In today’s competitive environment, many asset management firms face fundamental challenges, including attracting and maintaining institutional assets. Knowing how your firm stacks-up against your peers when competing for mandates is crucial. To address this need from an operational perspective, McLagan is introducing ODD IQ.
This service benchmarks asset management firms across over 150 risk areas in 8 broad categories, including cyber risk. The use of Aon Investment Consulting’s proprietary due diligence database and risk monitoring program allows us to benchmark your firm to the market and against Aon’s view of operational best practice. Because firms already submit ODD questionnaires to Aon, we can generate this report without further submissions required. As a part of Aon, McLagan provides clients with a complete operational view, leveraging data from over 300 asset management firms to help you achieve optimal positioning in the market.
Asset management firms are required to complete due diligence questionnaires (DDQ) for evaluation by investment consultants. If you have relatively weaker operational practices, you may not receive a buy rating. ODD IQ helps you avoid this by illuminating the criteria on which you will be assessed prior to the formal evaluation and benchmarking your performance to peers.
What follows are two examples of how ODD IQ helped in what might have otherwise been a negative situation for asset management firms. If these organizations had not participated in ODD IQ, they could have missed blind spots which portray them in a negative light relative to peers.
Case Study #1: McLagan ODD IQ: Unlock Insights into Your Business Operations
In this particular situation, when completing the questionnaire, the asset management firm (Manager A) lacked awareness of key operational risk areas and did not present material items of risk in the initial DDQ response. Therefore, the firm failed to provide a sufficient amount of information (and in some cases, even delivered incorrect or misleading responses) to accurately portray its operations.
By identifying outliers and indicating where your firm does not match best practice, ODD IQ allows you to put your best foot forward in representing your firm's business operations to institutional investors, especially in the current competitive market landscape where your standing relative to peers is critical.
Representing a relatively small firm, Manager A did many things well, but did not accurately portray firm operations in its DDQ responses, failing to highlight positive practices and the relative strengths and superiority of some of its existing processes. This did not represent Manager A’s business operations as “strongly” as it should have to institutional investors. Here are some examples to put this into context:
Example 1: Manager A initially responded that no external audit firm tests its internal controls, which is fairly common for small firms. However, Manager A did have an external firm test its internal controls on an annual basis, which is viewed positively by institutional investors and considered better than acceptable for a manager of its size. When evaluating a given manager’s operations, an ODD assessment includes consideration of firm headcount, AUM, and financials among other factors to assess how well the firm’s practices fit its risk profile.
Example 2: Manager A responded that it did not require dual authentication protocols in all cases of remote access to the company’s systems—a risk that could be identified as a cyber security limitation. In reality, Manager A had instituted dual authentication protocols in all instances (best practice), but did not represent itself favorably and mistakenly used an “old answer” when responding to the DDQ.
Example 3: Manager A responded that the firm did not have a vulnerability assessment or penetration test conducted on internal or external systems in the last 12 months (a notable risk in cyber security). However, it turns out that the firm had, in fact, conducted tests and incorrectly portrayed its processes. Many asset management firms indicate that cyber is a top-3 risk to consider in today’s landscape. Given this focus on cyber in the competitive market, it is critical to correctly represent the strength of your firm’s cyber security platform so that institutional investors have an accurate view.
The ODD IQ report spans across your firm’s operations, helping managers to zero in on areas for improvement and best practice alignment before a high stakes review for institutional investors. Using aggregated data provided to Aon through DDQs, this fact-based tool serves as a pre-check proxy for how you might perform in a formal evaluation for institutional investors. By demystifying what is, in fact, best practice and providing a benchmark that allows you to see where your firm stacks up in relation to peers, this tool empowers you with the insight needed to know where you stand. Acknowledging what you’re doing well, and in the case of Manager A, what needs to be remedied prior to an investment consultant or institutional investor evaluation, allows your firm to prioritize potential improvements and stay ahead
The ODD IQ report spans across your firm’s operations, helping managers to zero in on areas for improvement and best practice alignment before a high stakes review for institutional investors. Using aggregated data provided to Aon through DDQs, this fact-based tool serves as a pre-check proxy for how you might perform in a formal evaluation for institutional investors. By demystifying what is, in fact, best practice and providing a benchmark that allows you to see where your firm stacks up in relation to peers, this tool empowers you with the insight needed to know where you stand. Acknowledging what you’re doing well, and in the case of Manager A, what needs to be remedied prior to an investment consultant or institutional investor evaluation, allows your firm to prioritize potential improvements and stay ahead of competitors.
Luckily, Manager A in this scenario participated in ODD IQ and therefore had the opportunity to know on what criteria the firm's operational performance would be evaluated. Manager A could then proactively address areas where its submitted questionnaire indicated that it did not meet best practice, which ultimately put the firm’s representation versus its peers in a more favorable light. Given the large volume of mandates and RFP requests at any given time, it is often difficult to know what to prioritize in presenting your firm for evaluation. Manager A immediately (within days) implemented multiple changes throughout the firm in response to feedback provided by the ODD IQ report, positively impacting its operational best practice benchmark standing. This curbed a reputational risk that could have occurred with the combination of unfavorable and incorrect answers, which could potentially reflect a lack of knowledge regarding firm operations. Such a scenario would leave a negative impression on the investment consultant and institutional investors.
Without ODD IQ, Manager A could have otherwise been blind to these issues that were brought to the forefront as not meeting business operations best practice. While Manager A may have still received a passing rating, the firm would have been viewed less favorably by institutional investors in evaluating the manager within a competitive field. This is a great example of why ODD IQ is so important—to view where your firm does not conform to best practice, have outliers flagged in order to understand your performance relative to the competitive market, and to consider addressing risk items pinpointed for not aligning to best practice.
Case Study #2: ODD IQ Benchmark: A Critical Firm Comparison
In today’s competitive environment, knowing how your firm compares to peers when competing for mandates is crucial. In this particular situation, a global asset management firm reported that it did not have an Order Management System (OMS) in place. This was indicated by the respondent within the organization (Manager B), who replied to the Operational Due Diligence Questionnaire (DDQ). A response like this raises significant concern, as it is something for which a manager of this type and profile may not be recommended to institutional investors if no suitable alternatives exist.
Not having an OMS was a significant operational risk concern for a firm implementing the investment strategy under review. If Manager B did not present a well-controlled alternative, this would most likely be the impetus for a non-pass rating and is therefore critical to address prior to investor review. Further, Manager B was the only firm with this response out of the hundreds of data points in the ODD IQ database, indicating that Manager B was situated far below peers in operational performance in this area.
Utilizing a homegrown system instead of an OMS (which can facilitate straight-through-processing and efficiency), can be problematic for several reasons, including:
- Inefficiency to handle large trade volumes
- Manual / human error, including from rounding
- No audit trail; lack of system integration
- Breach of investment guidelines (pre-trade compliance checks)
- Alpha degradation due to slower execution
- Inability to catch a trade error (how often are ‘trade blotters’ reviewed and reconciled?)
Thanks to ODD IQ’s flag, it was determined that Manager B did, in fact, operate with an OMS. However, the operational question had been interpreted incorrectly by Manager B’s respondent who completed the questionnaire and thus, did not represent the firm’s business operations in accordance with best practice. If Manager B had not completed ODD IQ, the flag for this outlier would not have been noticed prior to evaluation. Furthermore, by catching this error, there was no time wasted by Manager B to understand why its operational performance evaluation was less favorable than expected, allowing opportunity for this issue to be remedied.
These efforts resulted in a pass rating for Manager B in this risk area, while reinforcing the importance of submitting quality information about firm operations. This scenario demonstrates how understanding what is truly best practice in the market can impact your firm’s business operations and the ultimate assessment your firm receives for institutional investors.
To put this into perspective, if Manager B did not have access to ODD IQ's insight into operational best practice, the ODD evaluation team could have accepted the provided response in the DDQ and potentially failed Manager B. This outcome would have been unnecessarily detrimental to Manager B, particularly given that an OMS was in fact in place.
Looking for more information? McLagan’s ODD IQ services provide objective, empirical reporting for managers on non-investment business risk in a space that historically relied exclusively on qualitative (and subjective) risk assessments that were opaque to asset managers. To learn more about this useful product, please contact our team.