Role of technology in buy side

Role of technology in buy side

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  ROAD AHEAD: BUY-SIDE Roleof Technology ABSTRACT Buy-Side firms are in constant need of adaption to the changing markets, Ever Increasing Regulations and increased Cost Pressures. This article highlights Emerging Technology Trends and potential for Asset Management firms to address some of the challenges through right Technology adaption Adarsh Panda
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  1 | BU Y - S I D E : R O L E O F T E C H N O L O G Y INTRODUCTION Capital Market Trends Pressure on Investment Banks Role of Buy-Side ASSET MANAGEMENT TRENDS Demographic changes Regulatory Costs TECHNOLOGY ADVANCEMENTS Business Strategy Analytics & Big Data Outsourcing Considerations Regulatory Upside Digital Transformation Dynamic Reporting Robotics CONCLUSIONS Short/Medium Term View Long Term Strategy NOTES & REFERENCES
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  2 | BU Y - S I D E : R O L E O F T E C H N O L O G Y INTRODUCTION Since the Global Financial Crisis(GFC) of 2008, Capital Market firms have generally made a good come back as reflection of capital growth in financial markets specially in equity/fund markets. However rising capital requirements and regulatory costs continue to affect the performance of investment banks and their ability to differentiate and compete in the market. On the other hand, Buy-Side firms have seen a steady increase in their Global Assets Under Management(AUM), which by estimate is only going to grow. With a reasonable positive assumption around their business model and Fee structures, this only means Asset Management firms would become bigger contributors towards overall Capital Market revenue. Additionally, changes in investor demographic as well as easy availability of market data has potential to push Buy-Side firms to re- innovate their business model including Direct Market Access which might drive capacity out of sale side. Advancement of technology has made data availability much easier for Non-Banking entities Popularity of ETF (Exchange Traded Funds) means easy exposure based trading Better market connectivity is impacting Capital Raising & Market making businesses
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  3 | BU Y - S I D E : R O L E O F T E C H N O L O G Y ASSET MANAGEMENT TRENDS Having established the important role of Asset Management industry, a closer look at their business model reveals increasing stress in their margin structure. Additionally, though global AUM have seen an increase (and will continue to rise), there have been decline in the high rate of increase in AUM that the industry had enjoyed prior to 2015. These two points re-emphasise the increased competition for net AUM flow (discounting organic growth) as well being able to create a scalable operating model in a cost effective way. We look at these in details. The investor Demographic and new AUM topics both require joint consideration. Asset Managers need to adapt and future proof if they want to stay competitive and relevant which means preparing now for future Generation investors(Y,Z). DEMOGRAPHICS CHANGE As wealth passes from baby Boomers to Gen X,Y,Z, the importance of Wealth Accumulation gets as critical as Wealth Preservation. As newer Generations are more tech savvy they demand higher customized services, which throws an awkward challenge to Asset Managers - Customization while being Competitive. Additionally, their risk appetites being quite different to baby Boomers, the demand for Alternate Assets might be one of the options the Asset Managers would have to consider as means of generating Alpha.
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  4 | BU Y - S I D E : R O L E O F T E C H N O L O G Y REGULATIONS While analysing Customization Vs Cost equation, the ever-increasing regulatory burden requires careful consideration. In Europe and North America, significant exercise is being carried out for compliance with regulations around clearing of Over the Counter(OTC) based contracts. Large number of standard OTC contracts now need to be cleared through Central Counter parties while its accepted that some will continue to be bi-lateral. Asset Managers having larger exposure to OTC based instruments need to put the right technology strategy with a view to support changes in Collateral Management and Mark to Market requirements. In Europe, Asset Managers would need to create additional reporting in support of transparency requirements of MIFID II by early 2018. While all these adds further costs to the already stressed operating model, there is probably no better time to create the right Enterprise Data Model(EDM) solutions than NOW. The growing regulatory focus on all sides of Capital Market, opens another important thread not to go unnoticed. The past few years have seen a steady growth of AUM under Retail segment. As impressed earlier, due to shift in Generations, the industry has seen pension withdrawals and significant in-sourcing of management function by Insurance & pension providers. While regulations will try to keep pace with Retail Investor safeguarding, this also presents a great market for Asset Managers considering Global wealth continues to rise. The Managers with strong Retail connections, will obviously have the head start advantage. However, consolidation on Buy-Side is likely as economy of scale will play a crucial role in being able to offer the range of services needed in retail segment while still being competitive in price.
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  5 | BU Y - S I D E : R O L E O F T E C H N O L O G Y TECHNOLOGY ADVANCEMENTS As we have established earlier, sole reliance on Market Driven AUM growth is a risky proposition. Differentiation by virtue of services offered and value generation will be key for Asset Managers to not only secure their market pie, but also gain additional shares as the industry moves towards disruptive technologies. Significant progress of technologies around Analytics and Big-Data provide great options for Asset Management firms to invest ahead of curve with a view to create differentiation when it comes to attracting new markets. As Asset Management Companies embark on technology transformation journey, its critical to define the business strategy and create technology roadmap as only an enabler to the same. For example, Business leaders need to decide if they want to specialise in Alpha or be a Beta Provider. In either case, having a deep customer understanding is going to be key for success. Advances in technology means availability of information, which also provides opportunity for Technology & Platform Providers to gain a piece of Pie. Considering most of Asset Management companies have valuable historical and current data about customers, strategic alliances with technology providers to create the analytics, is an option not to be overlooked. This also comes with cost reduction possibility by exploring Infrastructure outsourcing through hosting options in Private or Public cloud.
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  6 | BU Y - S I D E : R O L E O F T E C H N O L O G Y OUTSOURCING Retail strategy for most firms will likely be around creating array of customised services at competitive costs. The Asset Management industry might see scale consolidation to drive costs down, generating integration opportunities for technology providers at the same time reducing potential players. Similarly, investment service providers will need to scale up their technology platforms as more and more Asset Managers look to outsource their middle and back office as part of consolidation. The number of players who would survive this exercise is hard to predict, however Asset Managers would look at consolidating their operations functions into as less number of providers as possible. While, Retail segment has started to play a bigger role due to the factors mentioned, it’s also critical for Asset Managers to retain their institutional business. Managers solely focusing on institutional side, would need to ensure their operating model is efficient to survive the margin pressure and increasing regulatory costs. Outsourcing options will become more relevant than ever before and Managers might need to look at service providers who would be able to provide cost efficiencies by virtue of their scale of operations.
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  7 | BU Y - S I D E : R O L E O F T E C H N O L O G Y REGULATORY UPSIDE While we spoke about increased burden of regulations, this also provides opportunities for firms to consolidate and optimize their business mode. UCITS IV allows Asset Managers to distribute funds across EU by being domiciled in a country of choice. As a fall-out of the above topic, the demand of market utilities is something to be considered as outsourcing market matures and labour arbitrage reduces in value. Blockchain technology has potential to provide significant efficiencies through post trade DLT(Distributed Ledger Technology), however the speed of progress seems to be slow as the eco- system is looking to move carefully on this. KYC, Trade Matching & Reconciliation, Settlement & Clearing are few areas heavily being targeted for Block Chain models with increasing number of pilots aimed at them. Its highly likely however that, Block Chain would draw more attention from Investment Operations and Shareholder Admin service providers than Asset Managers themselves. This would be more prevalent as Asset Managers look to focus on revenue generating activities e.g. portfolio management while looking commoditize others.
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  8 | BU Y - S I D E : R O L E O F T E C H N O L O G Y DIGITAL TRANSFORMATION We discussed about how critical will it be for Asset Managers to be able to provide customised services while being cost competitive. Asset Managers who integrate Digital Transformation as key part of their Technology Strategy would certainly be able to create that deep and better client experience which we analysed earlier. This way, the cost of transformation can be built into a stronger ROI model which provides penetration into new markets and additional opportunities in existing areas of business. Front office is the area which provides significant potential for creating more digital processes which has direct impact on client satisfaction. As briefly discussed earlier, intelligent Analytics could play a big role as this would allow trading decisions to be made based on current and more accurate data. Depending on Business strategy, Asset Managers need to embark on the journey of right technology choices. ‘Multi Asset Class’ solutions would require the right technology orchestration to provide single view across multiple Order Management Systems. Choice of Analytics strategy also needs to consider how comprehensive data can be made available to the Analytics engine. Most of Asset Management firms are already investing in creating ‘Investment Book of Records(IBOR)’ which aims to provide a near real time view of Trading and Accounting books. Due to the widely different operating models adapted by Asset Managers, there is no ‘One Size Fits All’. However, the objective is to provide near real time copy of investment records for best possible investment decisions. The right Technology strategy will be based on which areas the firm decides to keep in-house.
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  9 | BU Y - S I D E : R O L E O F T E C H N O L O G Y DYNAMIC REPORTING The other area which is of significant digital consideration, is client and compliance reporting. This links tightly with the Enterprise Data model adapted by the firm. However, creating or adapting a technology platform which provides flexibility of Dynamic Reporting will be key to create a great digital customer experience. The more market moves towards tech savvy generation, the demand for self-service reporting is going to increase. Hence using the right technology platform is key, which not only generates positive customer experience but will also help cost reduction through legacy reporting platform decommissioning. Blockchain based Distributed Ledgers have gained significant interest for this purpose as there are potential for various counterparties to access the Ledger through their ‘Nodes’ and generate the reports in customised format through ‘Smart Contracts’. ROBOTICS Buy-Side firms who decides to keep operations in-house or service providers having fragmented applications footprint, are aggressively looking at Robotics Process Automation(RPA) which aims to replace software robots for activities typically done by operators or help desk staff. While RPA by itself won’t fix the operating model, however it provides quicker automation solution which helps free up FTE capacity. Few firms have already adapted RPA and are looking to move to the next level of Self- healing systems, which anticipates an issue and proactively suggests a fix. The applicability of various suggested options, will be a decision firms need to take based on Business driver and Technology Strategy.
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  10 | BU Y - S I D E : R O L E O F T E C H N O L O G Y CONCLUSIONS Buy-Side as an industry is going through multiple challenges due the Macroeconomic and Socioeconomic factors. The current operating models adapted by Asset Managers are more likely to be undergoing changes based on the business model individual firms decide to stick to. The Technology Strategy needs to evolve as an enabler to support the Business Model. The actual adaption and selection of technology platforms would depend on the Technology Strategy adapted and investment appetite at a firm level. In medium to long term, there is value in evaluation of ‘Disruptive Technologies’ like Block Chain and the industry is already seeing significant investments in these areas. The relevance of Technology service providers will be on a rise considering the industry would look beyond labour arbitrage in the process of identifying suitable business cases for Blockchain technology. The speed of progress has been slow so far, however there are areas in post trade processes, which firms are convinced as targets for disruption. The scale of impact of these on Asset Managers would be a factor of their future operating model, however Service Providers would need far more serious attention as disruption would potentially mean degree of dis-intermediation – which would be threat and opportunities both. During this period of due-diligence, the utility based model would continue to be evolved, however Technology firms and Service providers may consider creating an architecture, which would reduce the software waste if/when they decide to move to Block Chain in future. In short to medium term, re-evaluation of Enterprise Data Model would be a smart thing to do considering cost pressure on Buy-Side is ever increasing due to competition for new AUM as well regulatory overheads. Here Asset Management firms need to carefully decide functions to outsource (or move to Utility or Blockchain) vs functions to keep in-house. In either case, functions around Middle and Back office would fall prey to Robotics Process Automation which would be able to provide quicker FTE/Cost reduction while firms decide their Target operating Model. Not to forget, Digital Strategy is to be kept in mind while deciding on any automation and transformation approach and few firms would be ahead of others based on speed of progress.
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  11 | BU Y - S I D E : R O L E O F T E C H N O L O G Y NOTES & REFERENCES The Value Migration (May 2016) – Boston Consulting Group The Upside of more regulation: A billion-euro opportunity - Mckinsey&Company The future of asset management (April 2016) – ROBECO EFAMA Quarterly Statistical Release N°68 (Fourth quarter of 2016) ABOUT THE AUTHOR Adarsh Panda is a principal consultant at Syntel Europe Ltd (till April/17), specialising in technology consulting for Buy Side firms in Capital Market. He has worked in number of Technology consulting firms over last 17 years. If you would like to discuss any issues analysed in this article, please contact at ([email protected]),