Experts comment on key developments in fund administration.
In which areas will fund administrators deliver most value to asset management clients in the coming three years? Which new technologies will have the biggest impact? And what are the main barriers to promoting digital transformation in the asset servicing sector?
CLIVE BELLOWS, HEAD OF GLOBAL FUND SERVICES FOR EMEA, NORTHERN TRUST
At our core, we will always be the guardians of our clients’ assets. We can take advantage of new technology by using it to help us focus on value-added activities such as knowledge provision, data management, liquidity and risk management.
What will never change, regardless of new technology, is the need to deliver a quality and personal service. Technology is no substitute for this, which is why automation should enhance the service delivered by human employees, rather than replace them.
In promoting this agenda, our focus first and foremost is on keeping our clients’ assets safe. As custodians, we need to be careful with the technology we adopt – making sure it doesn’t compromise the safety of clients’ assets through cyber attacks while ensuring we’re compliant.
Rather than thinking of these factors as ‘barriers’, we believe these have led to a more considered approach to digital transformation – enabling us to assess where we can deliver the most value, without trying to reinvent ourselves as a straight technology company.
Artificial intelligence (AI) and automation are having a positive impact on process and efficiencies, which is why we’re making significant investments into these technologies. Importantly, we’re also making a significant time investment, working closely with our clients to build the right solutions using these technologies.
There’s no one-size-fits-all approach as clients will have different needs across the value chain. AI and automation comes in different forms, so at Northern Trust we’re working hard to collaborate with our clients to understand their needs and tailor solutions that deliver the most value.
For asset managers, the key to managing technological change is to choose the right solutions – for example, by choosing the right order management (OMS) and execution management (EMS) systems – which have a significant impact on their businesses.
By understanding the functionalities that they need and by working with the right partners, asset managers have learnt how to manage technological change while enhancing their investment strategies and complying with regulations.
RONAN GARRIGAN, CHIEF OPERATING OFFICER, ALTERNATIVE FUND SERVICES, BNP PARIBAS FUND ADMINISTRATION SERVICES (IRELAND)
Fund administrators are constantly seeking opportunities to deliver additional value to their asset management clients. At the top of the list are steps to enhance their data services and to extend the data and solutions accessible to clients via application programming interfaces (APIs). Investment managers are seeking faster and more flexible reporting, often via web-based or secure FTP (sFTP) channels, including more detailed insights on their front-end systems. The continuing expansion of the exchange-traded fund (ETF) marketplace is also creating openings for asset servicers to expand their ETF service offerings.
The application of technology will play an important part in this transformation. Use of robotics will assist the automation of relatively standardised low-complexity tasks and artificial intelligence will be applied more widely to data analytics and other processes. We will continue our migration towards exception-based controls and apply higher levels of automation across the fund transaction lifecycle, including trade processing.
Over time, we believe that the fund industry continues to get better at managing technology change – and this is a virtuous circle. With each ongoing technology development there is scope for the pace of change to increase further.
This said, the asset servicing sector continues to face barriers in meeting its digital objectives. Many firms continue to operate legacy technology and face a challenge in maintaining connectivity between their legacy systems – and ultimately in decommissioning them.
Lack of standardisation and process harmonisation also continues to hold back the investment funds industry – for example, the lack of an industry-wide standard for identifiers, flat file formats and data formats. This is accentuated by a rising regulatory cost incumbent on asset managers and their asset servicing partners. Additional regulatory reporting requirements, for example, have required firms to maintain more data points to satisfy this compliance obligation. Collectively, these challenges present a heavy adaptation cost at a time when firms face significant budgetary pressures and may see limited operational payback in the short-to-medium term.
JOHN FLOOD, EMEA ADVISORY LEADER, WEALTH & ASSET MANAGEMENT, EY
Over the next few years, the global asset servicing industry will face significant changes as it adapts to shifts in market structure and incorporates new technologies. Asset managers are placing a higher demand on their service providers not only to provide the core services better, cheaper and faster, but also to offer solutions to solve the challenges they, and their clients, are presented with.
More and more asset managers are diversifying their portfolios across alternative investments (i.e. real estate, hedge funds, private equity), increasing the need for outsourced administration. Institutional investors are becoming more selective and demanding greater transparency. This is creating a valuable opportunity for asset servicers to upscale their services and build closer relationships with investors and asset managers.
Fund administrators will therefore deliver most value to asset management clients by providing operating efficiencies (for traditional and alternative asset classes) and differentiation by enabling (real-time) access to data and service-delivery processes, as well as enhanced reconciliation between the managers’ front office and the asset servicers’ middle- and back-office platforms.
In considering the barriers to digital transformation, it is clear that digitisation is here to stay. While it may be unevenly distributed, we are still in the beginning phase. Digital is set to remain one of the leading CEO agenda items in the years to come. While asset servicers understand that having a coherent digital vision and strategy is essential, many companies are facing the challenge of where to start and what to invest in. Others have made investments and are struggling to achieve the benefits they seek.
In addition, increasing client demands and regulation requirements are placing enormous pressure on technology budgets – while at the same time pressure on revenues and cost is increasing. Consequently, the development of digital solutions is essential for the future success of their business. However, on the other side, the initial investment costs are significant.
Data technology is starting to play a transformational role, adding new services or enhancing existing ones. Over the next few years, the industry will experience significant changes as it incorporates new technologies such as automation via robotics (which is already a common technology), but also artificial intelligence and advanced data analytics, blockchain and distributed ledger technologies (DLTs). The increased use of technology is also redefining job roles and driving the need for new skill sets.
With the advanced technology also comes increased and new threats of cyber risks. When deploying new technologies, fund administrators need to remain vigilant and tackle concerns such as cyber security and data integrity. Asset safety will no longer just be about safekeeping. It will also include data protection against cyber crime.
The asset management industry is adapting to the technology change, continuously increasing investments in scalable, value-add platforms that offer outcome-oriented solutions and new emerging and complex technologies such as robotic process automation (RPA), artificial intelligence (AI), blockchain, and more. Recruitment is moving data scientists, and artificial intelligence and machine learning specialists, to the top of the priority list, while collaboration between asset managers and fintech firms is increasing.
Firms that adopt and integrate technology thoughtfully into their product offerings will be best-positioned to win. After initial hesitance or even uncertainty on how and where to start, we see a clear positive trend in managing this technology change.
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