White paper by Markus H Ruetimann, former Group COO of Schroders plc - part of the 2016 Fund Technology, Data & Administrator Operations, Europe report.
1. Introduction
Creating and advancing a scalable, agile and efficient infrastructure capability is critical to a firm’s ability to grow and meet evolving requirements from clients, business partners and regulators. Today’s sourcing strategies supplement internal capabilities and capacities with external talent, services and technology. Future sourcing strategies will need to take into account opportunities deriving from technological progress, such as machine-learning and artificial intelligence. While this evolution will take place over many years, it will materially and fundamentally impact the type of talent required in the future. Operations must also gear up to meet demands arising from business strategies which are solely based on one strategic deliverable – client-centric ubiquity.
2. Operational Alpha
Modern infrastructure capabilities create Operational Alpha by ensuring that the launch of new investment instruments or products is supported in a timely, secure and scalable fashion. Operational Alpha is also generated by accurately forecasting and then speedily processing transactions which impact cash flows. For example, the values of corporate actions and dividend payments to be handled during a day must be notified to the fund manager in the morning prior to the clients’ custodians completing their processing cycle. This allows timely investment decision making, but necessitates a competent workforce as well as an effective IT architecture. The latter will need to support near real-time intra-day cash flow forecasting, typically based on an Investment Book-of-Record (IBOR) system solution. Effective cost management is also contributing to Operational Alpha. Strategies must be developed for Operations departments to simplify, automate and converge core processes. This will also facilitate further outsourcing or co-sourcing as opportunities arise or are dictated by commercial considerations.
3. Emerging Ecosystem
Increasing operating costs and risks as well as prescriptive regulations and the ongoing digital transformation will force global securities services providers, fund distributors and asset managers to adjust their future operating models. While the time-frame is difficult to predict, it is likely that target operating models will be built on three critical capabilities:
3.1. Talent
Apart from ensuring a basic level of operational expertise and experience, operations will need to supplement these skills with computer and data scientists. This is important in order to make collaboration with internal users and technologists, as well as with external providers, more effective and focused in terms of aligning business and project priorities.
Future online client servicing platforms will aim to provide clients and internal users with near real-time access to portfolios, funds, investment performance attribution and other core data. The speed and the transparency will challenge Operations departments which must make an even more concerted effort to ensure data accuracy and availability. It also necessitates the employment of technology-savvy operations personnel to build the bridge between core processing of data and the delivery of data through systems.
Over time, it is therefore likely that talent pools in operations will become highly specialised as well as much more mobile and location-agnostic, particularly in an organisation of global reach. The associated challenges with respect to talent recruitment, retention and development are obvious.
3.2. Technology
Long overdue, the financial services industry is currently being challenged by new innovations – often described as FinTech. Technology is lowering the barriers for new entrants and, arguably, artificial intelligence will level the playing field between large and small players. Information security is also becoming a differentiating factor as the “black economy” of cyber-crime expands.
Operations and IT departments will play a central offensive and defensive role. Offensive, as enablers for the delivery of new client data and service requirements - and defensive, as guardians of a firm’s operating platform against external and internal threats.
Technology is and will undoubtedly remain a differentiating factor no financial services company can underestimate. A potentially revolutionary ecosystem which might emerge is one where services, data, technology, information security and risk management capabilities are co-sourced through a private cloud shared by a fund manager, a global securities services provider and a technology & data services provider. Such an approach would substantially reduce operating costs, duplication of effort and technology spend. Time will tell.
3.3. Insights
Many companies have already created data insight teams, embedded in investment, distribution and/or operations. Predictive machine learning is gradually impacting investment decisions (stock selection, asset allocation and risk analytics). Some hedge fund managers are using multiple forms of artificial intelligence for identifying and executing trades – what is known as super-algorithms. Fund managers and their distributors also increasingly share core fund data on shared platforms.
In operations, data curation capabilities are fast becoming critical to measure operational efficiencies, manage operational risks and assemble data which is required for regulatory compliance. Data captured includes insights into the causes of failed trades or settlements, inefficiencies at client-appointed custodians as well as internal deficiencies of data flows and increasing operating costs. Data is fast becoming an “asset” and operations is very much at the heart of the concept of “Data-as-a-Service”.
4. Conclusion
The talent, the technology solutions and the insights embedded in operations will become even more important in the future as the financial services industry experiences “the perfect storm”. Economic, political and social uncertainty inevitably impacts firms so that operations must continue to ensure reliability, security and stability at all times. A substantial responsibility which requires progress and firm leadership.
MHR/1st July 2016
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