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Transitioning to a risk-based oversight model: A five-step approach

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Operations executives at many firms wrestle with the pros and cons of shadow accounting. We at Accenture believe that in most instances, the cons of shadow accounting may outweigh the pros and recommend implementing a risk-based oversight model instead.

For investment managers, transitioning from shadow accounting to a risk-based oversight model can be challenging, yet the potential rewards could be substantial. A successful initiative would help investment managers to achieve the desired cost savings, scalability and efficiency that drove the initial outsourcing decision.

Here is a five-step approach when instituting a risk-based oversight model:

  1. Evaluate the Current State:
    Conduct a full assessment of your middle and back offices, including any changes in the underlying conditions and reasons for the initial shadow accounting decision. The Chief Operating Officer (COO) should review different asset types in the investment book, trading frequency, financial reporting requirements, as well as the service provider capabilities to evaluate changes to the firm’s circumstances.
  2. Risk and Activity Analysis:
    Identify the outsourced functional areas as well as their operational risk points. Review activities should be established to mitigate risk points. Greater operational risks should receive a higher degree of oversight. The complexity of the investment manager’s account structure and investment book has an impact on the types of oversight activities performed.
  3. Repurpose Operations Staff:
    Investment managers need to recast their operations staff from “doers” (producing output) to “reviewers” (analyzing output) of the service provider. Cultural resistance to change is to be expected, and bound to complicate the switch from performing tasks to reviewing tasks. Overcoming these barriers takes strong leadership and requires management’s commitment.
  4. Implement Oversight Model:
    Establish a plan that outlines and prioritizes major initiatives facilitating the redesigned environment. The implementation phase should also include an estimate of the resources required to implement the recommendations in the timeframe desired. Before “going live,” investment managers should document policies and procedures detailing oversight tasks, tolerance levels, responsible parties and oversight activity frequency.
  5. Continuous Evaluation:
    The investment manager and its service provider must continuously work together to identify new risks and establish processes that provide effective oversight. The service provider should also keep the investment manager aware of new service offerings and enhancements to tools available to clients.

Since the investment manager and the service provider need to team in this initiative, effective communication between organizations is key. Semi-annual meetings between the investment manager and the service provider would help build a strong working relationship and help ensure the continued success of the risk-based oversight model.

For more information, visit https://www.accenture.com/us-en/insight-insideops-asset-management-operations or contact me at keith.brown@accenture.com.


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