Swipe right for innovative alpha

Achieving the fine balance of front office innovation and platform standardization

Read the article to learn about:

  • Why front office innovation is an enabler for buy-side growth
  • The need to shake up black and white operating models of the past
  • How to achieve competitive differentiation and platform standardization
  • The role vendors can play is de-risking innovation adoption
Anders Kirkeby 300x300px
Anders Kirkeby
Head of Open Innovation, SimCorp
Linkedin Connect with Anders on LinkedIn  

 

It’s no secret that creating the “secret sauce” in investment management has become far more elusive than alpha itself. Today, the buy side is largely dominated by homogeneity, caused by a decade of M&A. This has been further intensified by the margin squeeze and numerous regulations. Not to mention the strain of building scale and expertise fast enough, to keep up with the rapid growth of alternatives and ESG. Asset managers are now stuck in a constant cycle of playing catch-up, with the desire for greater differentiation and cost reduction firmly glued on the business agenda.

 

What’s this got to do with innovation you ask?

None of these drivers are new, but what is changing, is the tide of firms who have simplified their systems architecture and consolidated platforms, to optimize cost and risk in recent years. These firms are now reaching an inflection point, having achieved high automation and with very little low hanging fruit of real consequence, to explore. Yet in a recent poll carried out by SimCorp, the competitive pressure to differentiate and the desire for better investment outcome has never been more significant. It’s not that the desire does not exist, it’s finding the means. 

What many firms have often missed out on in the past is the ability for innovation to drive these priorities. To date, there has been a lack of interest in business cases for innovation, often seen as a lower priority against more “no brainer” cases for cost reduction or alpha generation. But what if technology innovation is the means to achieve these outcomes?  

Rather than a competing priority, what if innovation acts as an enabler for differentiation? Where you can stand out from the competition to win new clients, reduce costs and generate better returns.Anders Kirkeby, Head of Open Innovation, SimCorp

You can be forgiven for thinking that differentiation is directly at odds with the work being done to standardize investment operations. After all, the current consolidation drive directly responds to the tangle of spaghetti systems accumulated over the previous decade, where best of breed solutions held their reign. Yet, while many firms are busy unravelling this state of affairs, there are still investment areas such as the portfolio management space, where asset managers use anywhere between three, four or more, best of breed tools to construct, optimize and calculate risk. All to gain a competitive edge in a low-yielding market.  

The question is, can innovation support a balance between differentiation and standardization?  

In short, yes. However, the sheer choice in the market and the idea of maintaining multiple vendor relationships and integrations is creating a drag, taking already scarce resources away from delivering investment returns and risk management. In fact, the wealth of fintech start-ups and scaleups available, makes it actually quite difficult to really understand the difference between those that sell fiction and those that really generate value. 

No longer a question of buy vs. build

In true fashion, many firms have taken the age-old approach of either buying or building their own innovation projects. The aim as always, is to perfect the data they see alongside their peers, to create competitive insights that give them an edge. This is particularly the case for portfolio construction and optimization, as well as ESG data and research, which were highlighted in a recent global SimCorp poll, as the top two investment areas that could benefit from innovation.  

But the pandemic has put much of this on hold, and where there are still live in-house projects, they are subject to a long and arduous procurement process. As for the ‘buy’ option, our recent poll indicates as many as 61 percent of you struggle with the sourcing, due diligence, integration and compliance aspects of such projects.  

There is a however, a new alternative that is gathering pace in the industry and breaking through the buy or build dilemma. And it comes from the market desire for a balance between retaining a core platform that delivers operational efficiency and having the choice to experiment and pick the tools that can really set firms apart from their peers. This shift is driving what we see as a desire for optionality. It is a shift we believe will shatter the operating models of the past. This time it’s not about buy vs build, or best of breed vs consolidation. It is about achieving the best of both worlds while retaining choice and full control.

This is equally important for those firms still working towards consolidation. To pursue value-add strategies, there first needs to be a ‘single source of truth’ established as the foundation for future innovation. But this doesn’t mean pushing innovation to the bottom of the shopping list. If anything, the availability of value-added services, be it access to new technologies or partnerships within the broader buy-side ecosystem, should be a key component in the search for a core platform. Firms should be confident that their chosen provider can demonstrate not just what they can deliver today, but how they will commit to evolving their services in the future too.  

What we are now starting to see is consensus around the fact that a trusted service provider can capably deliver at both ends of the spectrum, as an enabler of a core standardized platform and optimizer of competitive differentiation.Anders Kirkeby, Head of Open Innovation, SimCorp

Innovation has a significant role to play in meeting the desire to achieve differentiation while also addressing the competitive pressure to deliver more for less. Here, service providers can step up and solve the innovation conundrum, by delivering fast access to fintech innovation within a core platform. Interestingly, this notion is echoed in a recent Citisoft article, which discusses the very need for service providers to support in the delivery of front office innovation, while balancing the industry’s continued move towards standardized operations.  

De-risking innovation adoption to increase experimentation

Driven by client engagement, SimCorp has already taken the leap, from its traditional responsibility as a buy-side service provider, to create long-term partnerships, easily consumable services and open access to innovation. An integral part of this relies on opening up our platform and architecture, to grow and sustain a thriving Buy Side ecosystem. 

By carefully curating partnerships within the broader industry, from fintech, to data and cloud providers, asset servicers and custodians, we are solving challenges in investment areas, prioritized by our clients. Providing meaningful choice that is pre-integrated into SimCorp’s platform is essential to simplifying innovation adoption and ensuring a seamless data flow across the business.  

The very first of these investment areas, is the portfolio optimization space, where SimCorp has already garnered partnerships with Intellibonds, an AI-powered fixed income portfolio optimization provider and StarQube, for its investment decision and data science solution. These partnerships each offer a different flavour of portfolio construction and optimization functionality, giving clients the optionality that fits their unique needs, rather than a one size fits all approach.  

By democratizing access to innovation, we empower clients with easy access and exposure to external fintech innovation, without compromising on operational efficiency.Anders Kirkeby, Head of Open Innovation, SimCorp

But to really help the buy side succeed in their outcomes and grow adoption, we need to do more than just deliver access to innovation. Rather than simply partner with a fintech and pass on the paperwork to the client, service providers need to increasingly simplify the process, from the contractual process through to maintenance.

Why do this? A clear observation we’ve made in our market engagement, is that buy side appetite for innovation is stifled by the headache of integration and compliance. By delivering a service (and not just a solution), we effectively remove the pain of vendor procurement, compliance and maintenance, so firms can focus on simply using the additional functionality and redirecting resources to the work that matters. This essentially means taking the risk out of innovation adoption and keeping upfront costs as close to zero as possible.

As we see it, the future of innovation in the buy side, is not too dissimilar to that of an app store where you can easily plug into multiple tools and solutions, or to a very popular dating app, where you swipe right for the option that best fits your profile. And you can do this, all while benefiting from the operational efficiency of a core front-to-back, multi-asset platform.

The beauty of this is, if it doesn’t work out, you have at least learned something about your needs and what to look for next, which you can apply to a new review of available partners. Taking this very agile approach, is really the core of applied innovation and we believe it should be no different for the buy side. There is now no excuse for inaction, and no place for complacency. In the end, the firms who are the most agile and nimble at experimenting and adopting fintech innovation, will be tomorrow’s winners.

If you’d like more information on how front office innovation can deliver competitive edge and boost margins for your firm click here or get in touch with Anders Kirkeby Anders.kirkeby@simcorp.com.

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