SimCorp Leaders

Is ‘brand’ removing your ability to assess risk?

The parallels between a recent car purchase and how asset managers approach their technology purchasing decisions.

I loved my old car and now, I love my new car. Last year my beautiful Audi blew up. Of course, this didn’t happen overnight, it was a slow and painful death where thousands of pounds were spent on repairs. My wife finally said that enough was enough, and a new car was in order. My initial reaction was to go straight to an Audi dealership and upgrade to a Q5. I was then reminded by my wife that actually the last two Audis we had, both had similar problems.

Okay so I agreed, maybe it was time to change brands, but which one?

I felt very uncomfortable with this decision as a change of brand could kick up its own problems, maybe even worse ones. This decision is costly and not easily reversed. Better the devil you know? After much deliberation and reviewing our current and future situation, we decided on a smaller car but remain with one of the premium brands. To my (initial) horror I ended up with a BMW, which I now love and so far have only had a wheel realignment which BMW servicing fixed immediately, without questioning and at my convenience.

The importance of brand in the investment management industry

There seems to be a very similar mindset taking place in the investment management industry when reviewing a firm’s technology strategy. There is almost a resignation that brand and its comfort will prove itself rather than whether or not the technology is right for the firm’s ability to remain competitive. I’ve heard consultants and the like stating: “you’ll never get fired for implementing XX brand” or “upgrade even though you know it’s not optimal, we know this software.” The risk is that you may be letting brand take over the ability to assess if certain technology actually fits prior to taking this view.

Working at a fintech firm, I know many things but only two that help me sleep at night. Firstly, invest in the product to keep it as relevant as possible, so when a review happens, it will mostly prove that that firm has the right technology for their business strategy. Secondly, if it’s not optimal for the client, adjust and customize where needed. No firm really wants to upgrade technology that isn’t fit for purpose but also, it’s difficult to remove legacy technology once in place. Versioning by vendor should be taken very seriously. The upgrade to a newer version needs to add value and keep up with the changing landscape so heart surgery isn’t required down the road. Each version also needs to be cost effective ensuring the cost of technology is not eroding away any profits or efficiencies that have been gained.

The upgrade to a newer version needs to add value and keep up with the changing landscape so heart surgery isn’t required down the road.Peter Hill, Managing Director, SimCorp UK

In this constantly changing environment, investment managers with older systems often find themselves with little ability to accommodate new regulations, asset classes or investment strategies within their current setup.

Inefficient processes such as batch reporting also exacerbate the problem. Without real-time data, critical information is unable to move multiple times a day to the front office allowing for improved investment performance.

So, the question that I ask myself is “why are investment firms putting themselves in this scenario?” In this market environment, it is the responsibility of the vendor community to continue to deliver value as our clients are required to deliver alpha to theirs.

Without vendors investing into R&D, systems become outdated and very expensive to upgrade, hindering their client’s inability to compete. Coming back to my car, I would have continued to invest in the Audi brand had it not been years between cars and no progress being made to fix similar problems between the two models. With license fees being costly enough, similarly, the cost of servicing premium brand cars, it is important to remind ourselves that these costs are paid from part of the vendor’s profit. If a fair portion of those profits are reinvested into the product, then I may never have needed to change brands, however, it seems that wasn’t the case.