Following on from the last article where we identified that “Good Practices” in the Investment Management industry were being let down by poor legacy technology, this article is going to discuss how we should evaluate technology to deliver against the commercial needs of the industry; i.e. keeping fund administration costs under control through effective “FinTech”.
In particular the question, ‘how can we ensure that the system we choose today will still be relevant in the future?’.
The industry need was highlighted in the Investment Management Association’s (IMA) 2018/19 survey stating that even though funds are performing well and growing, the rise in costs of administering the fund are outweighing the increase in revenue, resulting in a 28% reduction in operating profits of the industry.
Systems existing in a vacuum will always produce the right results and will never become irrelevant. Most software becomes redundant because the environment around it changes. The chief virtue of the first software I worked upon in the 80’s did not allow you to over (short) sell. This is completely redundant now. Theses can be summed up under 3 headings:-
- Rules or regulations change
- New instruments come to the market
- There is a new innovation, not specific to our industry (i.e. a technical one)
In the past, suppliers of software to the industry have cobbled together disparate software in modular fashion. An Investment Management company may acquire software only to find that they had not budgeted for example accounting and that will be at extra cost. This is where companies using different systems for different things often use data warehouses to cover system shortcomings to combine data.
It all adds up to a mess and if you were designing something from scratch you wouldn’t do it this way, none of this complexity would exist. When looking at what software will look like in the future, we need to consider the tools that are available to us now and build in an allowance for where we think systems will be in the future (i.e. Futureproofing).
Looking at our three criteria as to why systems become redundant, I think we can tackle the first two of these by making the system a totally rules based one. Further to this, by making the rules engine part of the users remit, we are giving the people that understand the business the ability to dictate how the system works. Regulations and compliance needs will vary from fund to fund and jurisdiction to jurisdiction. The rules around how an instrument works and how it is accounted for will also be dictated by the users. Therefore, when a new instrument is invested in, no new module is needed. The users can create the instrument type, define how it works, how it is accounted for and how it is valued without a single intervention from a technician. This is a very important point.
Not only does it empower the user, but from a system developer’s point of view, it means that although there may be a lot of time spent getting the rules structured correctly, the system is then maintained by the users. From first writing the specification to the completion of coding has been over 5 years. We know this was time well spent. Moreover an “End to End” solution is the answer. Rather than having separate systems, an End to End solution that takes an order from a fund manager and have it flow all the way through the system with no additional intervention is desired.
The third of our criteria is obviously more problematic as we would all like a crystal ball to know where the next big innovation will come from. As we have already stated, we believe the Cloud will have a big part to play as it provides flexibility, availability and significant reduction in infrastructure costs, allowing processes to be delivered by third parties.
Trying to consider the future, the next big thing that everyone is talking about is AI. I believe this may have a place in our industry, but more in stock selection to replace some fund managers who run funds based on algorithms. This has already happened to some extent with Tracker funds.
Furthermore, we believe that ‘Voice’ may play a role, but again I question how this will work in a busy, noisy office environment.
We do not think the Cloud is played out yet either. We believe the future will see “Big Data” techniques being used to source data directly. Today, most systems take things like daily stock prices and add to the database, but this way of doing things is unlikely to exist in 10 years’ time. In designing your system now, allowance should be made that in the future this process may be redundant as it will be retrieved directly from the source. This may not be achievable at this moment, but given how inefficient the process is and that most systems in the future will be in the Cloud, things will surely change. We need to be ready.
So, in conclusion, the future is a single Cloud based system catering for all aspects of fund management; for any instrument across all jurisdictions. In future proofing software, attention must be given to using:
- The latest technology around cloud computing for ease of access and connectivity to other software.
- An integrated solution that cuts down on the amount of replication, repetition and inefficient costly practices.
- A rules-based approach that allows users (i.e. the people that understand the business) to dictate how the system works and have the flexibility to work differently for different fund structure and instruments.