Analyst Viewpoint

Establishing solid investment data foundations

Despite all the hype about data governance, big data and the investment book of record (IBOR) within the asset management industry, I believe that there is still a lack of confidence in, and progress surrounding, data.

The bottom line is that it’s difficult to see how you can manage a portfolio or deliver on a mandate if you have no confidence in the data held within your firm. There is no point in developing an effective growth strategy for the future until you have a grip on the present. That means establishing solid foundations for your operations – and being open and honest about the shortcomings of your technology infrastructure.

In terms of these shortcomings, one of the biggest issues identified in SimCorp’s recent white paper is the lack of appetite in dealing with legacy systems. Within many asset management firms, we see an IT stack that has evolved over time rather than been carefully planned. Changing long-established legacy systems is often high risk, expensive and slow, due to the fact that the technology is so deeply embedded within the firm.

Indeed, legacy software systems are expensive to maintain and often hard to migrate away from. Frequently they are the end result of many years of bespoke development, upon which an asset manager has become heavily reliant and is loath to replace (even if the firm knows that better systems are available on the market). In many cases, firms or key stakeholders are in denial about the legacy status of their systems.

In order to shift to a more efficient operating model, firms need to deal with those legacy systems and build an IT infrastructure that allows consistent, high quality data to be shared in a timely manner across the whole organization. Often this entails working from the same source of data, perhaps even establishing an investment book of record (IBOR). The IBOR can therefore become the acknowledged system of record for all investment data, with all other pre- and post-trade platforms feeding into, and extracting from, the IBOR. As a consequence, it becomes much easier to isolate each of the legacy systems in turn.

If a firm has a point-to-point interface within operations, then there is total reliance on that chain remaining unbroken and this can threaten the integrity of the entire infrastructure. If the IT architecture involves a central hub, such as an IBOR layer, then all of the spokes that feed into that hub can be changed independently without disrupting all of the firm’s operations, both upstream and downstream.

This kind of exercise will have huge impacts on the future of the business, but actually, they are steps that some asset management firms need to be taking now. All applications should be part of a regular and thorough risk assessment. Firms should be able to assess these criteria as part of that exercise and therefore conclude on the status of their applications. As a result, they will need to compile mitigation plans to ensure the long-term viability of their business is not compromised by unacceptable legacy issues.

Another key finding to emerge from the pursuing growth white paper is that although the long-term growth indicators for the investment management industry are strong, they are predominantly around growth in assets – not profits. Most commentators expect profits and margins to shrink, due to pressures from regulators, clients and competition.

If margins are reduced, then firms cannot afford to carry inefficient, manual processes into the future. Now is the time for firms to invest in improving the efficiency of their operations so that when revenues do start to decline, operating costs are falling in line. In other words, if firms do not deal with their operational cost issue now, as margins contract, they will firstly find it difficult to remain competitive and secondly, it will become progressively more difficult to justify the significant expense associated with changing these inefficient processes. In short, the longer the delay, the higher the investment will be.

Legacy systems and manual processes are two closely linked themes that represent huge issues within some investment management firms. Many firms tackle this as an exercise in rationalizing systems, but really the objective should be rationalizing processes and sources of data. The problem isn’t necessarily that you have too many systems in play; it’s often the case that you have those systems supporting different processes.

Interested in this topic? Read my previous blog on Vectors of growth.