5 Trends Which Are Shaping Investment Operations

Earlier this year, WBR Insights hosted a webinar to discuss the findings of the ‘Operations as a Competitive Advantage for the Buy Side’ report, commissioned in Q4 of 2017 by SimCorp. Below, we pick out five of the top challenges in investment operations revealed in the survey data.

1. Firms are Consolidating Their Systems

We found that 80% of respondents think the number one strategy to gain efficiency and therefore reduce operational costs is to consolidate systems. The same sentiment features amongst our interviewees’ top strategic priorities, where system consolidation and the reduction of interfaces were named as the top business priorities by 75% of firms.

Consolidating systems and reducing the number of interfaces can greatly simplify the operational environment, enabling automation, reducing manual processes, and ultimately reducing the cost of operations. But it also enables greater accessibility and accuracy of data to support the front and middle office, which will continue to differentiate and distinguish firms going forward.

Our interviewees also told us that their top priority was increasing the accessibility and accuracy of their data – there is a link here between the top two responses and the introduction automation to remove manual processes, as automation directly benefits from fewer systems, interfaces and more accurate data.

This reliance on accurate data actually extends to almost everything on the list. New technologies like AI, robotics, and ultimately even automation cannot work effectively if they are not informed by correct data, in fact, as you move towards a more automated environment, if your data is not consolidated and accurate, then you’re likely to automate yourself quickly to the wrong answer.

2. Regional Regulations Require Global Solutions

62% of respondents to our research cited solving the indirect global consequences of a regional regulation like MiFID II as a top challenge in today’s landscape. Our research also shows that new regulations mean new data management processes for three-quarters of firms.

The key to implementing better communication processes is to ensure the various regulatory implications that affect firms as they operate globally are pieced together coherently and consolidated centrally.

With regards to regulations like MiFID II, for example, it is important to look to partners who have experience globally, and aren’t focussed on any one particular jurisdiction. For example, if you are based in the United States but are concerned of the potential impact of MiFID II on your operations then you would benefit greatly from access to a regulatory centre of excellence based in Europe that’s focussed on global regulation. This would help you get the inside track on how to better understand how your organization might be affected by MiFID II, and then what solutions might be available to you.

3. Alternatives and Private Debt Are Proving Challenging and Costly to Support

Topping the list of most challenging and costly asset classes to support were alternatives (34%) and private debt (28%).

Likely this is challenging because the required sources of data to support them are not as readily available. As the front office trades ever more complex alternatives, you have to look to alternative sources of data to support them, and it’s just not as straightforward as it is across the rest of the asset classes.

However in combatting this the industry should be careful not to repeat past mistakes like, for example, how the industry attacked OTC derivatives. In that case, as volumes increased and more firms adopted OTC derivatives as a way to implement certain strategies, all of sudden entire operational teams and different sets of technology and systems were set up to support them. These were implemented at a significant cost, and to this day are still sitting as a separate silo or separate stack next to your core asset management business. This is hardly an optimal situation.

Firms should be looking to introduce solutions which can address the entire lifecycle and increase efficiency, and not the other way around.

4. New Investment Strategies and Mandates Can be Impeded by Operations

One of the key areas where operations can play a vital role is supporting a firm’s competitiveness through reinforcing its front office—unfortunately this is not always the case.

Here, the report found that operations face the challenge of overcoming the cultural norm that has manifested in the industry. When asked how the operations team were viewed by key stakeholders in the front office, 30% or respondents stated they were regarded as roadblocks to supporting new investment mandates, while only 17% felt they were seen as true innovators that provide the firm with a competitive advantage.

One of the main reasons for these types of conflict is a lack of communication, collaboration and understanding. However, it is incumbent on the organization itself to implement a framework through which to promote the required communication from various parts of the business—including the front office—to deliver projects successfully.

Ultimately, the most successful firms are the ones who have taken bold action, and have delivered meaningful change in an operating model that’s capable of meeting the expectations of the front office. This means developing and getting buy-in for executing an operations and technology strategy that’s going to set your organisation up for long-term success.

5. Combating Disruption from Non-traditional Competitors

73% of respondents agreed that the buy-side will experience disruption due to the entry of non-traditional competitors with advanced data and analytics capabilities. One of the biggest takeaways from the responses was a sense of urgency to transform operations on the buy-side – though strategies were unclear and certainly inconsistent. Some respondents said they were considering partnering with non-traditional competitors, others were turning to outsourcing, and still more looking to invest in a data and analytics team in-house. One respondent even admitted to not knowing what the best solution was. “There is tremendous pressure with little knowledge for an effective solution,” they said.

However, there is not need to panic just yet, rather, firms should be planning carefully for the future. In addition firms should continue to tighten their operations by improving efficiency and capabilities and reducing their cost structure in order to more effectively meet client demand.

Of course, it is always helpful to be innovative as well, and new technologies can provide significant benefit to your clients. Ultimately, however, firms need to be ready for disruption, because the industry will always change, and rapidly at that.

The best advice is to be ready for that change—and have a plan.

This article was adapted from a webinar hosted by WBR Insights and SimCorp with speakers Marc Mallett and Werner Vetsch. You can view the full recording of the webinar here, and can download the full ‘Operations as a Competitive Advantage for the Buy Side’ report here.