Farewell, Excel jockeys

Asset servicing and automated data sharing. By Frank Froio and Christian Graham, GlobeTax

16 May 2018

Every asset servicer faces a trilemma: boost client satisfaction, increase operational efficiency, and decrease costs – all at the same time.

In large part, the trilemma stems from the way in which information flows through the global custody chain. Because each intermediary uses customized systems to manage account and position information, there is a constant battle to reconcile the data as it passes along the chain. As a result, employees at each juncture must spend hours re-inputting figures, formatting spreadsheets, and validating outputs. Indeed, the dependence on spreadsheets has become so pervasive that there is now a world championship to celebrate these ‘Excel Jockeys’. While outsourcing the most difficult data manipulation to specialist providers can alleviate some of the pain, the problem of non-standard transmission remains. It is simply externalized rather than resolved.

Fortunately, efficiency gains are possible – and not just through learning new keyboard shortcuts. By engaging third-party vendors and establishing automatic data sharing programs, asset servicers can streamline the exchange of information, improving efficiency while decreasing costs. To demonstrate the potential of automated data sharing, a case study on withholding tax recovery is presented. In addition to improving efficiency, the service can boost client portfolio performance by more than 25 BPs. More money in client accounts translates to rising custodial AUM, addressing the trilemma (and more!) in one fell swoop.

Conceptualizing automated data sharing regimes

In the context at hand, automated data sharing is the creation of standardized methods for storing, updating, and communicating information among custody chain participants. In recent years, technologies such as cloud computing and Application Programming Interfaces (APIs) have dramatically simplified the real-time distribution of data along the custody chain.

The benefits of this instant and automated data accessibility are numerous. The faster that vendors can receive accurate, well-formatted data, the faster they can begin processing the information, expediting the delivery of benefits. Moreover, automated and structured data transmission reduces the need for manually inputting and reformatting information. This efficiency gain is beneficial. Not only does it avoid costly errors, it bypasses the upcharge that service providers often levy on manual processing.  

While automated data transmission has many merits, downsides also exist. Despite asset servicers’ painstaking security protocols, sharing data necessarily means distributing risk. If a vendor is hacked or uses the data for nefarious ends, the negative publicity can undermine an entity’s credibility and place them at financial, regulatory, and reputational risk. To reduce these risks, regular vendor audits, service level agreements, and standard operating procedures are widely recommended.

Externalizing withholding tax recovery services

While not every financial service benefits from automated data sharing, withholding tax recovery offers an excellent use case. More than ever, investors are seeking (and expecting) their custodians to deliver the performance-boosting service. Financial institutions are less enthusiastic, however, as the service is extremely difficult to administer. It involves managing thousands of global tax rates and processes, and confirming every beneficial owner has all necessary information and documentation on file, in accordance with the ever-changing requirements. These responsibilities say nothing about the struggle to: 1) identify opportunities for recovery, 2) submit claims to tax authorities around the world, and 3) ensure income payments flow properly to the ultimate beneficial owner. All the moving parts provide a perfect example of a service worth offering, but better left to specialists.

Making the decision to engage a specialist is only half the battle. The next hurdle is structuring the relationship. To overcome this obstacle, involved parties must determine how the vendor will obtain regular, secure access to information about each account holder’s identity and portfolio income—two components vital for providing a withholding tax recovery service. The case study at hand illustrates innovations in sharing this data.

Automated data sharing in withholding tax recovery services

A prominent, US-based broker-dealer (BD) engaged a third-party withholding tax recovery specialist to service clients. In the initial arrangement, the BD would mail the vendor statements each month containing client portfolio holdings. Upon receiving the files, the vendor would parse each document for the relevant client and position details, manually inputting the information into spreadsheets and uploading the files into internal software systems.  

Naturally, this mode of data transmission had drawbacks. The BD was forced to extract data, print statements, address and stuff envelopes, and mail a separate document package for each client. Upon receiving the information, the third party would unwrap the documents, identify the relevant information, and enter it manually into their system. Not only did this method delay the processing of claims, it also revealed more personal information than necessary to file tax reclamation applications. So, while the beneficial owner ultimately received a benefit, the process was more expensive, expansive, and time-consuming than it needed to be.  

With the help of technology teams on both sides, the partners implemented an automated data sharing protocol. In this new paradigm, the custodian automatically generates a report every month that includes only the minimum information necessary to file claims-- ten data points that include the stock position, issuing country, and account number, among other items. Although the report is automatically pushed to the vendor via a secure FTP site, a pull option also exists, affording the vendor direct access to the information on the BD’s systems, as necessary.

To ensure clients are getting the maximum entitlement at minimal risk, permission-based regimes strictly delineate who is permitted to access the data and what they can do with the information they receive. Clients must grant authorization to receive the service, legally confirming they understand the arrangement. Signed letters of authorization let the vendor to request Certificates of Residency and permit the filing of reclaim applications to foreign tax authorities. Audit trails represent the last check on power, providing a report that shows who has accessed client data and when.

As a result of this arrangement, beneficial owners receive their entitlements faster. In the case at hand, operational personnel now regularly finish submitting claims by the first week of each month for dividends paid the previous 30 days. Before, employees would not even receive account data until the second or third week of the month. Moreover, because the service is no longer manual, the vendor can charge lower prices, improving efficiency while decreasing costs.

Closing thoughts

As evidenced from the case study, automated data sharing has merits, especially in complex, yet beneficial, asset services like withholding tax recovery. The operational and reputational risks must be acknowledged, but can be limited by establishing appropriate permissions and audit ecosystems to delineate access while tracking results. Taking action to launch a program is recommended. After all, not many asset services can increase efficiency and decrease costs while boosting portfolio performance and enlarging custodial AUM. Because of these benefits, withholding tax recovery is a win-win-win for all parties involved (aside from those whose livelihoods depend on Excel).

Frank Froio is responsible for GlobeTax’s Relationship Management team, focused on strengthening trusted client partnerships. Christian Graham is a member of the team, concentrating on financial institutions in the United States. He maintains a particular focus on the Registered Investment Advisory and Financial Advisory communities.

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