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System consolidation enables the asset manager of the future

Key themes and considerations for investment management technology

Read the interview and learn about:

  • Why firms are re-examining their technology strategies
  • The key themes around system modernization and consolidation
  • The benefits of change to the business and to operations
  • The considerations for how and what to implement
Greg Faragher-Thomas

Greg Faragher-Thomas, Director, Alpha Financial Markets Consulting

Michael Karlsson Greenhill
Michael Karlsson-Greenhill, Analyst, Alpha Financial Markets Consulting

Asset managers are increasingly seeking not just to reduce the cost of their systems, but also to maximize the value provided. In an environment of increased diversification and complexity of asset classes, greater regulatory challenges, and pressures to maintain margins, firms need their investment technology to offer the best functionality whilst remaining efficient and agile. This article seeks to discuss how effective system consolidation, along with intelligent operating model design, can help to solve for these drivers, and thereby enable the asset manager of the future.

Differentiation vs commodity focus

Ongoing industry focus on efficiency and optimization has engendered growing emphasis on the line between core and utility functions. To this end, firms are increasingly looking to focus on their core functions and the factors that differentiate them, namely:

  • Investment
  • Product
  • Client

Technology strategies and architectures should be designed to allow an asset manager to concentrate on these differentiating factors; boosting capabilities whilst reducing complexity and inefficiency within the business. Further, the growing prominence of this line between firms’ core functions, e.g. investment decision making capabilities or distribution and client relationship management capabilities, and their utility functions, e.g. investment operations or back office functions, has provided for much greater commoditization of individual services, resulting in even greater onus on consolidating system architectures within effective operating models.

Key themes driving system consolidation and innovation

Operational efficiency and complexity
In recent years, many players in the investment management industry have sought to implement flexible operating models in order to adapt to new business models of investment, products, and clients. As a result, there has been a significant drive towards achieving operational efficiency by managing all assets on a consolidated investment platform architecture and utilizing increased automation such as workflow tools and digitized operations.

The core of this focus on improving efficiency is often in the implementation of streamlined and consolidated enterprise operating models. Importantly, this is not just an effort to attain economies of scale and to realize strategies for growth across geographies and capabilities; it is also a key component in risk mitigation, error reduction, and wider compliance. The use of lightweight and agile technology, when implemented effectively, can significantly reduce reliance on manual operational processes and thereby help to negate the potential for human error, tampering, and non-best practice in an environment of increasing compliance risk and regulatory pressure.

Mobility and ease of deployment
Design, implementation, and use of technology should be completely aligned to business use, although this has not historically been the case. Today’s digital environment both drives and requires firms to adopt models that are mobile, readily-accessible, easy to implement, and easy to use.

The growth of cloud-based and SaaS solutions provides the opportunity for a more agile and cost-efficient model, negating complex deployments and upgrades. This latter point is highly pertinent, as upgrades and maintenance, beyond just the initial deployment, should be low-cost, fast, and should have minimal adverse impact on the business. As such, ease of implementation and ongoing operational upkeep of investment solutions are significant drivers of time and cost considerations in operating model design and enactment. Further, consolidated cloud-based technology architectures allow for access to systems and data from a variety of devices and locations, whilst retaining both functionality and security.

Growth in complex investments
Firms are increasingly looking to diversify investment holdings and take advantage of more agile asset allocation and investment strategies that can generate differentiated alpha in an environment of often stagnant returns in traditional asset classes. As a result, there has been rapid growth in the multi-asset investment sector in recent years. However, the decision to grow multi-asset strategies requires firms to utilize investment technologies with wider functional capabilities. In such scenarios, a well-designed consolidated system architecture can have a significant positive impact in enabling portfolio managers to invest across asset classes while retaining a streamlined and integrated operating model.

Further, global alternative assets are also forecast to continue growing, reaching $14 billion by 2021 according to BCG, and the use of more sophisticated and complex instruments in turn requires firms to utilize more powerful investment technologies. This may provide a significant area of growth for vendors who can expand into alternative asset classes as the ability to retain a consolidated system architecture, to invest in both complex investments and traditional asset classes under the same technology framework, is a powerful concept.

Importance of data
Data can be a differentiator if managed effectively, for example through well-designed use of structured or even unstructured data lakes. To this end, firms have ever more data on their activities and their customers, and although Gartner estimates 73% of firms will have invested in Big Data architecture in 2017, a recent survey by Forrester indicates most companies are still only analyzing 12% of the data they already have. Data management is simplified in a consolidated architecture, where data can be much more centralized and the interfaces required can be streamlined.

Regulatory demands and increased margin pressure
The current regulatory atmosphere for the asset management industry comprises a number of large-scale initiatives covering various regulatory bodies, geographies, and functions. This includes several items that are soon to come into effect such as MiFID II, the Senior Managers & Certification Regime (SM&CR), and the General Data Protection Regulation (GDPR). The resulting impact, in addition to that of previous regulations (MiFID, MAR, Dodd-Frank, etc.) that were enacted after the financial crisis, is to further increase cost pressures across the industry. Symptomatically, the UK Investment Association have found that compliance, legal, and audit staff levels have grown by 50% since 2011. As a result, many firms are seeking to increase efficiency in these functions whilst also improving their compliance efforts further. Importantly, risk management and compliance have become competitive differentiators crucial to the investment process, rather than simple afterthoughts.

In addition to the enforced regulations and directives, the FCA have signaled that they expect to see greater economies of scale delivered to clients. In the wake of added competition from lower cost and lower profit asset classes (e.g. assets within passive funds and ETFs represent nearly a quarter of market share in 2017, according to the UK Investment Association), system consolidation can offer asset managers the ability to both attain economies of scale in traditional asset classes and to expand into challenger or alternative asset classes more effectively.

Implementing system consolidation and technological innovation

Key design characteristics of modernized investment technology models
Firms should look to design their future state operating models with a number of key characteristics in mind. These characteristics cover the factors which enable firms to utilize technology strategies which provide the maximum capability whilst simultaneously improving efficiency, aiding in the progression towards the asset manager of the future:

  • Scalable in the cloud
  • Software as a Service (SaaS)
  • Open and API-driven
  • Agile
  • Using modern/new technology
  • Digital
  • Secure
  • Incorporating data directly into operating model design

“Next generation principles” of consolidated system architectures
In order to complete a system modernization and consolidation program successfully, firms should apply the above design characteristics within the context of ‘next generation principles’ when selecting and implementing consolidated investment management solutions:

  • Selection and integration of the best tools in the market
  • Incorporation of ‘traditional’ technology alongside new solutions and tools
  • Entirely cloud-based solutions
  • Usage of modern collaboration platforms
  • Usage of workflow tools
  • Built around a client-centric framework

Summary

The asset management industry faces an ongoing challenge to improve efficiency in light of increased operational complexity, increased investment and asset class complexity, and increased regulatory pressure. Importantly, this last factor of heightened regulatory demands is evident not only in terms of formal compliance with MiFID II, SM&CR, GDPR, MAR, and others, but also in terms of growing focus by regulators on demonstrating and delivering value for money to clients.

Combined, these elements highlight the importance of employing efficient operating models to maintain and grow margins, and to do so in a manner that enables firms to focus on the key activities that differentiate them. The core business of asset managers is built around investment, product, and client, and to this end a successful operating model with an optimal system architecture draws the line between these differentiating functions and their supporting utility functions.

Effective system consolidation enables firms to focus on their differentiating factors without compromising on their capabilities and their supporting middle and back office functions. The aim then, is an operating model built around a consolidated system architecture that is open, cloud-based, code-light, API linked, workflow-friendly, and strategically designed around data. This incorporates the benefits of specialized and commoditized best-of-breed solutions whilst avoiding the pitfalls of a fragmented system and data architecture by integrating multiple capabilities into a single cohesive and agile framework, under which the whole can be greater than the sum of its parts. As a result, successful system consolidation not only aids in the development of asset managers’ current models, but can also serve to enable the asset manager of the future.

About the authors

Greg Faragher-Thomas
Director & Head of Front Office Practice, Alpha Financial Markets Consulting

Greg has over 15 years’ experience within the asset management area with emphasis around the front office space. Greg is also a subject matter expert and industry authority in technology solutions with experience in leading large-scale change programs across all asset classes for top-tier and boutique investment managers. Before joining Alpha, Greg spent 5 years with Charles River Development and prior to that 4 years with Bluebay Asset Management and JPM Asset Management respectively.

Michael Karlsson-Greenhill
Analyst, Alpha Financial Markets Consulting

Michael has a breadth of experience in business analysis and project management, having worked on a range of strategy and design, vendor selection, and benchmarking engagements for a number of leading global Asset Managers. Most recently, Michael has served as Alpha’s Front Office Practice Manager, and prior to joining he worked at the Bank of England in strategy and change and at a $55bn AUM investment manager in equity research. Michael has passed Level I of the CFA Program and is both IMC and P3O qualified.

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