The problems and prospects of disruption in investment management
Disruption is coming! Often said with anxiousness and flickering eyes. But what is disruption and how does it look in the investment management industry?
By Kenneth Brandborg, associate partner | January 11th, 2016
Investment management is a somewhat conservative industry. The recent years’ new demands, new regulation and new economic reality are forcing the industry to change. Solvency II, Emir and last but not least Mifid II put a tremendous pressure on the organizations and the entire business model for the investment managers. Not only directly but also from the derived demands from the clients, who also are met with the new regulation.
The world economy also poses a great challenge to the investment managers. A low rate environment, excess liquidity and inflated equity prices are challenging traditional investment theory. The CIO’s are forced to engage in new and more complicated investments. Alternatives have grown tremendously in popularity in 2015. Alternatives are a mixed group of assets, but the common feature is that they put new demands on the risk management. Administration of the alternative investments is much more complicated and expensive than for usual assets. This underlines the increased focus on the value chain in the investment companies and the costs associated with that chain. Front office creates value but the longer you move backwards in the organization, the less value is created.
Don’t let the geeks take control
Given the challenges in achieving a reasonable return in the financial markets, a lot of the attention has turned to the no-profit generating areas at the investment managers. It is often easier to find more efficient and cheaper solutions in risk management and back office than finding new investment possibilities. The first step towards disruption is taken. The need or wish to change the organizational structure and the changes in conducting investments open up for new ideas and out of the box thinking.
The pit falls are many and they are close. The most obvious is to let the IT geeks drive the implementations of new cost effective solutions supporting the investment processes and new databases trying to retrieve new information from the market to the investment analysts. But beware; letting the IT departments drive projects that solve business needs often ends up with solutions that are perfectly correct but absolutely useless.
However, data and IT is a great part of the solution to the challenges facing the investment managers – and the playing field for disruption. Using all the challenges to rethink your business and services instead of reacting defensively will increase the possibility that you will come up with truly disruptive ideas.
The current state of that playing field at investment managers often imposes challenges. IT often looks like the organizations it underpins: Like a hospital, systems have been build and implemented to support the different experts working in different areas at the investment manager. The organization and IT work in silos. Many of these systems are build in-house on Excel platforms. Standard systems have been bought, but only fractions of their functionality is used. This has to change.
Focus on the client!
Focus must move from the in-house experts to the client. The organization must reflect this. How many meetings have started by asking ‘what would be best for the client’? Everything that you do must make something either better, cheaper or easier for the client. EVERYTHING! The organization and IT should reflect the workflows that maximizes the value for the client, not fractionated areas of expertise.
Data warehouses, datamarts and dataprojects must be driven by the business part of the organization. IT must implement, facilitate and challenge, but the drive must come from business. BI is a key part to knowing the clients and offering the service and information they deserve. Excel solutions must be shut down to a great extent. The reason is not the dependence on the single employee that has built the solution, nor the issues concerning security. The reason is that data in an Excel sheet is very hard to share. A key to being successful in a disruptive environment is to have all data available for the entire organization in a strong flexible BI-tool.
Watch your data
Focus must also be on data governance. The future IT landscape will build on decentralized systems and central data. This makes data discipline and data governance corner stones. Disruption often looks like it comes from wild ideas and freethinking, but it must rest on a foundation of high quality data – otherwise data issues will obstruct the disruptive ideas.
The last key area in drive and preparing for disruption is having agile and knowledgeable vendors. No matter if it is systems or services. Vendors need to quickly adapt to the ever-changing environment and have a response ready, when you turn to them for advice or solutions.
Meeting these requirements does not guarantee that your organization will burst of disruptive ideas, but it will facilitate your ability to adapt to others disrupting your industry, and it prepares your business for the disruptive ideas you come up with.
