Data, digitisation, and financial technology are the buzzwords of tomorrow, today!
Everyone seems to be talking about: ‘digital’, ‘big data’ and ‘smart data’, however you choose to define them; and today’s FinTech environment feels reminiscent of the Dot Com era of the late 1990s.
Yet data has been around the financial services industry for decades. After all, this is an industry based, at least in part, on having an information advantage (importantly a legal one).
So it is helpful to take a step back and think about how data is used in the fund management industry, and what is making things feel different right now.
Data has four primary roles in investment management:
1. To enhance investment decision-making, or generate alpha;
2. To manage risks (investment-related or otherwise) and ensure regulatory compliance;
3. To reduce costs by making investment operations more efficient;
4. To attract assets by helping funds managers identify what their current and prospective clients want and how to better target the right products to them. Given the significant distribution shifts expected in Europe in the coming years, this is an area where senior leaders in fund organisations are putting increasing focus at the moment.
None of which is new, so why all the excitement now?
Firstly, as we enter the era of the Internet of Things, we will see an explosion of data both in volume and variety, making it harder than ever for fund managers to differentiate the signal from the noise.
In addition to this, the industry is creeping closer and closer to a fully intra-day model, meaning the velocity of data is becoming more and more important.
A third, and key, driver has been the regulators. They are asking for – previously unheard of – enormous amounts of data; and in parallel, raising the bar on the analytics they want performed on it and on the attestations they are seeking with respect to the data’s quality.
The industry is also increasingly aware of the value data provides, which is worth as much as, if not more than the transactions being performed. This represents a massive mindset shift for an industry that has always been transaction-centric.
A fifth factor is that the tools to join and analyse data are advancing significantly. We are seeing something of a genesis of a new generation of tools focused on unstructured data and cloud computing, among others, and the new analytics and insights that these tools can bring.
Finally, as the millennial generation becomes a greater part of the work force, expectations for the way people interact with their financial institutions are changing. Providing an experience, that is mobile and seamlessly multi-channel, social, personalised and visually engaging is essential.
So while data is definitely not a new topic, the industry has hit an interesting crossroads, from which we are likely to see a new generation of industry leaders emerge.
However, with these changes, challenges follow. As an industry, we are not that good at managing the data we have today, let alone all of the new data that is coming our way.
According to our research, there are three distinct groups, each at different stages in the journey toward ‘data dexterity’: ‘Data Starters, ‘Data Movers’ and ‘Data Innovators’.
The investments Data Innovators are making are translating into greater confidence across a range of areas, including scenario-generation and stress testing, managing multiple external and internal data streams, optimising electronic trading, and cross-portfolio analysis of risk and performance.
They see data as a business topic, not one for the IT department. This is a key characteristic of the Data Innovators, and in short, they are translating their data and analytics capabilities into competitive advantage.
There is a lot going on, but it should not be cause for panic. Robo-advisors are behind a very small amount of the world’s assets today; big data-driven approaches being deployed by institutional investors are driving the management of a pretty small amount of money; and the industry is still in its infancy in joining structured and unstructured data to derive new insights.
The real changes are likely to be more gradual than what many are forecasting, but they will happen, and the industry will look quite different as these changes take hold. As happened during and after the Dot Com boom of the late 1990s, attempts at radically different business models are likely, a high degree of iteration, failures along the way, and steady but persistent industry-level change - a period, which could be characterised as ‘the quiet revolution.’
So what to do?
The most important step is to get control over existing data. Break the “legacy trap” and replace the outdated systems that are locking up your data in silos.
Make sure regulators’ expectations are met in how and what should be reported to them. Compliance is now an everyday business priority. Nine in 10 investment organisations expect reporting requirements to increase over the next three years, but 50% of investment organisations say their data capabilities will struggle with regulatory changes.
Attack all manual work that drives up costs, so the savings can be plowed into being a Data Innovator; whilst staying focused on cyber security and data privacy, which become more and more important with each day that passes.
Once these have been addressed, or are at least in hand, such organisations will reduce the likelihood of being left behind by their comparatively ‘innovative’ peers.
By James (JR) Lowry, Head of Europe, Middle East, and Africa (EMEA) and Strategy, State Street Global Exchange.