What’s next for the investment management industry?

Read the interview and learn about:

• How the cloud can solve for a complex infrastructure
• Why data transparency starts internally
• Limited Partners and alternative investments
• Mastering regulatory compliance
• Making the most of the data deluge
• Tackling increasing client reporting demands

 

Marc Schröter, Senior Vice President, Head of Product Management, SimCorp

Recent years have shown that global investment managers need to deal with increasing levels of complexity. 2018 will be no different. This article looks at six key issues that will require special attention from investment managers to tackle challenges and seize opportunities.

When looking at the year ahead, six drivers of complexity put special demands on investment managers’ operating models:

1. Increasing tech-complexity
2. Growing demands for transparency
3. Alternative investments
4. Increasing regulations
5. Data growth
6. Increasing client reporting demands

1: Cloud for a complex world

The ability to focus on your core business gets increasingly important as the challenges of a complex world keep growing. Technology is one of the drivers of complexity and typically not part of investment managers’ core business. As the tech-complexity of most operating models has increased over the years as a result of short-term solutions, we now see an increasing demand for tech-simplification.

Cloud offers the opportunity to shift some of the complexity to somebody else – the cloud provider – in other words outsource the complexity. This can be done as traditional “lift and shift” outsourcing to a private cloud or as a migration to a public cloud. The solutions are different in the way that a private cloud generally refers to a fixed pool of dedicated hardware which requires manual processes, whereas a public cloud offers a shared pool of hardware operated at an extreme scale and where everything is automated and paid for by consumption.

In a 2017 report,¹ cloud solutions were reported as a preference among 62% of the investment management firms surveyed. Only a year ago, these numbers would have been more conservative. In 2018, we expect to see early adopters deliver the first successful cloud deployments of previously on-premise-only systems.

So, what can you do if you have not begun your own cloud strategy work? I recommend that you try to find out how public cloud could support your business as this looks to be a trend that is bound will pick up even more pace. Discuss options with your vendor and share experiences with your peers about how cloud can help reduce complexity as well as bring a higher level of cost-effective scalability. Consider how cloud may allow you to outsource some of your firm’s non-core activities and help ease system integration.

2: Data transparency starts from within

We hear the word ‘transparency’ regularly. Investors demand transparency over their investments and fees. Regulations like Solvency II and MiFID II focus on increasing transparency in the market. What is often overlooked though, is the equal importance of creating data transparency within an investment management firm.

With the amount of regulatory changes to come in the next 12 months, from the inclusion of FX into the BCBS-IOSCO Margin Variation Rules to the introduction of the landmark privacy law, GDPR, better data transparency in firms’ operations seems the only way forward. What’s more, many other areas would benefit from improved data transparency.

One way to achieve this operational data transparency is to operate on a ‘golden master’ or single source of data provided by an Investment Book of Record (IBOR) across an integrated solution. This is no new phenomena, but growing in adoption, and with good reason. Research from the consultancy Forward Look, Inc. suggests improved timeliness and quality of data delivered by integrated solutions can translate to anywhere between 51-242 basis points (bps) of inherent alpha.

In 2018, the transparency once perceived to be a luxury will become a necessity. Investment managers will begin to see the need for a holistic data approach, not just to sustain, but to achieve the competitive edge required to grow.

3: Data sharing and alternative investments

In 2018, we expect to see the continuation of a trend where Limited Partners (LP) – partners whose liability is limited by the extent of their share ownership of alternative investments – are improving their strategies to achieve higher returns at acceptable levels of risk, and using technology to effectively manage alternative portfolios.

With the rise of technology and its broader application for LPs, there is a natural inclination to request more and more data from the General Partners (GPs) – partners with unlimited liability and investment authority – particularly for underlying portfolio performance data in the form of Key Performance Indicators (KPIs). The larger reason for the increase in data requests is an increasing regulatory pressure for greater transparency.

GPs are generally accommodating, but we continue to see many struggling with data management and stakeholder requests, and continually playing catch-up when it comes to investor requests for portfolio performance or look-through data. Despite being a topic of discussion for a decade now, there remains no generally accepted standardization of reported look-through data.

The power of technology will help Limited Partners manage alternative portfolios, make better investment decisions, and manage risk using data that makes sense. Looking ahead, an effective strategy values data quality over quantity with the right technology tools to help gain insights.

4: Taking a strategic approach to regulatory compliance

During the last 10 years, new regulations have impacted the financial markets broadly and placed many new requirements on the IT solutions that companies use to support their business. This is not likely to change in a foreseeable future.

The combination of tight regulatory deadlines, multiple updates to timelines, and uncertainties about requirements makes this an extremely complex environment to navigate in. This has caused many investment managers to opt for tactical short-term IT solutions to become compliant within the expected timeline and requirements. However, as anyone involved in IT projects has experienced, tactical solutions tend to live for much longer than initially planned, and most often they end up generating higher operational costs.

Experience also already confirms that investment managers who have chosen configurable solutions that do not require a complete or partial rewrite when having to accommodate regulatory or technical changes, have been much better positioned than those who chose a short-term tactical solution.

To truly master today’s environment of regulatory change, investment managers should plan ahead. If you make continuous process improvement around regulatory compliance a core part of your company’s DNA, it ultimately becomes a competitive advantage.

5: Move data to the center of your enterprise

Data is what drives your investment decisions. Data is what you input, create, and retrieve from your operations every day. Data is what enables you to tackle challenges and seize investment opportunities. However, as the internal and external demand for data and the volume of data expand, the complexity of managing that information is a growing challenge.

If you are holding back a data management project because it seems overwhelming, you need to ask yourself: What use is the data we hold within our firm, if we can’t access it and generate value from it with the way our setup is today?

To tackle the data complexity, we see a massive driver in the industry today towards services that will combine data from multiple vendors and create golden-copy reference and price data for consumption in end-user systems. As a result of this trend, we expect firms to switch from IT-led data integration projects to more business-led data services projects and the introduction of a more subscription-based ‘pay for what you eat’ type data offering, which provides exactly what you want, when you need it.

For a clear majority of firms, such a data services approach would provide a number of business benefits including data simplification, operational cost reduction, and increased agility in terms of reacting to changing times and data requirements.

6: Opportunities to win through client experience

Generally, competition is increasing to both win and retain clients. A low-yield environment means that differentiation through superior investment performance alone is becoming a challenge. Also, brand loyalty is not as strong as previously and technology is making switching providers easier. Consequently, the quality of client service and experience delivered is becoming increasingly vital to differentiate from your peers.

From a client communications and reporting perspective, increasing regulatory and client demands for reporting are putting a strain on current operating models. For a long time, firms have under-invested in client-servicing technology and are consequently struggling to scale their client service alongside business growth.

Clients expect timeliness and increased levels of transparency in their reporting, which many organizations are unsuccessfully are trying to meet with manual processes and legacy technology. According to a 2017 Cutter Associates benchmarking report on client reporting, only 31% of managers can deliver their reports within seven business days, far below the expectations of investors and undoubtedly contributing to poor client experience.

With similar market conditions predicted for 2018, how investment management firms choose to prioritize and respond to client demands, will determine the outcome of the struggle to win and retaining clients.

2018 is your chance to differentiate your firm from the competition

Tackling the six issues identified as putting further demands on global investment managers need to be top-of-mind as we enter 2018. They will drive the increasing complexity that needs to be dealt, but they will also present the opportunities that you can leverage to differentiate your firm from its competitors.

About the author

Marc Schröter, Senior Vice President, Head of Product Management, SimCorp

Marc is responsible for the product strategy for SimCorp Dimension. He has been with SimCorp since 1995 and has worked as a consultant with investment managers on virtually all aspects of front-, middle- and back-office operations. He holds a Master’s degree in Engineering from Aalborg University and a Bachelor’s degree in Finance from Copenhagen Business School.

1. ‘Strategies and Priorities in Asset Management – and the Impact for IMS Vendors’, Lindberg International, April 2017.