As multiasset investing continues to grow, so too have the operational complexities of supporting these strategies. Further, the search for yields has driven a meteoric increase in the use of alternatives and other illiquid assets within these strategies, leading to new operational challenges.
At the same time, the buy side is faced with an increasing volume of complex data from disparate sources, emanating from traditional, siloed "best-of-breed" systems. This disjointed operating model has resulted in additional costs, particularly where alternative investments are concerned, adding to overall operational pressures and leading to strained cost margins.
However, the ability to support multiasset investing can be simplified, and made more cost-efficient, with a technology strategy that embraces the consolidation of asset classes beyond that of fixed income and equities, to include illiquid instruments on a single investment management platform.
The changing tide
It is reassuring to see that we are not alone in this view. In the third annual North American InvestOps report, 100 operations leaders across asset management, insurance, pension funds and others have shared this sentiment when discussing strategic priorities for 2019. In fact, an overwhelming 80% of respondents said that they would like to see alternatives consolidated onto a single platform for front-to-back-office processing. This is not surprising since alternatives were called out as the most expensive asset to support in 2018 and cost of supporting these assets is still identified as a challenge in 2019.
The survey results indicate a decided trend toward system consolidation and reducing systems interfaces. They also highlight that buy side organizations recognize that a consolidated system, supported by the single source of data from an investment book of record, can reduce the costs of deploying alternatives and other asset classes.
Yet, the question remains; what is the best way forward? And how does the buy side implement what is often seen as a large-scale change? Our view is that the benefits of using such a platform will grow as operations leaders work to deploy phased consolidation strategies to support today's investment operations' demands.
Breaking through the barriers of change
It's not just the reports that observe a change in attitude toward system consolidation. The market itself is very clearly driving toward a multiasset front-to-back-office platform solution. This is evidenced by recent buy-side projects, as well as acquisitions of "best of breed" solutions by software vendors and custodians, which are now attempting to integrate these disparate technologies. Operations leaders know the risks, costs and the magnitude of effort involved in integrating best-of-breed solutions.
Interestingly, 65% of North American heads of operations for buy-side firms aim to pursue system consolidation through a front-to-back-office solution offered as a platform or a service, rather than a similar front-to-back offering from a custodian. But for those still unsure or in favor of an outsourced approach, how much should they trust that a technology provider, which has just recently jumped on the platform consolidation bandwagon, can deliver on the promise of a truly integrated platform?
When embarking on the platform consolidation journey, operations leaders need to consider a checklist to closely assess proven vendor expertise, as well as examine the underlying architecture of the consolidated platform under consideration. Operations leaders should determine if the platform originated as a best-of-breed solution or whether it was purpose-built as a multiasset front-to-back-office solution, with a unified data source in a single database. They should also find out how many client references can attest to project delivery success, both in scope and complexity of asset classes, as well as number of platforms consolidated.
Agile change transformation
Platform consolidation does not have to be overwhelming. No "Big Bang" change is required. Today, with the proliferation of agile development, and lean product management, it is possible to start small and show business value early. Organizations can implement this strategy for just a few portfolios before expanding to the entire book of business. Embracing an agile delivery approach is the biggest way of mitigating the risk of these transformational projects and the best way of showing stakeholders value early in the project.
It's no sacrifice
Achieving consolidation and operational efficiency doesn't have to come at the expense of feature-rich functionality. When reviewing, buy-side firms need to understand upfront the extent of instrument coverage, the investments the vendor makes in research and development and their willingness to share development road maps with the utmost transparency.
Human capital benefits
While the benefits of system consolidation are very apparent from a complexity and risk reduction perspective, such initiatives can have a profound positive impact on the workforce. A consolidated automated platform can mean less time and resources spent on manual processes and maintaining disparate, legacy systems, and more time spent on business growth and innovation.
Over the years, too many firms have allocated valuable human resources to battle inefficient processes and aging technology. Today, as the impetus continues on reducing costs, limiting operational risk and increasing assets, and as these drivers all converge, the buy side is recognizing the limitations of their current investment technology and the need to move away from the fragmented past to a simplified future.
As the industry continues to attempt to reconcile its most pressing needs with its current systems, we expect to see greater embrace of consolidation. In the end, those who see their way toward consolidation will be creating increased competitiveness for their organizations for years to come.
James Corrigan is executive vice president and managing director, SimCorp North America, New York. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.