Invoking H. G. Wells and Aldous Huxley in the context of asset management might seem like theatrics, but the business of asset management has changed. The stark reality is that players must adapt to a new world — and perceiving a clear way forward is the first step.
In the not-too-distant past, asset managers made money by either implementing active mandates with high fees, by executing large passive mandates with low fees but at scale, or by customizing active or passive mandates to client needs, also with high fees. But as competition has ramped up, margins have narrowed.
Active managers felt the pinch first, as the value of their active alpha was challenged by lower-cost passive alternatives. Competition then erupted in the passive area itself, developing into an all-out fee-fight, as underscored by Fidelity Investments' announcement of the first no-fee index fund. Now we are witnessing the robo-advisers' challenge to the more traditional customized business.
Increased competition and lower margins inevitably force firms to take a hard look at operational efficiency, including technology. Unfortunately, due to a lack of investment since the global financial crisis, many asset management firms are today powered by a patchwork of antiquated legacy systems and technology that both inhibit scalability and require constant and expensive maintenance and reconciliation. While asset managers readily acknowledge that being in the technology "plumbing" business is ancillary to essentials of asset management, exit strategies are scarce. Granted, firms can simply hand over the keys of their investment infrastructure, including all the necessary plumbing, to a BlackRock (BLK) or Bloomberg. But while such decisions may reduce some of the pain, firms also surrender control and the critical ability to differentiate through customization of their investment processes.
The investment processes of asset managers ultimately will be driven by flexible and powerful technology ecosystems that cost-efficiently provide customizable, scalable and integrated front-to-back solutions for investment management. Practically speaking, however, such systems are still years away — numerous current marketing claims notwithstanding. But here's the good news: the foundation on which those systems will be built already exists. Consider the following — and fully executable — new model: a cloud-based, open platform built upon proven best-of-breed solutions for portfolio construction and risk management.
Risk management and portfolio management are the core of any investment process. The key to creating innovative products is sophisticated portfolio construction, with risk management ensuring the right risk-return trade-off. The flexibility and independence of best-of-breed solutions enable firms to fully leverage their investment process and differentiate their strategies from competitors. In fact, settling for anything less than best-of-breed puts firms at an immediate competitive disadvantage.
Only the cloud has the on-demand power to drive the most sophisticated best-of-breed solutions. That same on-demand power handles complex heavy-duty analytics, enabling research teams to build, back test and bring to market new products and strategies faster and at lower cost. And let's not overlook the cloud's ability to efficiently scale assets under management.
The cloud also offers firms an out — a way to shed the costs and headaches of managing their own data centers. With cloud-enabled "infrastructure as a service," firms have the ability to tailor their infrastructure to their specific needs. A single common infrastructure also translates to lower total cost of ownership, because fewer and more streamlined processes and components deliver greater value dollar for dollar.
A decade ago, most asset managers rejected the cloud as too vulnerable from a security standpoint. But no more. The cloud is now the sandbox in which the best developers play, giving cloud-enabled firms the ability to capitalize quickly on the latest architectures and advancements in interoperability, interactivity and flexibility.
Why an open platform?
State-of-the-art portfolio- and risk-management tools are only part of the solution. An open platform gives firms the ability to create a complete and fully integrated investment ecosystem, by placing best-of-breed accounting systems, investment book of records, trade-order management systems, consistent data feeds, etc., side-by-side with their best-of-breed risk and return tools. By definition, an open platform gives clients the flexibility to pick and choose, such that the platform can either serve as an extension of the client's investment management system, or the system itself.
Open platforms are an option that is long overdue in asset management. In fact, the real question is, who wouldn't want an open platform? Existing monolithic platforms lack flexibility and adaptability, forcing users to sacrifice control and — again — the ability to differentiate themselves.
The asset management business is today more competitive than at any time in its history. To compete effectively, firms must have the flexibility and power to create and manage competitive investment processes consistent with their vision, and the ability to do it efficiently and cost effectively.
Looking back 15 and even just 10 years ago, when Axioma proposed sophisticated, technology-driven, cloud-based solutions to clients, the response was often something like this: "Find a guinea pig and let us know how it goes." Those days are over. The way forward for asset managers is clear: access to best-of-breed solutions powered by the latest technology, plus full data consistency, interoperability and scalability across the enterprise. Why? So they can cost-efficiently focus on what they must do best: creating investment products that generate superior returns for their clients.
And that is what we call a win-win — for both asset managers and investors.
Sebastian Ceria is founder and CEO of Axioma Inc., New York. This content represents the views of the author. It was submitted and edited under P&I guidelines but is not a product of P&I's editorial team.