Regulation, rising costs, compressed fees all contributing to pressure of change

Investment managers undoubtedly feel the pressure of change. Costs are rising, fees are stretched, and margins are being compressed. Simultaneously, the industry is facing significant regulatory and compliance shifts.  

Under such circumstances, it’s nearly impossible to drive efficiencies and adapt to the changing landscape without making some operational changes. Asset managers that want to future-proof their firms are repositioning themselves by re-evaluating and optimising their operating models.

Many seek to take advantage of new opportunities, innovative thinking, and new methodologies in the search for Operational Alpha® – the value an organisation gains by improving operational processes to increase efficiency and reduce costs. In today’s landscape, significant opportunities exist to use technology differently to achieve these goals – and in doing so, gain a competitive edge.

Defining technology’s direction in investment management

Technological innovation has already started separating the ‘winners’ from the ‘losers’ in the asset management industry. For example, the use of artificial intelligence (AI) holds the promise of helping firms identify complex patterns and trends, potentially improving investment strategies. Automation can help drive accuracy and speed across many functions – including valuations, trading and reporting – while reducing execution costs.

PwC believes that as technology (in the form of automated advice and client service) becomes prevalent, the industry will consolidate in certain developed markets, with up to 20% of the firms currently in existence either being acquired or eliminated.

Asset managers should feel the pressure to stay ahead of the curve in order to remain competitive. Technology is already according to a paper by Morgan Stanley and Oliver Wyman estimated to be 15-20 per cent of the industry cost base, and, may lead players to outspend their mid-tier rivals on innovation by a ratio of as much as 3:1.

This is evident in today’s market, with a majority of respondents (62%) to Confluence’s Asset Management Trend Survey Report Q4 2017 citing ‘replacing manual processes with automated technology’ as an important goal for back office operations over the following 12 to 24 months. Achieving data accuracy/consistency was the top back office challenge, while 82% felt that centralising data was extremely important.

One particular concern for many firms is technology drag. Technology depreciates both financially and in terms of performance, and traditional investment cycles in technology last around five years. However, with industry-wide moves to heighten digital capabilities and draw on agile development techniques, innovation is occurring much faster than this.

The most successful investment firms are not just moving to agile solutions; they are adopting an agile mind-set. This includes placing cross-functional teams around products and services, and empowering those teams to achieve results.

Successful asset managers are also hiring technology talent to drive a new and creative vision and culture in their organisations. They are identifying disruptive technologies, and re-designing long-standing processes. They are embracing machine learning to perform repetitive tasks faster and with greater accuracy. Many are using public and private cloud capabilities to gain efficiencies and scale in powering their businesses. They are also drawing on predictive analysis to deliver data-driven insights to support their decision-making.

Key technology considerations

Investment firms wanting to rethink their approach to technology, particularly in the context of refining their operating model, must take several key factors into consideration. The first is whether it makes more sense to build or buy new infrastructure. Asset managers must be mindful about potential future limitations when making their selections. Will the firm have the flexibility to move across platforms and providers in the future?

Here, it is often helpful to split technology into two separate areas of ‘core’ and ‘non-core’ focus, as this allows asset managers to take a different approach to each.

In the ‘core’ section, investment firms should place anything that can support them in attracting or retaining business. Any technology or system that helps articulate their vision, informs investment decisions, or is part of the product set, should be included in this first section and be part of any agile programme.

The second area of ‘non-core’ focus relates to any technology that is commoditised, such as reconciliations, which should be procured as a service where possible. This can allow firms to devote greater resources to, and focus more closely on, their areas of expertise.

Other ways managers may use technology to gain a competitive edge include adopting a cloud-first strategy. By placing architecture in the cloud, managers are able to reduce development cycles and create a more flexible cost base. Investment firms should also sunset legacy applications as new technologies are introduced to help prevent regulatory concerns that may arise later from fractured data and operations.

Managers that have resource constraints may choose to outsource certain functions to a third party provider who already has the technology built into their solutions and the ability to invest in technological innovation. Outsourcing can level the playing field for smaller or medium-sized firms by reducing the amount of investment required to move away from an outdated technology model.

Using technology to gain a competitive edge

Technology is already changing the investment industry at a faster pace than we have seen previously. It will further change what organisations can learn from data – informing business and investment decisions accordingly – while digitisation will bring new opportunities for asset managers to interact differently with their investors.  Because of this, operating models are going to change.

From Northern Trust’s perspective as an asset servicer to asset managers, we see many of the most proactive firms integrating technology into all aspects of their operations, to grasp these opportunities, gain efficiencies and maintain their competitiveness. For those that are yet to do so in earnest, now is the time to assess their businesses and take action.