Commentary: How asset managers can harness tech to manage compliance costs

Fee pressure and shrinking margins are a fact of life for asset managers, so it's natural that reducing costs is a primary goal for firms of all sizes. But evolving global regulations make it harder to achieve this goal. More and tougher regulations require managers to commit additional technology and people to compliance, causing costs to climb.

Asset managers are well aware of the relationship between these goals and challenges. According to Northern Trust's new survey and paper, "Driving Growth in Asset Management," cutting costs is an obvious top priority. Of the 300 asset managers surveyed, 87% said controlling costs is a strategic operational priority for the next two years. At the same time, half noted that the regulatory environment they face is a top challenge for launching new products. Further, 45% are confident they'll spend more time and money on meeting regulations in the next two years than they did in 2019.

So how do asset managers reconcile the desire to reduce costs with growing regulatory expenditures?

Smart technology investment can disrupt the pattern of rising regulatory compliance costs. While technology implementations require upfront investment, asset managers that make the right decisions can benefit from greater cost savings in the long run.

Most managers in our survey understand that technology investment is the key to managing rising regulatory costs: 64% of survey respondents said they plan to leverage new technologies to achieve their goals in the next two years. But to break out of this challenging loop and stay ahead of their competitors, managers will have to identify the right technology strategy for their own operating model, jurisdiction and product mix.

Planning ahead for regulatory costs is particularly challenging as the landscape is always evolving. When launching a new product — particularly a global product — it can feel impossible to predict what the top compliance concerns for that product will be even one year later. As managers distribute investment products into new markets, the responsibilities increase as they face the requirements of various global regulatory bodies. This can make it challenging to produce an accurate, dependable cost forecast for compliance measures.

Technology has the potential to bring a greater level of certainty to the regulation planning process, but managers will have to take a targeted look at their operating models to determine which solutions will optimize their ability to manage costs.

Regulatory technology, or "regtech," can help automate tasks such as the scanning of changing regulations and the potential solutions available to support compliance. Customized applications of artificial intelligence and automation can also improve these operations.

Because of the increasing amount of information available today, data management is an attractive outsourcing opportunity. In fact, 45% of managers surveyed are planning to outsource their data management function in the next two years. Among their greatest data management challenges are managing changes to existing data, consolidating data and adding new data sources. Better data management can help to control the costs of compliance activities and support a more efficient response to regulatory needs. For example, outsourced partners with access to transaction activity can help managers meet the requirements of MIFID II in Europe.

To set their regulatory digital transformation plans into motion, asset managers must optimize their operating models to be as agile as possible before inviting in a solutions partner to help them improve. Thinking of their operating model from a "whole office" perspective rather than fragmented across the front, middle and back offices gives them a better view into where data backlogs are slowing them down and which aspects can be optimized or outsourced.

When it is time to look for technology partners, asset managers should prioritize two traits that improve the prospects for long-term technology partner relationships.

First, seek out service-oriented providers with deep knowledge of the global markets and the regulations in which they operate. Technological expertise is crucial, of course, but asset managers need experts that are able to understand their business and guide them through the implementation and use of tools in order to realize the full potential of the offering.

Second, look for providers that can fulfill multiple technology needs within one solution. A holistic service offering provides a more complete view of how new technology is working within the asset manager's operating model — creating the potential to improve operations across the enterprise.

As asset managers continue to seek growth, better data management and technology can help them navigate all aspects of the regulatory environment. In order to achieve their cost-management goals, forward-thinking firms are investing in outsourced relationships that provide a strategic platform on which to grow efficiently.

Dan Houlihan is president of asset servicing, Americas at Northern Trust Corp., based in Chicago. 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.