3 key ways the past year has boosted Asset Managers

Over the last two decades, asset managers have increasingly seen the strategic value that the tax function can bring to the business. In 2020, the pandemic’s challenges gave many tax departments a chance to show how well they can respond to unexpected pressures and changing demands. Using process innovation in front and middle-office activities combined with data analytics and new tax technologies, many companies have enabled their tax functions to become more efficient and generate more value.

As a result, many tax departments now have innovative, cost-effective new ways to tackle old problems. As we explore below, their abilities to help asset management organizations adapt quickly has furthered perceptions of tax departments as value-adding functions in three key ways:

As part of broader finance function transformations, many asset managers sought to improve the efficiency and cost-effectiveness of their tax compliance over the past several years. With the sudden pressure to preserve cash and contain costs when the pandemic emerged, these efforts yielded significant returns as tax technology offered solutions for generating cash flows or unlocking value.

By digitally transforming their tax processes using intelligent automation, asset managers can reduce the time needed to perform multiple steps. Robotic process automation (RPA) and cognitive technologies, such as natural language processing, can drive automation of the end-to-end tax process, as well as many front and middle-office business processes.

These technologies help people be more efficient in the work they do now and continue to improve over time. By working closely with their teams to identify processes and design the most advantageous workflows, asset managers can implement an automation path that puts technology in the hands of their people.

Other areas of transformation include FATCA and other complex agreements

As the globalization of labor and investment continues, tax is becoming more important, especially when it comes to critical due diligence processes for identifying and validating investor information. Historically, these processes were time-consuming, with individuals manually gathering information from documents and then entering the data into systems by hand to be compared against external databases. Today, cloud solutions and natural language data translation can be leveraged to facilitate a more robust process with instant feedback.

Regardless of the technological tools employed, those tax departments that either invested in these areas before the pandemic, or quickly scaled to incorporate them early in the crisis, were able to shine. At the same time, those tax departments who perhaps previously did not have authorization from leadership to invest in tax technology and innovative processes have perhaps never had a stronger business case to do so. 

Before the pandemic, many asset managers recognized that advancing tax technology held the promise to boost tax compliance efficiencies through automation and standardization, while also improving access to higher quality data for making business decisions.

On considering the prospect of investing in and maintaining the global tax technology infrastructure needed to realize this promise, however, many asset managers saw more benefit in outsourcing. That way, they could leverage the extensive investments in leading-edge global platforms made by external service providers with the right expertise.

Even before the pandemic began, fund administration had seen success in outsourcing. In the past, fund administrators who maintained accounting for hedge or private equity funds often set up their own internal tax group to centralize and standardize their tax data on platforms designed to automate their tax analysis.

More recently, however, there have been significant changes in the services that fund administrators perform. Aided by technology, many funds have become more hands-on in managing their portfolio companies and have gained competitive advantage by embedding digitalization in their processes. These processes include targeting, valuations, due diligence and post-integration planning. At the same time, fund administration has undergone consolidation, especially around their tax regulatory and compliance functions.

As part of this transformation, administrators have outsourced tax service activities for thousands of funds to global external service providers in the last 5 or so years.

With ready access to superior data and analytics from their service providers, tax can become a key variable in decision making in areas by leveraging sandbox, benchmarking and scenario planning. Better visibility of this data also opens opportunities to communicate more effectively with investors, which can often result in more assets under management.

The third way tax functions have elevated their contribution and value is by fully working remotely successfully.

Traditional tax operating models generally involved tax professionals working as centrally located teams. This meant attracting and retaining talent within the local market, an expensive proposition in New York, London and other financial centers.

Now, with remote working, asset managers can access a greater pool of professional recruits with lower compensation costs. An added benefit of a remote workforce is the reduced need for commercial real estate in prime financial services hubs.

As the pandemic highlighted the effectiveness of remote work for tax compliance, as well as the talent and cost benefits, more asset managers have shown interest in the idea of outsourcing some or all their tax compliance activities entirely.

For some large asset managers, this has meant an increase in the “lift-and-shift” approach to outsource their tax data and compliance management. This approach sees organizations transfer most of their tax teams to an external service provider, allowing the organization to focus more on its core businesses.

Previously, many of these in-house tax teams spent well over half of their time managing data to meet daily tax compliance needs. A lift-and-shift transformation allows them to move to a more client-facing business partner role, upping their game with more, strategic work and greater opportunity to contribute value to the core businesses.

Meanwhile, the careers of tax team members who were lifted and shifted in the transformation also stand to benefit. Working with the external service provider will expose them to a broader group of clients beyond fund administrator’s clients. This broadens their opportunities for advancement and allows them to expand their knowledge into new areas, especially for those who wish to deepen their expertise in the latest tax technology.

Now that we are well into 2021 and closer to leaving the pandemic’s challenges behind, we expect these three trends to continue for asset management organizations as they relate to outsourcing of tax services. The accessibility of rich data analytics supported by workflow management and data governance provides the industry with the confidence to rely on outsourced tax service providers to ensure their compliance requirements are being met. In doing so, asset managers can transform their in-house tax teams into smaller, more agile business partners that create competitive advantages.

Nader Karimi
Principal, Business Tax Services, KPMG in the US