Following the financial and economic crash of 2008, we have seen the rise of iron-clad regulation and the need to prove and justify every single decision. Technology is often seen as the enabler, both for the regulators and also for the firms that need to comply.
Technology is also the key to operating faster, smarter and more profitably. But given the pace of change, the traditional model of purchasing software is becoming redundant. No longer do investment management firms want or need to enter into a standard software licensing agreement to address gaps in automation or business workflow.
In the new world of financial technology, faced with shrinking budgets and resources, licensing software is no longer the best ownership model for investment managers. Instead, they should look at the “technology services” model, which offers several software applications together with data and infrastructure, and is supplemented by technical resources and services.
A challenge for fund firms is how to achieve the dichotomy of needing better technology but having fewer resources to throw at it.
Traditionally, a firm looking to revamp its procedures would implement an appropriate system following a rigorous vendor selection procedure, often lasting several months. However, the evolving nature of the industry means that firms can no longer operate within the same timescales. Regulations and market conditions are changing so rapidly that to remain competitive, companies must be thinking about implementation in weeks, not months.
The alternative? Let’s take an investment management company looking to streamline its compliance services as an example. A compliance service, in which the compliance team simply logs into a secure website that displays its daily compliance reports, can be leased by the investment manager, thus doing away with the need for software installation, servers and maintenance. The compliance service requires the investment firm’s daily holdings data, but otherwise bundles the application functionality (running the rules, displaying the results, facilitating breach management) with market data, in a hosted environment. Software upgrades and rules updates happen behind the scenes, and the technology service provider uses compliance experts to set up new accounts and maintain the rules.
The investment management business has thus streamlined its compliance management process, but has a defined service fee based on business usage rather than licence fees and upgrade services. The service provider’s technical experts manage the system while its compliance experts handle the guideline review and configuration. The investment management firm is responsible for sign-off, breach management and oversight. With the on-going compliance advisory services offered by the technology service provider, guidelines remain updated and well-documented through interactive reporting of actual operational rules.
Some vendors still remain software companies, selling licence and offering upgrade services and product support. Several small, niche vendors offer newer applications that from day one run as a hosted solution, whereby the investment management business does not need to purchase the hardware.
A few larger vendors combine a comprehensive range of application functionality with data, infrastructure and services into a technology services platform. They are the closest to fully offloading the technology burden from an investment management firm focused on generating alpha, onto a technology partner with in-depth expertise in automating the investment cycle.
The advantages gained with a rock-solid operational infrastructure, the latest application functionality, and service expertise enables firms to focus solely on investment decisions and trading.
Geoff Larkin is regional head of professional services of Linedata Asset Management in Northern Europe
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