Supplements » FundTech Winter 2017

TRADE TALK: Look to the future

Funds  Europe  asked  a  panel  of  operations  and  technology  experts for their  views  on  the  fund  manager’s ops  team of the future.


RAKESH VENGAYIL, DEPUTY CHIEF EXECUTIVE, BNP PARIBAS ASSET MANAGEMENT ASIA-PACIFIC

What is the biggest technology challenge you face?
From an internal perspective, we are taking a more structured long-term strategic approach as opposed to a short-term tactical approach to respond to the fundamental issues the industry is facing today, such as margin compression, cost inflation and scalability, and technology plays a critical role in responding to this. We are moving towards more integrated technology infrastructure and solutions, generating better operational efficiency: greater process automation to increase agility and speed of execution. This transition is the biggest internal challenge.

Externally, the biggest challenge is positioning us better by building a solid foundation and strategy to capitalise on all digital initiatives in the marketplace and in the services offered to clients. Developing competitiveness of management and commercial activities: whether by exploiting the potential offered by artificial intelligence/big data in tools and market screening to ultimately improve performance and enhance effectiveness of vendors’ tools, or customer experience. BNP Paribas Asset Management’s recent partnership with Gambit, a leading provider of digital investment consulting solutions (‘robo-advice’), is a major step in our digital strategy and further proof of our commitment to providing quality investment solutions to our clients.

Has your outsourcing approach changed in the last few years?
Nothing much has changed in our approach, outsourcing allows us to focus on our core competencies while offloading non-core activities to service providers. We strongly believe that the full value of outsourcing is derived by having a partnership approach with the providers, innovation, ease of relationship management and improved strategic flexibility, not just cost saving. To achieve this, we invest a lot in transition management, governance and service management.

Do you think the institutional asset management industry is a good user of new technology?
There is an increased appetite and adoption in the asset management industry.  It is not seen as a prolific user of new technology because asset managers are often disintermediated from the end consumers, so the intermediaries are often credited, but it is changing and there are more fintech engagements.

In BNPPP AM, we actively use new technology in enhancing the competitiveness of investment management and the client experience by exploiting the potential offered by artificial intelligence/big data.

Do you see a practical use for blockchain in the asset management industry?
I see it more in the securities and asset servicing side rather than asset management, although indirectly asset managers could be the beneficiary. The main application of blockchain is as a transaction tool or framework and as a result of greater operational outsourcing, asset managers are less involved on the transaction side.

Are legacy systems still an issue for asset managers?
They are without doubt still an issue. We are seeing more consolidation and that always highlights any legacy issues. But the industry is responding differently than in the past. They are looking at more structural changes rather than short-term fixes.  At BNPP AM, we are implementing/developing an integrated front-office toolkit.

What do you think the technology department of an asset manager will look like in the future? Will there still be one?
There will still be one but it will be much more of a quality control and value-added role, more than low-value operations or in-house development and coding. We will continue to see more outsourcing and greater use of third-party software and technology.

It is happening everywhere.  When there are economies of scale, it makes sense to exploit it. So I see the role of a COO and the operations/technology department as being more about operational strategy and security rather than technology development or coding.


TREVOR HUNT, CHIEF INFORMATION OFFICER, MUFG FUND SERVICES

What is the biggest technology challenge you face?
I have worked in technology for 30 years. The challenges now are similar to what they were when I started – the four S’s, speed, stability, safety and security. Time to market is critical: can solutions be delivered quickly in response to a new client requirement? Can changes be introduced seamlessly without causing operational disruption? Can the information that is being used be relied upon for integrity and accuracy?  Is the information secure following true ‘need to’ principles and protected from both internal and external cyber threats?

One of the key differences now is that all staff typically have more personal computing power in their pocket than they do at their desk (assuming they have one). So the biggest challenge is how we can adopt the four S’s principles to a ‘bring your own device’ world.

Has your outsourcing approach changed in the last few years?
The FSA letter to asset manager CEOs in 2012 drove a change in approach to outsourcing. The coordinated work by managers and servicers (‘OWG’, or Outsourcing Working Group) resulted in effective operating principles for managing outsourced relationships. As an asset servicing partner, we look to work with our clients to operate within the principles of transparent oversight, exit planning and standardisation.

More recently, the principles have been formalised into standards – via SSAE18 as part of the annual SOC certification regimes.

Do you think the institutional asset management industry is a good user of new technology?
In my experience, the sell-side has typically had more discretionary spend to experiment with newer technologies. Whilst that’s great from a time-to-market perspective, it has typically led to a fragmentation of vertical technology stacks and solutions. Asset managers who are more conservative and operating within tighter margins can take more time to make decisions on the adoption of newer technologies. AI, software robotics and big data technologies are all opportunities for the industry and are certainly beyond the proof-of-concept stage in many firms. The bigger question is whether these can replace or are only supplements to the core engines of OMS and accounting platforms, which are typically the greatest cost to an institutional asset manager.

Do you see a practical use for blockchain in the asset management industry?
We are in a hype cycle with blockchain and more specifically cryptocurrencies. Our clients are talking to us about exactly this point – can they have a crypto share class, and can they subscribe with bitcoins? That tells us there absolutely is a practical use.

We recently assembled as a team in a blockchain lab in Dublin to brainstorm different ways in which it could be adopted across our value chain. The key to this is understanding what blockchain delivers – a single source of immutable truth. At first glance, that appears to be applicable to data, but where it thrives is providing a single version of the truth from multiple sources. We saw opportunities in the settlement of mortgage-backed securities and private equity GP/LP transactions – and on the personal  level, I recently installed my first mobile blockchain app, Appii.

Are legacy systems still an issue for asset managers?
I think asset managers are finding ways to tackle the legacy system issue in a smart way. You could argue that a platform like Aladdin is a huge legacy system, but it’s not because the product has been developed and adapted to provide exactly what their clients need. What is different is that the delivery model means managers have variable rather than fixed costs with amortisation. ABOR (accounting book of records) as a service remains a lucrative opportunity.

What will the technology department of an asset manager look like in the future? Will there still be one?
I am a firm believer that we need to move on from the idea of an isolated IT department. We need to be a technology-enabled organisation with staff rather than ‘users’. Having worked across technology, operations and change, I can see that is exactly where the true value often is and it’s where the FAMGA five (Facebook, Apple, Microsoft, Google and Amazon) are disrupting many different industry sectors.


STEVE YOUNG, CHIEF EXECUTIVE, CITISOFT

Are asset managers good users of technology?

No. The industry has been built upon a risk-averse, safety-first culture. As a result, it lacks the ability to embrace new technologies early and to support new products and vendors. The current vendor community is too small and dominated by a small number of large vendors. This is a reflection of the demands and buying culture of asset management. Some firms are looking to break the current pattern by creating innovation labs and new silos to investigate how to embrace new technologies. This will struggle to have the required impact unless they simultaneously attack the cultural issues and bring in fresh talent to implement a new approach. Technology will be an increasing differentiator in the industry, and those who are able to transform to embrace it will enjoy significant early-adopter benefits.

Are asset managers in genuine danger of disruption?
Yes. The industry is complacent because of the high cost and difficulty of entry, but disruption is inevitable. It is likely that the initial disruption will come from within, with large firms using their scale and economic power to significantly change the business models and fee structures. This in turn will pressure smaller firms to look to innovate and build new operating models in order to find and stimulate niche services.

As this disruption takes hold, it will enhance the potential of firms entering the market, using their superior client experience skills to change the model and bring a more client-orientated model to the market. Currently the industry is built on domain knowledge, brand strength and safety. The client experience has remained largely unchanged over a long period of time. As clients’ demands change, and they will, it will be interesting to see if the incumbent firms can evolve to meet those demands. Some will, but many will struggle to adapt quickly enough.

How can blockchain be best deployed in the asset management industry?
Blockchain, or distributed ledger technology (DLT), has the potential to have a significant impact on the industry. It does also face some significant challenges. Perhaps the largest is getting a rational and objective approach. Currently there is too much noise and not enough reality. The impact will be felt over time as new processes and services are created – some of these will be built using DLT. In my view, the technology is the enabler, not the driver to innovation.

It is clear that there are many areas where there is potential for a DLT- based solution to bring significant benefits to the industry. I would expect client onboarding, shareholder registry, transfer agency, portfolio construction/modelling and compliance management to all be areas of focus for innovators. There is a lot of talk of trade management and settlement being disrupted by a DLT solution, but this will require the industry to move together and this is not something it has a strong record in achieving.

How is AI being used in the industry?
AI is increasingly being used to bring more automation to decision support and portfolio construction, both internally and also to offer direct services to consumers.  It will also become increasingly common in the middle office, where tools will emerge to manage trades and data in a more efficient and cost-effective manner. Marketing will also become transformed by the use of AI tools, allowing firms to quickly adapt and position their products and services to a more discrete and better-identified target market.

What technology innovation would you like to see that has yet to appear?
Interoperability remains one of the largest challenges in the industry today. I would like to see the emergence of standards and technologies to make it simpler, cheaper and faster to create a more seamless infrastructure, both internally and between organisations. Currently there seems to be a trend to implement single applications covering vast expanses of business. This is as a result of the difficulty of maintaining and evolving complex technology stacks of disparate and poorly connected systems.  It is questionable as to whether these huge single systems can evolve and change in a fast and nimble manner, or a better solution may be a more specialised app, which can be easily integrated.

What will the asset management it/ ops department of the future look like? Will there be one?
It will vary considerably across the industry. In many firms, IT will become a feature of all management positions and specific IT roles will provide  a service to maintain and implement new solutions. In many cases, this is where IT is now or is heading, where the IT role is not strategic or decision-making, but is an internal services department.

Some firms, though, will awaken to the potential of IT being extremely strategic and will use it to revolutionise their operating model. Here, a new breed of strategic IT roles will emerge to be constantly reviewing new technologies and solutions to bring a cutting edge to the firms’ competitive positioning, working with key users and clients to constantly evolve and improve their experience.

Finally, some passive firms will look to have a simpler operation based on passive management. Here, in the short term, IT will be largely outsourced, alongside many areas of the operation.


BILL GOURLAY, MANAGING DIRECTOR, INDEPENDENT CONSULTANTS NETWORK

Are asset managers good users of technology?
Whilst asset managers are starting to use larger amounts of technology in their businesses, I think they are behind some other parts of financial services. There is definitely a trend today, that when someone talks about ‘fintech’, they’re usually referring to something in the payments space. This trend is very representative of an industry where the bulk of the innovation is in the banking space, and there is still a lot of work to be done to maximise the value that new technologies can bring to the asset management space. Asset managers can play a bigger part in promoting this as, for the most part, they are not the firms who are running accelerator, incubation and innovation programmes today.

Are asset managers in genuine danger of disruption?
Perhaps to a lesser extent from new leftfield entrants, but more from established firms choosing to expand their capabilities into the asset management sector. As regulation and market forces create pressures for financial services firms, it is only natural that they will seek to build revenue from adjacent areas.

The result could see wealth managers, private banks, investment banks, investment consultants and asset managers increasingly treading on each other’s toes as they expand their business activities into previously unfamiliar territories.  Clearly, there are gigantic technology players who could become disruptive in the space, but the key aspect (often overlooked in the perennial conference debate) is whether the return on investment for new entrants, who are already doing very well in other - less regulated - sectors is actually worthwhile and worth the hassle.

How can blockchain be best deployed in the asset management industry?
Far too many organisations have become obsessed with trying to find a way to use blockchain, or DLT, in a solution. One of the fintech era’s biggest weaknesses has been a tendency to come up with a really clever solution, but have no idea what the problem is that it’s trying to solve. The temptation is clear, as the industry media is always keen to publish something relating to the latest buzzwords and it’s an easy way to tangibly demonstrate being innovative.  However, it’s far more important to concentrate on the issues in hand, find a suitable solution, and if that happens to be blockchain – then so be it.

There have been a couple of announcements regarding firms using DLT recently, but it does raise the question of whether this is actually the best solution for the job, or simply the one which will obtain  the highest marketing profile.

How is AI being used in the industry?
AI has the capability to be of immense value to the asset management industry, as we analyse trends and investment patterns using vast amounts of data. However, one of the challenges that we are seeing is the possibility of AI becoming the new blockchain, with too many firms devaluing it by simply trying to find a way to work the term into their marketing materials. Not all AI is equal either, so it’s vital to understand exactly what elements of the solution are genuinely using this capability and how impactful that is to the end result. However, for those firms who are successful in using it in their investment and distribution strategies, there is enormous potential.

What technology innovation would you like to see that has yet to appear?
Putting my operational hat on, I’m not so worried about the need for yet another innovation, when there are so many things already in place that aren’t being used properly yet. In some ways, too much innovation can become a distraction for firms as they delay implementing the ‘bird in the hand’, whilst they consider what the future value might be of the ‘two in the bush’. For the asset management and funds sector, we still have some pretty fundamental operational inefficiencies in place (dare I say the words ‘fax machine’?) which have been solvable for several years now through the work of firms such as SWIFT, EMX/Euroclear, Clearstream and Calastone. Even the alternatives space can now benefit from this due to the work of the GAIA group.

There is often a temptation to seek the next big thing, either through new technologies or the formation of yet another working group, but certainly from an operational perspective, most firms still have some significant cost savings to be made simply by implementing the full range of solutions that are already available today.

What will the asset management it/ ops department of the future look like? Will there be one?
Technology has played a sizeable role in financial services since at least the 1970s, and its evolution has played a very important part in shaping the industry. In no way do I see this decreasing and, in fact, it is more likely that the IT departments of asset managers will become ever- more critical in the success of the organisation as more key decisions are made via the use of predictive AI.

With this rise in profile, though, will come great responsibility. In these future asset managers, the impact of a technology failure could be absolutely catastrophic, as it is likely to be such an important part of how the business is run.

Perhaps the most suitable analogy is to consider the future IT/ops department as ‘mission control’, given that technology will increasingly guide, track and protect the successful progress of an asset management firm as it navigates a complex and uncertain universe.

©2017 funds europe