done”? Or is it fit for purpose?
If your firm had better tools in place that provided actual usage insights, would you adopt a different expense allocation model?
If your firm finds it difficult to allocate market data expenses the way it would like, what level of confidence is there in the ability to appropriately forecast and manage market data expenditures?

Does your firm have a successful allocation model? Or are you struggling to establish a fair and justifiable model?

If so, Cutter can help you to evaluate your options and choose one. Contact us at [email protected], and let's get started.