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March 29, 2017 01:00 AM

How investment managers can survive the pending regulation changes

Kirk Littleton
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    Investment managers that offer separately managed accounts to institutional investors, family offices and other high-net-worth investors typically have established their own middle-office operations, as their custodian bank's infrastructure usually did not fully support all the requirements of such accounts.

    These in-house operations, many of which were created 10-plus years ago, are still in place today using legacy technologies and processes that are simply not keeping up with the current demands placed on managers. For example, many of the investment accounting systems in use are more than 15 years old with limited multicurrency capabilities and do not support the wide range of asset classes required by today's complex investment strategies. But perhaps the most significant deficiency in many of the in-house operations is the lack of a data management system.

    While many the large managers have adopted robust data governance programs requiring significant investment in data warehouses, small and midsize managers continue to rely on their legacy accounting system as their de-facto data warehouse. This will make it very challenging for those managers to comply with the pending regulatory changes as so many of these regulations are heavily dependent on rich investment and time series data.

    Make an investment

    Firms should consider making new investments in technology, investing in new talent, streamlining their daily operations and workflows, or outsourcing everything or certain components of their middle-office operations.

    Among challenges money managers face are:



    • Upgrading technology. Many investment managers are looking to upgrade their technology with a particular emphasis on their investment accounting platforms. There has been consolidation of many of the lower cost investment accounting systems and the concern is the R&D for these aging systems will be cut. With that in mind, many managers are looking at a few startup fintech companies to replace legacy systems. The other technology components being reviewed by investment managers include trade/order management, performance, client reporting (including web/mobile solutions), billing and customer relationship management systems.

    • Governance. Many investment managers agree a strong data governance program supported by an investment data repository/warehouse is going to be essential in order to comply with the regulations that go into effect over the next 18 months.

    • Cybercrime. The Securities and Exchange Commission is heavily focused on managers' cybersecurity programs. With regulatory pressures and tight budgets, money managers are increasingly concerned with maintaining their cybersecurity programs.
    • Outsourcing some or all of the middle-office business functions is looking more attractive than ever before with a few service providers offering a full complement of services to small and midsize managers. Outsourcing can eliminate the need for changing accounting systems and also transfer some cybersecurity concerns to the outside firm.
    Level of complacency

    Over the past decade, there has been a certain level of complacency with middle-office operations and the technologies deployed by small and midsize managers. This new wave of regulation, in addition to consolidation of legacy fintech firms, has fueled the remaining and startup fintech companies to offer new technology solutions and for outsourcing providers to build, scale and price their solutions to appeal to small and midsize investment managers.

    The old adage, “if it ain't broke, don't fix it” has been the prevailing attitude but that is clearly changing as managers seek to comply with the new regulations and to grow their firms over the next decade.

    Kirk Littleton is director of business development, Ultimus Fund Solutions, Cincinnati. 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.

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