Convergence of retail and institutional

October 20, 2011

I have noticed a definite trend over the last number of years with respect to the convergence of the retail and institutional worlds within asset management firms.

It is not simply just a convergence of the product and service offerings, but also the internal alignment of the teams responsible for each business line.

The operating models that were at play 2-3 years ago had these teams run on separate lines, now firms are aligning their internal structures along functional roles as opposed to business lines, in turn blurring the line between retail and institutional.

 So what is happening out there? What are the drivers? What is causal? What are the symptoms?

There are several key drivers that I see in play:

1. There is board and shareholder pressure to build leaner operating models that scale better and deal with financial market changes in a more flexible and predictable manner. This is borne out of the major flux we have seen in the financial markets since the end of 2008 and the renewed focus on operating costs.

2. There is a growing level of investment savviness amongst retail investors, in particular with the key market segment that has a high level of disposable income. These investors are demanding greater depth and breadth of information on their portfolios, thus driving the retail (product- focussed) reporting model ever closer to the client-focussed reporting model of the institutional market.

3. Institutional clients are demanding glossier client reporting artefacts – something which the retail side of the business are generally more adept at producing. This combined with the demands from the institutional sales teams and channels for product-like factsheet documentation for the various strategies and composites being marketed, is a key driver in getting the output production teams internally more closely aligned.

The results of these drivers are that internally the business lines are being remodelled and combined such that the retail (product) reporting structures are a by-product of the more bespoke client-focussed institutional lines.

The retail investor is also being offered increasingly complex products; synthetic ETFs, Absolute Return funds, Long/Short strategies and SMA/WRAPs.

In turn, retail investors are demanding increasingly complex statements and monthly factsheets – note the increase in retail asset managers offering detailed equity and fixed income attribution reports, both at product and account level.

Asset management firms have been quick to grasp the obvious efficiencies available by viewing the product side of the company as just another institutional client – thus enabling them to unleash the power of their considerable investments in client reporting solutions to tailor them for the retail line of business.

Another driver in the area which is driving consolidation of the systems that service both lines of business is the focus on building an investment product master to deliver a formal data quality management framework to support the considerable desire to produce better quality data and content in a more timely and efficient manner.

So in the future, we should expect to see more, not less, convergence of the business lines. Clearly, the two lines of business will always have clear demarcation lines in terms of level of service, reporting, fee structures and distribution, but the back- and middle- office teams and services that serve the business lines will see continued consolidation to leverage the obvious efficiencies and quality improvements being demanded by investors and shareholders alike.

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Posted by Ronan Brennan

Buy or Build?

August 22, 2011

In the world where asset management technology and data quality management departments intersect, a perennial question is raised vis-a-vis implementing technology frameworks that support the data quality management process, build and manage various master data systems (e.g. security master or product master) – should we partner with a technology vendor with a best of breed solution, or should we just build it ourselves?

Like many such perennials there is no right or wrong answer. As a technology vendor, I often argue that something like data quality management is not actually the core competency of an asset manager and rather than figuring out how to manage their data, they should focus on their investment product strategies, growing their customers etc. I do sometimes wonder though if some of the asset managers out there are financial technology companies with an asset management firm bolted on or just plain vanilla asset managers. There are some managers that have actually spun off technology companies themselves based on internal developments.

My own experience is that there really are just three camps:

 1. Build it ourselves unless there is an ultra compelling reason not to;

 2. Apply a balanced decision-making process to weigh up the pros/cons of doing an internal build versus finding a vendor to work with;

 3. Use a vendor unless there is an ultra compelling reason not to.

Are any of the camps more correct than the other? Not really – they have their reasons for the strategies they employ. There are ultra successful examples of all 3 company types – so adopting one or the other strategy does not seem to have held anyone back, but that all being said – you would have to perceive that those in camp #2 have a more pragmatic view on life.

Camp #1 companies tend to be IT-led organizations, where technology is a key driver in all aspects of what the company does and so is at the forefront of all strategic decisions – hence the need to retain internal (and full) control of all technology in use. They would normally be fundamentally opposed to outsourcing any aspect of their business.

Camp #3 companies tend to be “IT-deniers” – they are obviously the complete polar opposite of camp #1 companies and tend to be 100% led by business. The IT department is there to support and maintain systems and does not form part of the strategic fabric of the organization. One of the goals will be to maintain a low IT footprint and outsource wherever possible.

Camp #2 is the hybrid – they recognize that technology is important, but are not beholden to their own IT department. They are of the view that if there is a specialist vendor out there that has specific domain expertise and has built the same solution/product over and over again for many of their competitors, then this company will deliver a best in class solution – they retain their own IT resources for delivery of standard solutions for which an external vendor adds no specific value, or  for areas where they believe they have unique USP.

In my opinion, Camp #1 is made up of about 30% of the market, Camp #2 would account for 50% and Camp #3 would account for 20%.

The pragmatists amongst us recognize that camp #2 are probably the most balanced of organizations, but these companies really do struggle with the challenge of identifying what they should and should not outsource… it may depend on the size of the potential project or the expertise required.. or the business may influence a final decision.

Of course once a decision is made to use an external vendor, next choice is “local-install or cloud”?

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Posted by Ronan Brennan

Client Reporting – Data Management: The Critical Issues

November 29, 2010

I recently  participated on a panel discussion at the Osney Media’s Client Reporting Conference in London that was chaired by Peter Bambrough a management consultant at Citisoft.  The topic for the panel was “Data Management: The Critical Issues”,  and on the panel I was joined by:

  • Philip Keeler, Head of Operations IT, Hermes Fund Investors Ltd
  • Bob Simon, Senior Director of Business Development, CorrectNet

The first question that was presented to the panel was “Why do data management projects go wrong?”

My own view point here is that projects I have seen fail were nearly all down to a lack of clear data governance, stewardship and generally poor communication.  In order for a data management project to work there has to be a common understanding of the issues at play. Communication is key here, especially between the middle and back office –  all teams have to be speaking the same language.  Another issue that the data management projects face is the lack of understanding from senior management. As Philip Keeler of Hermes said, “there needs to be a holistic view within the company, senior managers need to be aware of the issues and the implementation processes involved”.

Also when implementing a data management project is it important to break down the project into manageable chunks, make realistic deadlines and achievable goals, this in turn will reduce the risk and make the project less likely to fail.

Some of the interesting points that came out of the discussion with respect to running successful data management projects were:

  • Silo approach is only helpful if you have complete view of the landscape
  • Warehouse approach to everything is always going to lead to failure as they take too long to implement and the landscape invariably changes before the project finishes
  • Better model may to  have data warehouses feeding data hubs, from which business unit ‘fit-for-purpose’ data marts are published
  • Communication both top-down and bottom-up is critical
  • Senior management buy-in to project is essential
  • Multi-tiered stewardship
  • Governance and stewardship operating hand-in-hand
  • Clear understanding of current cost exposure versus the new target state

Another question put to the panel was in relation to getting the right people to work with the data – who are the right people?  We know that it is not a job for marketing departments or indeed asset managers. Organizations need to avoid the “Just in Time” data management operating model where a team of client reporting or marketing execs scrub and cleanse the data just prior to publication.  This is a critical job and the right people need to be there to ensure that it is being carried out correctly.   So who are the right people for the role? It was agreed unanimously that you need to adopt a multi-tiered approach to stewardship – you need stewards operating at the data source level – data analysts – that are comfortable dealing with the low level source oriented quality issues, you need product specialists that are comfortable looking at the data from a product/strategy perspective and you need business analysts working in the front-line teams (client reporting / sales / marketing) that are comfortable looking at the data from a reporting / presentation perspective.

The general consensus among the panel was that communication, understanding the data issues and ensuring the correct people are managing the data are all important elements in the fight against combating data management issues.

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Posted by Ronan Brennan

Battle for the middle office

October 18, 2010

I note that the industry press are starting to pick up on the new battle fronts that have opened up in the mythical middle office - check out the recent article in Ignites.

This is symptomatic of a few things that are happening in the industry today:

1. Opportunities for profitable outsource deals in the back office are few and far between;

2. The middle office offers significant opportunities to service providers who have the innate ability to untie the Gordian Knots.

Let’s look at the first point above – opportunities for outsourced deals in the back office are few and far between – this is no doubt true. There are very few opportunities of interest in the market today – the practice of  ’service provider hopping’ which was prevalent for the past number of years has tailed off significantly. There are many war stories of note where asset managers having moved provider, later wished they had never done so. A lot of this business was put out to market via RFP, thus driving deal values to such a low level that the unlucky winner of the business could not provide the quality of service being demanded by the asset manager.

This raises the question as to whether RFP is the right way to go about sourcing a provider who is ultimately required to be a business partner as opposed to a commoditized widget supplier. Beauty parades are starting to become popular, once more as the asset manager realizes that there is real value in having the right business partner as opposed to the cheapest service provider managing their back office.

The race to the bottom of the barrel between the various providers of back office functions has not only reached the bottom but has bored right through it – the bps rates that are being charged to manage some funds are clearly at a level that risk managers within the asset management companies should be uncomfortable with – it is not a healthy situation.

The cut-throat nature of the back office deals has led to renewed and sustained focus on other aspects of the asset manager’s business that are ripe for outsourcing – the opportunity of note is in the middle office, which leads me to my second point above – the middle office offers significant opportunities to service providers who have the innate ability to untie the Gordian Knots.

Service providers are now looking to lift-out or take on the middle office functions as part of any back office negotiation. In fact, there is anecdotal evidence that certain providers are pricing back office services at below cost level in order to latch onto the middle office opportunities that offer significant long-term margin.

The providers who are winning this new business are the ones who have re-structured themselves to deal with the challenges that the middle office presents. While there were some early horror stories with middle office deals of yore, the  larger service providers have tuned their business up rather quickly to ready themselves for the new battle for business.

The service providers who will prevail will have the scale, technology, culture, but most importantly drive for efficiency, that allows them to take on complex businesses and quickly untie the various Gordian Knots that have formed around the asset manager’s data, technology and operations.

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Posted by Ronan Brennan

Intersections of data and regulation on the horizon

April 27, 2010

I see a few interesting developments on the horizon with respect to data and the various financial regulation bodies.

I have kept my musings deliberately brief – if anyone is looking for more in depth commentary let me know and I will do a follow-up post on that topic…

Read the rest of this entry »

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Posted by Ronan Brennan

The 5th Annual Asset Management Industry Forum

February 15, 2010

I attended the FSO Knowledge Exchange “5th Annual Asset Management Industry Forum” event in December last and was lucky enough to be asked to contribute as a speaker on the panel discussion “Expert Perspective: Best practices in data management outsourcing“.

The core thread of the discussion centered on the criticality of enterprise data management to investment management processes in front, mid and back-office. This panel also explored how outsourcing data management can be used to generate a sustainable competitive advantage in key areas such as research, analytics, risk management, compliance, investment performance measurement and client reporting.

Some of the discussions themes for the panel were:

- What challenges and opportunities do you see in your EDM strategy in the current environment?

- Which parts of your current EDM strategy do you see as the best candidates for outsourcing?

- What makes a good outsourcing relationship work?

- One of the bigger challenges for organizations that outsource back/middle office is the loss of the data management platform to the outsourcer – how do you now support the front-office?

- The biggest concern with any outsource process is loss of control – how do you deal with this?

- How can outsourcing data management be used to generate sustainable competitive advantage and how do you measure the ROI of such an initiative?

- How do you see upcoming regulatory requirements impacting the outsourcing of data management?

A key theme from the floor was whether outsourcing data management led to a loss of control – the overwhelming response was that if managed badly, the process would lead to the feared loss of control, but with the right partner in place and with a true partnership oriented approach to working together there was no reason that any control would be lost, in fact the consensus was that such an arrangement would actually put many asset managers back in control of their data.

Since the event had a strong ‘outsource’ slant – a recurring theme throughout the day centered on how to achieve a true partnership with your outsource vendor – the successful relationships identified all had shared risk and reward and flexibility in approach to service level specifications – with regular service reviews and open dialog.

The following is a quick video interview I gave to FSOkx after the event. I have some further video content of the panel discussion which I hope to post soon.

BTW FSO have an interesting webinar on March 9th which has a very similar theme to a post I made recently, and finally they also have an event in the UK in April – “The 2nd Annual Investment Management Industry Transformation and Outsourcing Strategies Forum“.

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Posted by Ronan Brennan

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