Industry Events

The State of the Fund Administration Industry (UFS as industry proxy)

 

Gary Tenkman, Ultimus CEO, provided a quick review on the strategic direction of the company that is being driven by four key areas:

Retail Alts – Ultimus made big investments in talent and technology over past years as they saw growing interest from traditional fund managers and $30-$50B RIAs with built-out retail distribution channels wanting to launch alt products to their retail investors and also meeting with alternative managers that are looking at the retail distribution landscape to find new ways to raise capital. Ultimus does administration for numerous clients that have one or more retail alt products (e.g., tender offer, interval, BDC) and feel they are well positioned for continued growth in this space. Many industry studies state that retail investors represent only a small fraction (1%) of allocations into alternatives which is expected to grow to 10-15% over the next decade.

ETFs – Ultimus has continued to win big in the ETF servicing market ever since doubling down on their investments in this space once the SEC approved active ETFs. They crossed over servicing 100 ETFs earlier this year and received the highest ranking across the globe for the third year in a row in Global Custodia’s annual ETF Administration survey.

Middle Office Services – With T+1 trade settlement, many fund firms are now looking to out-source pieces of their middle office, like trade operations, and Ultimus has doubled the number of clients leveraging their middle office servicing product in 2024. Ultimus has positioned its middle-office product to be a scalable solution, allowing asset managers to significantly reduce their fixed infrastructure costs while benefitting from an economically efficient model to support future growth for even $50m and below asset managers. This is unlike other more high-profile middle-office products like State Street’s Alpha product with a 7-figure implementation fee.

Takeaway Business – The key competitive advantage for Ultimus in winning business from competitors is that Ultimus only does fund administration with a strong client-centric culture and a commitment to investing in technology and experienced talent with a 5% employee turnover rate. The firm helps clients with everything from legal to tax to helping structure products to distribution support, all of which adds a great deal of value from a client viewpoint. Many major fund administration competitors are part of a much larger organization without the same client connectivity and strategic budget control to ensure the needed investments in tech and people.

 

ETF Landscape 

Mike Prendergast SVP, ETF Product at Ultimus led two panels exploring the rapid growth of ETFs:

Understanding the Current ETF Landscape to Optimize Product Success – (panelists: Jim Gregory, ETF Global – Victor Werny, CBOE – Reggie Browne, GTS – Larie Lydick, Ultimus ETF Product Mgmt)

Panelists discussed in detail and provided insights on the process of launching and supporting an ETF, including the importance of pre-launch planning; learning how to best connect into the ETF ecosystem (market makers, index providers, calculation agents, etc.); market maker involvement; pre-defined distribution and marketing strategies; and the post-launch support needed to successfully launch new ETF products and enable future growth.

Other topics discussed were emerging ETF trends (active ETFs, options-based products, leverage/inverse ETFs, and crypto ETFs), the complexity of dealing with certain asset classes like private securities, and the SEC’s concerns around multi-share class ETFs, which still have uncertainty around the regulatory path forward.

Seeding Options for New ETFs – (panelists: Alex Fiandaca, NASDAQ – Cassandra Borchers, Thompson Hine – Rob Velotta, Cohen & Co.)

With US ETF Assets at $10 trillion and over 3600 ETF funds, there has been a large rise in active ETFs with 396 new launches as of September 2024 from over 100 sponsors, including 46 new issuers. Active ETFs represent 72% of new launches in 2024 and are seeing over 30% of asset flows.

A major driver of this ETF activity lies in the benefits of the ETF structure over other vehicle strategies which include efficiency in managing portfolio assets in one portfolio, administrative efficiency, expanded distribution opportunities, access to new investors, and possible tax efficiency of Section 351 transfers.

Various pathways were discussed on how to use Section 351 in-kind contributions from existing mutual funds, SMAs, or LP structures as a source of seed capital. Industry experts discussed the legal, operational, and tax considerations, including the comparative benefits and challenges of each option.

 

Registered 40Act Alternatives

The Tidal Wave of Alternatives in the Wealth Management Channel (panelists: Sean Mclean, Ultimus SVP Retail Alternative Fund Services – Vadim Avdeychik, Clifford Chance Partner – Robert Meschi, Pontis Global Partner – Jacob Mohs, Interval Fund Tracker)

Registered alternative funds are one of the fastest growing areas within ’40 Act products with an overall market value of just over $350B currently represented by 35% BDCs, 25% Interval Funds, 20% Tender Offer Funds, 17% Non-traded REITs, and 3% Conglomerates. Interval Funds are the fastest growing product type within Registered Alternatives totaling $90B in AUM which is 3X higher than 5 years ago.

Due to their high growth rates, various industry experts in this panel provided information, insight, and the latest developments focusing on unlisted closed-end interval and tender offer funds which as of 9/30/24 comprised 235 total funds and $162B total AUM. With the number of these funds up 11% and AUM up 16% in 2024 YTD, there are also 53 funds currently in registration with the SEC.

Panel topics covered key differences between Interval Funds and Tender Offer Funds, fund variations coming into the market, the SEC registration process, key considerations for fund seeding transactions, the competitive landscape in terms of fees and incentive fees for these products, how rule 2a-5 changed the valuation landscape, what it takes for an advisor to be successful in launching a registered alternative fund to retail investors, key considerations and challenges when targeting different investor types, and how the Ultimus Gateway Platform offers a more efficient and cost effective way for an advisor to get a registered alternative fund launched.

 

Operational Innovation

 

Enterprise-Wide Operating Models: Promoting Operational Efficiency (panelists: Steve Scaringe, Ultimus SVP Business Development – Don O’Hara, PennHaven Brokerage Partners CEO – Gary Thomas, Huber Capital Mgt – Bill Hortz, IID Founder)

Panelists discussed how technology is being applied to create a new enterprise-wide operating model for investment managers and fund companies by digitally integrating back, middle, and front office operational platforms. Benefits would include actualizing greater operational efficiency, enhanced reporting, and more predictable expenses across the firm.

The panelists worked with asset managers in the audience by walking through the recommended mindset, questions, and steps they might take in better understanding the operating issues involved and making the tech decisions needed. Ultimus client Gary Thomas, COO of Huber Capital shared the methodology and processes he set up in his firm to make complex tech decisions and proactively build strong working relationships with his firm’s technology strategic partners.

Evolving the Front Office: Outsourced Trading (panelists: Paul Wahmann, Ultimus SVP Middle Office Services – Don O’Hara, PennHaven Brokerage Partners CEO – Dan Lilly, PennHaven Brokerage Partners Head of Trading – Steve Scaringe, Ultimus SVP Business Development)

Panelists explored the growing trend of investment managers outsourcing all or portions of their trading desk to help remove operational burdens and risks to the firm, especially with new T+1 settlement cycle rules. Benefits of an outsourced trading desk include providing access to experienced traders, better trading systems with advanced analytics and oversight tools to monitor trade quality and broker performance, and broader market access than a small in-house trading desk.

Important distinction made by Don O’Hara, CEO of Pennhaven Brokerage Partners was that outsourcing can be done on a full basis – comprehensively handling order entry, execution, settlement, and reporting –  or on a partial basis depending on the needs of the asset manager with common scenarios like only covering international markets or providing coverage during staffing gaps. The outsourced trading model comes in both broker-dealer and independent provider variants, with the independent providers offering a more agnostic approach. Bottom line: by utilizing a third-party execution desk, managers are strategically able to reduce costs, manage operational risks, and shift focus to more alpha-generating business areas.

Cybersecurity Risk Management – (panelists: Shawn Waldman, Secure Cyber Defense – Mel Van Cleave, Ultimus SVP Technology – Kristin McCann, Ultimus SVP Compliance)

With a deep understanding of prevailing threats to network and digital safety, security and compliance experts provided valuable insights on risks related to cybersecurity and third-party oversight. Shawn Waldman CEO of Secure Cyber Defense discussed the need for asset managers to develop a fortified cyber program that would include specialized tools to monitor/analyze digital environments, identify gaps in their systems defenses, prioritize remediation efforts, and report ongoing progress.

Data Governance – The Triad of Trust (panelists: Dan Bergeron, SkyTerra CEO – Denise England, Skyterra Data Governance Analyst –  Mel Van Cleave, Ultimus SVP, Technology)

Industry data professionals discuss the three pillars of data governance – risk, compliance, and security – helping asset managers to safeguard their data. Dan Bergeron, CEO of Skyterra further discussed how the essential practical elements of data governance and building an efficient data management strategy focuses on the synergy between people, process, and technology.

 

The Intermediary Sales Marketplace

Kevin Guerette, Ultimus SVP, Distribution Services – which provides Ultimus asset manager clients with distribution planning information, intermediary reconnaissance, tools, thought leadership branding, and other distribution support services – led two breakout sessions to provide different perspectives from large intermediary sales platforms and successful Ultimus boutique asset manager clients.

Intermediary Insights (panelists: Justin Scanlon, Fidelity Investments – Phil Collier, Raymond James – Josh Hinshaw IV, Morgan Stanley)

The panelists, representing large intermediary sales organizations, shared a great deal of details for Ultimus clients on the requirements and process for funds to be added to the Fidelity, Raymond James, and Morgan Stanley platforms including minimum asset thresholds, advisor demand, ongoing monitoring/culling of low-performing funds, no transaction fee (NTF) programs, discretionary/non-discretionary advisory platforms, and the growing popularity of unified managed account (UMA) programs.

Looking toward 2025, the panelists highlighted priorities such as expanding managed account offerings, the increasing adoption of interval and tender offer funds, enhancing tax efficiency, and leveraging artificial intelligence technology to improve advisor productivity and client service.

Tactics for Distribution Success (panelists: Mark Clewett, Conestoga Funds – Colin Barber, Sierra Mutual Funds –  Ryan Holloman, Weitz Inv Mgmt – Jonathan, Westwood Holdings Group)

This panel was comprised of Ultimus asset management clients that have successfully implemented varied plans for growing their firms and fund assets by improving their distribution strategy. They openly shared with their peers the experiences and insights they learned on a full range of distribution related topics including wholesaling, marketing, content development, data, technology, conference tactics, and many others.

 

AI For Asset Management presentation

Presenters, Shawn Waldman, CEO of Secure Cyber Defense and David Fischer, Associate Director AI & Innovation of KPMG,  discussed how Artificial intelligence (AI) and large language models (LLMs) like ChatGPT can be used to automate and augment many business processes across financial services firms, such as:

• Knowledge management and answering regulatory questions
• Compliance analysis and gap assessment
• Sentiment analysis and preparing for analyst questions
• Data extraction from documents
• Automating HR processes like job descriptions and performance reviews

 

However, they also warned that there are significant risks and challenges with using AI/LLMs, including:

• Data security and privacy risks if sensitive data is input into public models
• Potential for misuse and prompting models to generate harmful content
• Deskilling of employees who become over-reliant on AI
• Difficulty verifying the accuracy and reliability of AI-generated outputs
• Risk of bad actors exploiting AI/LLMs – e.g., using deep fakes to trick users into authorizing wires

 

Organizations need to have a strong governance framework and ethical guidelines in place to responsibly deploy and manage AI/LLMs. There are significant data security and privacy risks that organizations need to carefully consider and address by training employees, establishing data quality standards, and implementing controls to mitigate risks.

 

Regulatory Discussions

Avoiding Regulatory Pitfalls: Connecting the Dots from SEC Cases and Priorities to Your Compliance Program (panelists: Kenneth Fang, ICI Associate General Counsel – Kate McCurry, Kilpatrick Partner – Nicole Crum, Sullivan & Worcester Partner – Martin Dean, Northern Lights Compliance Services President)

The panel discussed recent cases, trends, and areas of risk, as well as provided suggestions for bolstering asset management firm compliance programs.

Washington Update: A View from Capitol Hill and the Upcoming Election (Kristin Solheim, ICI Sr Govt Affairs Officer – Terry Davis, DLA Piper Partner – JoAnn Strasser, Thompson Hine Partner – David James, Ultimus EVP Chief Legal Officer)

Panelists had a lively conversation about regulatory developments impacting the fund industry and the latest inside scoop from Washington DC insiders about the election and how various outcomes could impact the regulatory agenda going forward.

 

Conclusion

The 2024 Ultimus Registered Funds Client Summit provided asset manager clients and industry business partners a thorough lay of the land of the forces at work, trends, and the strategic solutions needed to address ongoing industry change. The Summit’s learning opportunities actively help asset managers explore how they can better operate by integrating new thinking, business resources, and technology across their enterprise to meet major challenges and goals.

Reporting on the Ultimus Client Summit helped reinforce the massive nature and scope of the transformations going on in the asset management industry. This positions the Ultimus Client Summit, in my mind, as taking its place among other top asset management conferences like the Investment Company Institute, the Money Management Institute, NICSA, the SME Forum, and the MFEA, but with an intensely practical business leadership focus on industry trends, marketing, sales/distribution, operations, and technology. This position calls for keeping an eye on the topics and discussions going on at their Client Summits in the future.

For full disclosure, Ultimus Fund Solutions is a Founding Member of the Institute for Innovation Development and I regularly attend and report on their events to stay informed and better able to report on the evolution and innovation happening in the asset management industry.

 

 

 

 

The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We operate as a business innovation platform and educational resource with FinTech and financial services firm members to openly share their unique perspectives and activities. The goal is to build awareness and stimulate open thought leadership discussions on new or evolving industry approaches and thinking to facilitate next-generation growth, differentiation, and unique client/community engagement strategies. The institute was launched with the support and foresight of our founding sponsors — Ultimus Fund Solutions, FLX Networks, TIFIN, NAIFA, NASDAQ, Advisorpedia, Harvest, Pershing, Fidelity, Voya Financial, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines).