Investment Technology

An industry at an inflection point – part one

Stephen Collie

21/06/22

In part one of this commentary, Stephen Collie, Head of Sales Engineering, FINBOURNE Technology, summarises the main challenges raised in the keynotes and panels at The Summit for Asset Management (TSAM) in London, and why speaking the same language is vital to creating operational resilience.

Last week I had the pleasure of speaking at TSAM London, where the buy-side community came together to explore the latest challenges, opportunities and disruptors, against an evolving technology and regulatory backdrop. In this takeaway article, I’ve penned down some of the key points raised at the event, as well as our own thoughts here at FINBOURNE, which I hope you find informative and thought-provoking.

From the keynote by James Sproule, chief economist at Handelsbanken, to the first panel on strategic transformation for the future, the morning sessions laid a stark but true picture of the inflection point asset managers are finding themselves at. In a market with heightened volatility, inflation uncertainty and geopolitical disruption, being able to harness trusted and timely investment data across positions, portfolio, risk and exposure is proving more critical than ever, while balancing the tightrope of cost optimisation and transparency.

We also heard about the spaghetti of legacy systems and architectures, duplicated interfaces, and accumulation of separate systems, leaving asset managers struggling to meet the needs of a new data-hungry generation of investors. With the threat of new regulations bearing down and continued scrutiny over fees, it was made clear that the cost of operating at this new level of transparency, within the current status quo, is now too high to sustain.

As PWC put it, asset managers have three options: scale up through M&A, diversify and innovate, or extract efficiencies and lower the cost of operating before it is too late. In our view, the first two have been in motion for some time now. The latter, we believe, is the one many buy-side firms have stalled on, falsely perceiving it as a luxury rather than a necessity.

This is why we think that needs to change now…

  •  Cash transparency is king

Where cash was once king, now transparency is. Asset managers can slash fees but this will mean nothing if investor and regulatory demand for greater transparency cannot be met. Driving this is the rise of the activist investor and the democratisation of investing – namely direct indexing – both of which are here to stay.

While performance is of course key, we are seeing a new generation of value-driven investors who want more granularity on their investments and are not afraid to take on their managers, or in the case of direct indexing, bypass them altogether. This is not an entirely new phenomenon, but it requires firms to recognise and respond to the evolving investor profile quickly.

  • Computer says no 

Supporting the rising interest in sustainable investing and private markets assets (which panellists across the event all pointed to) is bringing many firms reliant on legacy tech to breaking point. With complex and unstructured data sets, private markets assets are proving tricky at best and impossible at worst.

As one speaker said, we will be seeing more horses, paintings and wine in our institutional portfolios, without a cusip or sedol. In short, firms need to redefine the way they handle and understand these assets in order to cash in on the peaked interest.

  • Big data = big problem

Delivering more value and more data now comes with very real consequences, whether that is drawdowns or regulatory fines. This adds more cost and operational stress, making it particularly important to have a data foundation that supports both public and private markets, and understands the nuances of non-traditional data sets.

We know storing more data isn’t the answer. In fact, I’d go out on a limb to say the industry has focused on hoarding data for too long and has now come to the jarring realisation that capabilities for making the disparate data sets integrated, consumable and being able to derive meaning are missing.

Much of the reasoning behind this comes down to the impact of technical debt and a lack of appetite for innovation (aka inertia). In fact 60% of CIOs surveyed by McKinsey in 2020 cited that their organisations’ technical debt had risen perceptibly over the years, with 10 – 20% of total annual technology spend – which could be dedicated to new products – being diverted to resolving legacy issues.

This insurmountable challenge has led to many firms experiencing the following challenges (to name a few): 

  • Data silos and inefficiencies e.g. duplicate purchasing of market and reference data
  • Slow response and change management to regulation and market opportunities 
  • Difficulty meeting investor due diligence and regulatory reporting
  • Inability to leverage emerging technologies and innovation to support future needs

The final piece in this puzzle is in the translating and interpreting of data across systems so that different functions and entities in the investment ecosystem (from the EMS and PMS, to the fund administrator and custodian) can speak the same language. Effectively a Rosetta Stone for asset management.

Once this fundamental piece is in place, firms can understand their data consistently, derive value and meaning from it and empower multiple functions – from decision-making to analytics. Critically, the resilience it creates eliminates inconsistencies and inefficiencies across the investment ecosystem, for example allowing firms to avoid the need to make daily adjustments to strike the same shadow NAV as their custodian.

Think about Google Translate – what did we all do before it came to being? It seems so logical now and hard to imagine a time before it (but there was and I have the Collin’s Gem phrase books in at least five languages to prove it).

However, it all starts with owning and controlling your data, to minimise operational cost and risk. This is an opportune time to address technology innovation, breaking free from the cycle of best in class systems, outsourced solutions and sticking plasters, and moving towards an interoperable and modern ‘data stack of the future’. It’s a model we feel can solve the very real data challenges that firms are facing today, while also shaping the future of global investment management.

Stay tuned for part two of this commentary, to learn more about piecing together the modern data stack and why innovation doesn’t have to be big bang…

Stephen Collie

21/06/22

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