Market conditions have been less than kind to the asset management industry. Mounting regulatory pressures, the fee squeeze and a continuing low interest rate market have pushed firms to define themselves by their competitive edge.
Agility is becoming an increasingly crucial goal for firms, whether it is being able to get new investment vehicles to market quickly or empowering the front office with real time data. Although this sounds like business as usual, putting these strategies into operational mode continues to be the biggest obstacle to an asset manager’s future success.
Coupled with this reality, is the explosion of disruptive technologies targeting the institutional investment industry. You’d be hard pressed to get through a day without seeing or reading about buzzwords like Blockchain, Artificial Intelligence or Machine Learning being the ‘next big thing’ for the buy side. Innovation is of course a thing to be welcomed by any industry, but given the tangled web of complex systems, multiple interfaces and legacy architectures many asset managers are currently dealing with, the need for simplification is the more immediate concern.
The tangled web of front office investment technology
Let’s look at the reality of the front office, for example. In a recent poll conducted by SimCorp, 31% of firms stated approximately 30% or more of their daily activities are performed manually. In real terms, a similar finding from Tabb Group illustrates this as a highly-skilled manager spending an hour each day, reconciling data and unravelling errors caused by ‘bad data’. This is time that would be better spent on actual trading, to improve performance.
In addition, 50% of the participants stated that the market factors bearing the greatest impact to the front office are the pressures of increasing data and mounting regulation. MiFID II will of course have been front of mind here, but implementing the stealthy BCBS-IOSCO Collateral Management rules that came in to play last month, is also of grave concern to asset managers. Lastly, one of the often-overlooked areas that has shackled the front office is that of real-time data. According to the poll, 40% of firms felt that accessing real-time accurate positions and cash data was their greatest front office challenge. When put into the context, a buy side firm’s only job is to preserve and grow their clients’ capital and support their investment objectives. They simply cannot afford to have obstacles like these standing in their way.
Removing inefficiencies like these is now no longer a choice, but a necessity. But just how do you maintain a competitive edge in a patchwork environment filled with single-purpose IT systems?
Understanding ‘system consolidation’
Whilst there are some firms making a steady shift away from multiple systems or ‘Best of Breed’, and the industry’s reaction towards system consolidation is growing positively, there are still firms choosing to stick with incremental fixes. The risk is that these can resurface, often resulting in further problems later down the road. To avoid this, others – forward thinkers in their field like AXA, Fannie Mae, Generali, UBS and Unigestion – have chosen to take a step back and look at the business rationale across the whole office. In doing so, they are now able to deliver the tools their asset managers need to reduce operational risk and to compete successfully.
When the term system consolidation is talked about, it is often met by CTO’s, COO’s and Heads of Operations with concern, dread and even sheer panic. And yes, whilst a full-scale front to back office implementation can take years, when we talk about consolidation in today’s terms, we are talking about step-by-step change. It is for example, switching off 10 or 20 systems, many of which may be asset-class based, and replacing them with one or a coveted handful, to form the core of your operations. It’s about systematically addressing one part of the investment lifecycle at a time, be it front, middle or back office. Most importantly it’s about removing the pain points across the business. Whether it is the burden of manual reconciliation, operational challenges such as data risk and the obligation of regulatory implementation. Consolidation can also contribute to an organization, by improving the firm’s responsibilities such as cost, transparency and governance.
Innovating the front office
The front office is one area that many asset managers are recognizing as key to future growth. In a recent InvestOps report, ‘Front to Back: Optimising Cross Asset Investment Operations’, 78% of the 100 European buy side firms surveyed, stated front office technology as the top area for investment, followed by back office technology and cloud services. This is not surprising, as competition between buy side firms tightens and increasing reference data volumes continue to disrupt the front office.
In the same vein, service providers have also turned their attention to front office innovation. There now exists already a plethora of OMS and EMS solutions on the market. SimCorp too has invested significantly in automating much of its front office solutions as part of its front to back offering. For instance by providing integration with market leading platforms like OTCX and TS (formerly TradingScreen). These not only deliver the highly sought-after automation and connectivity many firms need, but also provide data sharing capabilities and best execution evidence, for regulatory best practice.
One system, infinite possibilities
Managing cost and risk
The front office is just one area of innovation some firms are considering. But when we look at the ‘whole office’, some of the facts and figures speak for themselves. Moving to one multi-asset platform, can lower the total cost of ownership significantly, through the reduction of interfaces, data hubs and hardware platforms. One of the biggest costs eliminated is the testing expense associated with upgrades. Equally important is the reduction in vendor risk, associated with having so many moving parts. That in itself is a major concern for most COOs.
Making the time and capital investment into an integrated system also improves automation of reporting and processes, making the investment lifecycle smoother, quicker and less reliant on manual workflows. Firms can capitalise on this immensely, by automating low complexity tasks and reassigning skilled individuals to more sophisticated processes. At the same time, an increasingly automated process can have a significant impact on corporate actions and collateral management, which the InvestOps report found to be areas suffering from the most manually intensive workflows.
A single multi-asset platform for core processing, delivers the best foundation across the investment lifecycle
Scale & agility Global businesses can scale operations efficiently with an agile 24/7 follow the sun model. At the same time, accessing one system for multiple asset classes, reduces the time to market for new products.
Accurate data lineage Fully traceable data lineage with ‘one source of truth’ for the whole organization, minimizes data sharing and manual reconciliation challenges.
Real time data Availability of accurate and real-time cash and positions data, provides the front office with more informed investment decision-making and middle office risk management.
Simpler Regulatory Implementation Achieve timely regulatory implementation and best practice, with many reporting processes automated e.g. TR reporting. In the InvestOps report, this proved a popular pain point for most firms, with 72% firms stating support for regulatory requirements as their top strategic objective for 2017.
Flexibility Investment platforms, such as SimCorp Dimension, that can operate with existing single-purpose systems with the potential for full integration, offer the most practical approach to consolidation. This flexibility gives firms the competitive edge the need and the ability to determine where to start and how to proceed, at a tailored pace.
As with most technological change, consolidation does not happen overnight. But by acknowledging the need and partnering with a technology expert, one with a clear long-term strategy, an organization is more likely to succeed in its journey towards operational efficiency, to fulfil its investment needs, and to ensure its future growth.