The search for yields has driven a meteoric increase in the use of alternatives and other illiquid assets within these strategies, leading to new operational challenges. As multi-asset investing continues to grow, so too have the operational complexities of supporting these strategies. This article explores how to address active managers’ key concerns around efficiently supporting multi-asset strategies and deploying new asset classes, while containing the costs of these strategies.
In addition to struggling with the challenges of multi-asset investments, many buy-side firms are faced with an increasing volume of complex data from disparate sources, due to an operational setup of siloed ‘best-of-breed’ systems. This disjointed operating model results in additional costs, particularly when managing alternative investments, adding to overall pressures and straining cost-to-income ratios.
However, we believe the requirements to support multi-asset investing can be simplified and the operations made more cost-efficient. Achieving this requires a technology strategy that embraces the consolidation of asset classes beyond that of fixed income and equities, to include illiquid instruments on a single investment management platform.
New report confirms changing tide
Recent insights confirm that we are not alone in this view. In the third annual North American WBR InvestOps report1, 100 operations leaders across asset management, insurance, pensions, and other industry segments have shared this sentiment, when discussing their strategic priorities for 2019. In fact, an overwhelming 80% of respondents stated that they would like to see alternatives consolidated onto a single platform for front-to-back office processing. This is not surprising, since alternatives were called out as the most expensive asset to support in 2018, and the cost of supporting these assets is still identified as a challenge in 2019.
… an overwhelming 80% of respondents stated that they would like to see alternatives consolidated onto a single platform for front-to-back office processing.James Corrigan, EVP & MD, SimCorp North America
The survey results indicate a decided trend towards system consolidation and reducing systems interfaces. They also highlight that buy-side organizations recognize that a consolidated system, supported by a single source of data from an Investment Book of Record (IBOR), can reduce the costs of managing alternatives and other asset classes.
Yet, the question remains; what is the best way forward in achieving such a target operating model? And how do you implement what is often seen as a large-scale change? Our view is that as operations leaders work to deploy phased consolidation strategies to support today’s investment operations’ demands, the benefits of using such a platform will grow and become apparent more quickly.
Breaking through the barriers of change
It’s not just the report that observes a change in attitude towards system consolidation. The market itself is very clearly driving towards a multi-asset front-to-back office platform solution. This is evidenced by recent buy-side projects, as well as acquisitions of point solutions by software vendors and custodians, who are now attempting to integrate these disparate technologies. However, operations leaders also know the risks, costs, and the magnitude of effort involved in integrating these point solutions.
The market itself is very clearly driving towards a multi-asset front-to-back office platform solution. This is evidenced by recent buy-side projects, as well as acquisitions of point solutions by software vendors and custodiansJames Corrigan, EVP & MD, SimCorp North America
Interestingly, 65% of North American Heads of Operations aim to pursue system consolidation through a front-to-back office solution offered as a platform or a service, rather than a similar front-to-back offering from a custodian. But for those still unsure or in favour of an outsourced approach, how much should they trust that a technology provider, who has just recently jumped on the platform consolidation bandwagon, can deliver on the promise of a truly integrated platform?
Choosing consolidation with confidence
When embarking on the platform consolidation journey, operations leaders need to consider a checklist to closely assess proven vendor expertise, as well as examine the underlying architecture of the consolidated platform under consideration:
A true golden master
Did the platform originate as a point solution or was it purpose-built as a multi-asset front-to-back office solution, with a unified data source in a single database?
Real user cases
How many client references can attest to project delivery success, both in scope and complexity of asset classes, as well as number of platforms consolidated?
Agile change transformation
Platform consolidation does not have to be overwhelming. No ‘Big Bang’ change is required. Today, with the proliferation of agile development, and lean product management, it is possible to start small and show business value early. Organizations can implement this strategy for just a few portfolios, before expanding to the entire book of business. Embracing an agile delivery approach is the biggest way of mitigating the risk of these transformational projects and the best way of showing stakeholders value, early in the project.
It’s no sacrifice
Achieving consolidation and operational efficiency doesn’t have to come at the expense of feature-rich functionality. In your review, make sure you understand upfront the extent of instrument coverage, the investments the vendor makes in R&D, and their willingness to share development roadmaps with the utmost transparency.
Human capital benefits
While the benefits of system consolidation are very apparent from a complexity and risk reduction perspective, such initiatives can also have a profound positive impact on the workforce. A consolidated automated platform can mean less time and resources spent on manual processes and maintaining disparate, legacy systems, and more time spent on business growth and innovation.
Implementing effective and lasting change
Over the years, too many firms have allocated valuable human resources to battle inefficient processes and ageing technology. Today, as the impetus continues on reducing costs, limiting operational risk, and increasing assets, and as these drivers all converge, the buy side is recognizing the limitations of their current investment technology and the need to move away from the fragmented past to a simplified future.
As the industry continues to attempt to reconcile its most pressing needs with its current systems, we expect to see greater embrace of consolidation. In the end, those who see their way towards consolidation, will be creating increased competitiveness for their organizations for years to come.
2019 North American InvestOps Report: ‘Empowering multi-asset front-to-back investment operations’, WBR Insights, SimCorp, 2018.