MDSL was able to help a large, U.S.-based asset manager automate the cost allocation of index licenses for the fund management industry using our Index License Manager (ILM). Let's take a closer look at this client success story and explore the complexity of license management, MDSL's proposed ILM solution and what organizational outcomes were produced for the client.
Index licenses for funds and ETFs are especially complex and perhaps the last category of market data to be brought into an inventory tool for reconciliation. They also come at a significant cost, in some cases representing the largest single cost category attributable in some fund products. The lack of visibility in this category is a problem at a senior level because it is a key metric in determining fund profitability.
The reasons for the complexity include, but are certainly not limited to,
1. License policies for funds and ETFs are typically based on valuations (usually of assets, but also product revenues and trade expenses) over varying periods, many involving basis-point tiered pricing combined with variables such as floors, caps, specific annual and quarterly commitments, exclusivity periods, etc.
2. Different index providers have different definitions of many of the licensing concepts. For example, how the required AUM over a period is defined can vary (e.g. end of month; mid-month etc), and how double-counting of valuations can be avoided (in the case of fund-of-funds).
3. The need to support frequent changes in benchmarks at the fund level which occur during an invoice period also means any given license may only be partially applicable, per fund. There are also new funds launched and closed during such periods.
In this particular client success story, the U.S.-based asset manager had grappled with these problems and was considering building an in-house solution to address their needs. However, given MDSL’s long-standing relationship with the asset manager, the ILM product was piloted as part of this evaluation process using a subset of representative fund and license information. Ultimately, the solution was selected based on its existing features, but also the flexibility MDSL demonstrated to support the diverse range of fee scenarios.
The ILM solution was used to import fund and valuation data from a golden source on a scheduled basis and then apply processes to map fund valuations and metadata to the licenses. It calculated predicted fees based on a library of several dozen fee models, attached to the licenses. The asset manager was able to see all the licensing costs at the fund level, dynamically, for the first time. The costs were automatically published into dashboard report, bringing real-time spend visibility to the business and fund managers were able to see index licensing costs by index provider, fund, business line, fund domicile, issuing entity, category, shareclass, and more. Further, it automatically populated the templates required by the vendors for declaration submissions, which were used to generate invoices.
The asset manager saw significant improvements in license expense reconciliation, invoice payment efficiency, and cost visibility to the business as a direct result of our innovation in the area of Index License Management.