In collaboration with WatersTechnology, we recently sponsored the webinar, Improving trading performance through single front-to-back office platforms, in which I was joined by Samer Ojjeh, Principal at EY, as well as a representative from a global asset manager.
Rather than summarizing the entire hour-long discussion, I thought I would share some of my key takeaways from the discussion.
We all agreed that since the global financial crisis, asset managers of all shapes and sizes have been trying to consolidate their systems. This is especially true for those investment firms still struggling with legacy or so-called “best of breed” systems. If we could agree on the problem, what then are some of the reasons for not taking action? How can these firms get started? And most importantly, how can they make the business case to the decision-makers in their organization?
The panelists, from left to right: Terry Flynn, SimCorp Front Office Product Expert, SimCorp; Samer M. Ojjeh, Principal, Financial Services - Asset Management, Ernst & Young LLP
Hamstrung by legacy and fragmented systems
The discussion started by covering one of the key challenges that firms have. After years of M&A and geographic expansion, many large and medium-sized asset managers have accumulated a host of different and intertwined systems (some of which are legacy) that simply cannot keep up with the pace of change. In many cases, asset managers are investing in asset classes that had not been invented when their systems were designed so it is no surprise that these systems experience problems as firms expand their reach.
Utilizing multiple vendor or legacy in-house solutions to support front to back multi-asset workflow results in higher costs and increases both risk and inefficiency. The resulting complex processes and interfaces limit firms' ability to comply with regulations, launch new products or enter new markets quickly. Perhaps most critically, this makes it very difficult to have an accurate, firm-wide view of cash and positions. Without an accurate, up to date investment book of record (IBOR), compliance, risk, portfolio managers and traders are flying blind…or at least flying on last night’s information.
My key point was that technology has often been approached as an evolutionary process, with firms fixing problems as they arose, rather than taking the time to make the right strategic decisions. “Best of breed” may have seemed like an easy path until firms realized that they needed to work with and see data across silos within their businesses. This is where best of breed really breaks down. If a firm manages fixed income on one system, equities on another, maybe FX on a third and finally uses a fourth vendor for their investment accounting, is anyone surprised that risk and compliance management are a mess?
The hidden cost of maintaining all these systems can be huge. It means configuring, documenting and training users on multiple systems and trying to keep multiple systems working together across asynchronous upgrade cycles. Each disparate system also means an additional interface that must be maintained and likely will require daily, if not intraday, reconciliation to ensure data integrity.
Fixing the issue at hand
In terms of technology, the panelists agreed that firms have for too long been focusing on short term solutions. As the pace of change in the industry continues, this is simply no longer viable. It is time for these firms to take a step back and take a strategic view of their business. Decisions to address issues today must also be viewed in terms of their impact 3, 5 and 10 years down the road. What are the current and future needs of your global operating model and what infrastructure requirements do you need to support this service offering?
We all agreed that it is time to take a more holistic view of technology platforms, from order management, all the way through to fund accounting. Only a long-term view will get you the right technology and vendor.
Decisions to address issues today must also be viewed in terms of their impact 3, 5 and 10 years down the road. Terry Flynn, Senior Sales Manager, SimCorp
Ensuring quality data flow from the back to front office
For US elections, it might have been all about “the economy, stupid” – but for asset managers, it’s all about the data. This point was stressed many times throughout the webinar by all participants, even the best system in the world is not very effective if the underlying data is poor.
For the front office in particular, trust in data is critical. Without it, portfolio managers and traders cannot do their jobs properly. Each integration point between systems means an interface and will need reconciliation, and this always brings the chance of errors. Errors mean not only financial risk, but also regulatory and reputational risk. Losing a few dollars on a trade is one thing, getting fined by a regulator or losing a client is quite another. Sometimes these reconciliations are done behind the scenes in the back office, but there is a lot of evidence that because it is their job on the line, front office personnel are forced to spend their time trueing up cash and positions at the start of day.
Asset managers are increasingly seeing data as a potential competitive advantage. Those who master it will have the edge over their competitors. For some firms, data management borders on an obsession and may include a dedicated Chief Data Officer who makes it an integrated part of the operating model and ensures clear ownership and governance. These firms believe that it is not enough just to have the best systems, but that the data must be right as well. Without accurate data, even the best system in the world is still going to produce the wrong result.
How to make the business case – a few ideas
One really interesting takeaway from the webinar was the point about making a business case for a change/upgrade of investment management systems. This is certainly not a trivial exercise. It has long-term impacts and can cost a lot of money.
What was made clear by the panelists though, was that while it is a significant project to take on, the benefits can be significant too. Outdated legacy systems or a cobbled together host of fragmented solutions hinders agility and growth and can be a drag on performance. While inertia can be attractive because it is easy, the cost of doing nothing can be huge.
Outdated legacy systems or a cobbled together host of fragmented solutions hinders agility and growth and can be a drag on performance. While inertia can be attractive because it is easy, the cost of doing nothing can be huge. Terry Flynn, Senior Sales Manager, SimCorp
Three interesting points came up, when it came to convincing decision-makers of the need for a change.
- Your reputational risk is on the line. Fragmentation and legacy systems increases your chances of data errors, compliance violations and security breaches, etc. You don’t want to end up on the SEC website or on the cover of the Wall Street Journal, so this needs to be managed properly.
- Attracting talent. In the battle for alpha, asset managers should not under estimate the importance of being able to attract the best and brightest. They want top technology in the front office. It is not just about cash to invest, top tier talent demands the infrastructure to support them.
- Due diligence for asset owners. It is easier to trust asset managers with modern technology.
Finally, the size and scope of projects like these can be daunting so it is critical to identify areas where easy wins can be achieved. Bringing business value early in the project validates the strategy and is beneficial to overall project morale. It also makes selling the business case much smoother. It is easier for senior management to embrace a project that produces some return on investment within a year. Even though investment managers stress a long-term view to their clients, they sometimes fail to heed their own advice when planning their technology strategy.
What are your thoughts? Feel free to leave a comment below, or connect with me on LinkedIn to continue the conversation.