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18 September 2019

Time to stop following the herd?

By Steve Young

I recently read KPMG’s “Insight from Asset Management CEOs” report. It brings out some excellent and thought provoking ideas and observations from the leaders in our sector, with strong themes such as “responding with bold steps”,“it’s time to change” as well as CEOs taking a more active role in driving change.

I am in complete agreement with the contents of the report, however I wonder if one key element has been overlooked: The changes in the industry are varied and growing, and many commentators have observed that this is as much a cultural shift, than a technology shift. I have covered his subject in previous blogs and I believe that cultural change is critical, but just as technology alone cannot bring about change, neither can culture. These two critical aspects must work in tandem- having a fresh and different view of technology is fundamental to the evolution that the industry needs.

Traditionally, the core technology for asset managers is based on a reasonably narrow asset class mix. As a result many managers have adopted large single systems that are very structured and controlled. This asset class mix is a key element of how firms can now evolve and compete. Firms now look to a far wider range of assets, often structured in a completely different way to traditional asset classes with radically different workflows.

Firms can no longer wait for an extended amount of time for assets to be supported. Systems need to be agile and adaptable, with built-in flexibility as a core design principal. The ability to take on a new asset class with maximum efficiency is paramount. Any firm that needs to install new software releases or patches to achieve this will be at an increasing disadvantage. Asset managers need to consider not only the lead time for their technology provider to re-engineer their product and release it to the market, but also the cost and effort required to test and accept this change. New asset classes can affect many parts of the system, and acceptance may not be simple. The larger the system the larger the task.

Recently we have observed clients in this sector embracing a wide variety of assets – one example is alternative credit. Unless they can simply extend their operating model to cater for these assets, the choices are to work manually or to mandate a specialized third party. In a world of tightening margins, neither of these approaches is particularly attractive.

It’s clear asset managers need to look at varied systems that answer the different questions the market are facing. As the KPMG report demonstrates, investment in technology is growing, but increased spending without a broadened mindset is futile. Firms who use the same processes and advisors will struggle to find the optimum solution. Influencers and decision makes are burdened by existing knowledge and a vested self-interest. Many consultants are driven by utilization of resources and lack the motivation and capacity to seek out and evaluate new options.

Companies who are looking to embrace the opportunities that market changes present, need to be far more open-minded in order to differentiate and win. Perhaps for any significant operational and technical reviews, firms should ensure a separation between selection and delivery, in order to ensure a more objective approach. They also need to challenge far more and ensure all avenues have been explored, as opposed to the same beauty parade being run.

The ever-increasing need for agility in asset management is driving strategy and ultimately change. There is a lot of noise in the market about the efficiencies and cost benefits of a single system, which can be a short-sighted and narrow view. Using the system the respective peer group uses has been considered the safe option. Now however, significant changes to the industry are leading to new ways to compete and differentiate, so following the herd is no longer sensible.  Increasingly, a new culture and one that embraces a new and inherently more flexible technology will drive and impact change.