FUND TECHNOLOGY, DATA & ADMINISTRATOR OPERATIONS, EUROPE · PDF fileFUND TECHNOLOGY, DATA & ADMINISTRATOR OPERATIONS, EUROPE 2016 CONTENTS 19 3.3 INTERVIEW What is the key to building

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FUND TECHNOLOGY, DATA & ADMINISTRATOR

OPERATIONS, EUROPE 2016 Assessing the state of technology and its growing importance for fund and asset managers

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FUND TECHNOLOGY, DATA & ADMINISTRATOR OPERATIONS, EUROPE 2016

CONTENTS

SECTION 1 AN INDUSTRY IN TRANSFORMATION 7 1.1 ROUNDTABLE DEBATE How are others successfully managing fund distribution and

documentation? Interviewer:

• Zara Amer, Head of Content, Clear Path Analysis Panelists: • Ulrik Modigh, Head of Asset Management Operation, Nordea Investment Management • Dragomir Velikov, Chief Investment Officer, Compass Invest

SECTION 2 MANAGING INCREASING REGULATORY COMPLEXITY 11 2.1 INTERVIEW What are the key regulatory updates and their likely impacts

on the industry? Interviewer:

• Zara Amer, Head of Content, Clear Path Analysis Interviewee: • Susan Wright, Senior Regulatory Advisor, Investment Management Association

SECTION 3 OUTSOURCING CAUSE AND EFFECT 15 3.1 INTERVIEW What steps can be taken to ensure offshore outsourcing

strategies are successful? Interviewer:

• Zara Amer, Head of Content, Clear Path Analysis Interviewee: • William Jenkins, Director, Amundi

17 3.2 INTERVIEW Which areas of the value chain respond most effectively to

outsourcing strategies? Interviewer:

• Zara Amer, Head of Content, Clear Path Analysis Interviewee: • Olivia Vinden, Principal, Alpha Financial Markets Consulting

Neil Curham, Executive Director, Alpha Financial Markets Consulting

Denise Thomas, Head of Operations, Standard Life

Markus Reutimann, Former Group Chief Operating Officer, Schroders

Matthew Davey, Former Senior Vice President and Head of Asset Managers at State Street Bank, UKMEA

Haider Mannan, EMEA Head of Buy-Side, GoldenSource Corporation

FUND TECHNOLOGY, DATA & ADMINISTRATOR OPERATIONS, EUROPE 2016

CONTENTS

19 3.3 INTERVIEW What is the key to building successful and long-lasting

relationships when outsourcing? A service provider’s perspective. Interviewer:

• Zara Amer, Head of Content, Clear Path Analysis Interviewee: • Matthew Davey, Former Senior Vice President and Head of Asset Managers at State Street Bank, UKMEA

SECTION 4 CURRENT BUSINESS TRENDS 22 4.1 INTERVIEW Three technology enabled business trends to follow Interviewer:

• Zara Amer, Head of Content, Clear Path Analysis Interviewee: • Neil Curham, Executive Director, Alpha Financial Markets Consulting

25 4.2 WHITEPAPER For effective global management should all data be centralised? • Haider Mannan, EMEA Head of Buy-Side, GoldenSource Corporation

SECTION 5 FUTURE THREATS AND OPPORTUNITIES 29 5.1 INTERVIEW How do companies satisfy and empower the ‘millennial’ workforce

whilst simultaneously improving their bottom line Interviewer:

• Zara Amer, Head of Content, Clear Path Analysis Interviewee: • Denise Thomas, Head of Operations, Standard Life

31 5.2 WHITEPAPER Constructing efficient and effective operational capabilities in

order to meet critical business competencies • Markus Reutimann, Former Group Chief Operating Officer, Schroders

Ulrik Modigh, Head of Asset Management Operation, Nordea Investment Management

Dragomir Velikov, Chief Investment Officer, Compass Invest

Susan Wright, Senior Regulatory Advisor, Investment Management Association

Olivia Vinden, Principal, Alpha Financial Markets Consulting

William Jenkins, Director, Amundi

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SECTION 1AN INDUSTRY IN TRANSFORMATION

1.1 ROUNDTABLE DEBATE

How are others successfully managing fund distribution and documentation?

7Fund Technology, Data & Administrator Operations, Europe 2016

How are others successfully managing fund distribution and documentation?

1.1 ROUNDTABLE DEBATE

Zara Amer: To what extent, is technology helping to shape the future of the finance industry? Can you both talk to us about the different fund technologies on offer and their benefits to Chief Operating Officers (COOs), Chief Technology Officers (CTOs) and Chief Financial Officers (CFOs)?

Dragomir Velikov: I believe that financial technology will be a game changer for the wealth management industry. Despite the fact that our industry ranks among the slowest adopters of digital technology in the global financial sector I believe that we have no choice. We need to strategically invest in new technology and to modernise, as well as to rationalise the operating and investment process, while improving client experience through digital capabilities.

The availability of big data analytics, complex operational and trading platforms as well as portfolio management software products contributes to the work of all operational staff in a wealth management company.

Therefore, I believe that the new technology will improve every aspect of the fund management industry including day to day operations of the COO, CTO or CFO.

Ulrik Modigh: I see this developing in a number of ways. Number 1 is efficiency in production (operational and investment processes), where technology will give more opportunities to improve/simplify the existing setup. Number 2 is the client offering where digital solutions in the future will play a more important role compared to today – for example the introduction of MIFID will, in my view accelerate this development. The fact that part of the income on funds will be advice, will accelerate this process, because advice for some client segments (retail) will move from being client advisory driven into a digital advice, to keep the efficiency and profitability in the lower retail segments.

• Financial technology a game changer for the wealth management industry?

• The 6 megatrends driving change in the industry

• What role technology will play in the successful distribution of strategies into emerging markets

• The growth of f intech and the need to adapt

POINTS OF DISCUSSION

Moderator

Panelists

Ulrik Modigh, Head of Asset Management Operation, Nordea Investment Management

Dragomir Velikov, Chief Investment Officer, Compass Invest

Section 1 - Roundtable

Zara Amer, Head of Content, Clear Path Analysis



Zara Amer: What do you consider the 7 megatrends that are driving change in the fund distribution industry to be?

Dragomir: Number 1 is technological change – to survive in a digital world and to demonstrate its value, the wealth management industry in general needs to keep pace with the new waves of digital opportunity that are emerging. One of the biggest challenges for companies when addressing the revenue and profit is to effectively benefit from digital technology to transform their businesses.

Ulrik: I agree, we recently saw that Aberdeen Asset Management has taken the decision to begin selling funds via apps.

Dragomir: 2 is demographics – the rapid growth of the world population along with the aging societies in the developed countries and urbanisation as a global phenomenon, represents a trend that has already affected the global economy. Forecasts suggest that these Trends will remain and grow for decades to come. The expectations are not only for expansion, but for the transformation of societies, that inevitably creates a wide range of opportunities for all economic sectors, including the wealth management industry.

Number 3 is the shift of global economic power – The global economic power shifts away from the established advanced economies to the emerging ones.

Number 4 is to do with new business models. During the last two decades, we are witnessing a significant transition from the conventional business models to industries such as on-demand services, online retail and sharing economy. They are reshaping the market and becoming a vital part of economic trends also in the wealth management industry where we social trading, on-line and mobile access to trading becoming more and more popular.

Ulrik: It should be added that the further generations will require very different product offerings. Why do the client offerings have to be revisited and changed into their contexts (no manual, 2 options, 1 click)?

Dragomir: Number 5, is the need for global political stability. Economic growth and political stability are deeply connected. Global uncertainty and growing local conflicts are affecting the world economy. Events such as Brexit and European Union (EU) sanctions towards Russia inevitably influence the capital flows and wealth managers constantly need to adapt to this new dynamic environment.

Dragomir: Number 6 is resource scarcity and climate change – according to many researchers climate change is one of the most probable reasons to affect the global economy in the near future along with unemployment and income disparity. Therefore, the situation requires investment in sustainable and cost-effective alternatives to traditional sources of energy, as well as in technologies that allow for a more efficient use of scarce resources, such as water. Investments which guide capital towards projects and companies that help manage resources sustainably and responsibly are gaining traction.

Ulrik: Agreed, Environmental, Social and Governance (ESG) criteria, plus sustainability, will be incorporated into investment management, where the alpha creation will be interlinked to ESG. Further this will be a bigger part of the product offering to the clients, and will thereby help diversify from passive products.

Dragomir: Number 7 - legislation will continue to drive the agenda for asset management. Fund distributors and asset managers are still facing a turmoil of legislation and to be successful in this environment you need to be able to cope with all this legislation, understand it, implement it and monitor it going forward.

EMERGING MARKETS ARE BENEFITTING NOT ONLY FROM MORE FAVOURABLE DEMOGRAPHIC TRENDS BUT ALSO FROM THE SPREAD OF TECHNOLOGY AND HIGHER EDUCATIONAL ATTAINMENT WHICH MAKES THEIR WORKFORCE MORE PRODUCTIVE



Zara: How will increased exposure and the continued shift of economic power from OECD countries to emerging markets impact the financial industry, both in terms of investment decisions and distribution strategies?

Dragomir: Emerging and developing economies accounted for approximately 85% of the global population, 38% of global GDP and yet only 13.6% of the global investable stock market capitalisation as of December 2012. Since 1990 these economies have grown at a rate of 5.1%, against 2.1% for developed markets. We expect this pattern to continue for the next five years and EM to continue to grow with above 5 % p.a.

Capital will inevitably focus on regions that are developing at a higher pace, so we could see many emerging markets re-rated in the coming years. The size of the global middle class is expected to grow from its current 2 billion to almost 5 billion in 2030, entirely driven by emerging markets.

Compared to the Organisation for Economic Co-operation and Development (OECD) countries, emerging markets have been far less plagued by indebtedness and the need to pursue austerity measures.

Emerging markets are benefitting not only from more favourable demographic trends but also from the spread of technology and higher educational attainment which makes their workforce more productive. Therefore, I believe technology will be essential for successful distribution strategies in EM in the years to come.

Ulrik: I agree with the above - if you as an asset manager will be able to stay ahead of the curve, you have to be able to focus on 1) the opportunities as an investment manager in the EM space, i.e. build up the necessary investment competences and 2) reaching out to the future clients the future clients in EM/Asia in order to have a distribution channel in this geographical area. If a bigger part of the future flows will be in no OECD countries, this has to be addressed and planned for.

Zara: How are markets adapting to the rise of electronic platforms and do you think Fintech can help facilitate fund distribution?

Dragomir: Fintech is growing and all managers (traditional and new robo advisors) are realising the need to adapt. As the amount of available client data is growing it is becoming difficult to accurately process the information. New technologies can now facilitate investors segmentation and help bring the right product to the right people. In particular, data analytics, machine learning algorithms, natural language processing, and behavioural analysis provide the ability to identify customers’ behaviours and trends. However, these processes will be an essential tool to identify the precise profiles of the investors and develop products tailored to their needs.

Ulrik: I agree with the above, the legislation is pushing/facilitating for new technology to be able to serve the clients. The fact that advice

will be a part of the future income stream and that fees cannot only be charged via products but will also require asset managers or distributors to be able to bring forward advisory solutions via new technology. If all advice were to be made via traditional advisors it would dilute the profitability of the products, especially in the low segments. We have not yet seen Fintech companies take over business, they still rely on the existing market participants – but if the traditional providers do not embrace the opportunities in the technology they run the risk of losing business later down the road.

Zara Amer: Have new regulations significantly disrupted distribution trends in the hedge fund sector, and if so, how are firms dealing with and driving the resulting challenges and opportunities?

Dragomir: The situation after the financial crisis is different, and most hedge fund firms worldwide are faced with significant regulation that has increased their compliance and reporting workloads, added to their cost bases and, in many instances, restricted their ability to sell their funds.

The aftermath of the tightened regulations, however, is that the confidence in the industry has increased. With respect to Europe alone, it can be said that harmonised legislation helps all companies to participate on the EU market under equal conditions, which undoubtedly benefits the industry.

Ulrik: I have limited insight into the hedge fund industry, but I would guess that the low yield environment is a benefit to the hedge fund managers, because this might be a good alternative to the search for alpha and return higher than zero. On the other hand, hedge funds are well under pressure from legislation and might also face a consolidation exercise to cope with all the new requirements.

Zara: Thank you both for sharing your views on this topic.

SECTION 2MANAGING INCREASING REGULATORY COMPLEXITY

2.1 INTERVIEW

What are the key regulatory updates and their likely impacts on the industry?


Section 2 - Interview

What are the key regulatory updates and their likely impacts on the industry?

2.1 INTERVIEW

Zara Amer: Before we discuss specific regulatory matters, could you give an opinion on the extent of asset managers’ preparedness when it comes to outsourcing options? Is the industry as educated as it should be?

Susan Wright: As per the original definition of outsourcing contained in the Markets in Financial Instruments Directive (MiFID), the asset manager is the party that outsources specific activities to a separate service provider. At no time does the responsibility for such outsourcing pass from the asset manager to that service provider.

The UK regulator - the Financial Services Authority (FSA), now the Financial Conduct Authority (FCA) - carried out a thematic review of asset managers’ outsourcing arrangements and considered there to be some poor practices; which included a blurring of the responsibilities between the asset manager and their service provider.

In 2012 a Dear CEO letter to asset managers on outsourcing was issued by the regulator, which challenged the industry to ensure there was appropriate oversight and governance by asset managers of activities outsourced to a third party. Representatives from across the industry responded by forming an Outsourcing Working Group (OWG) to consider the contents of the letter and subsequently published the OWG Report in 2013.

Since that time, asset managers have refocused on who does what for them and asset managers now give greater consideration as to how they can demonstrate to the regulator their own oversight of outsourced activities and any related risks, rather than simply rely on their service provider. Asset managers have also had to review the skill-set of those whose role it is to effectively oversee and challenge the activities carried out by the service provider.

With the publication of the above-mentioned OWG report, asset managers were able to consider aspects of good practice from across the industry. Although not endorsed in any way by the regulator, mention was made of this industry report in the FCA’s Thematic Report at the end of 2013.

Today, a key determinant of the selection of any service provider will not only be about the ability and expertise to carry out the outsourced activity, but also what a service provider can offer in relation to appropriate Management Information (MI), which will assist the asset manager in demonstrating effective oversight – both to their own board and to the regulator.

Zara: Internal processes are key in identifying risk, potential areas to be outsourced, and limitations based on regulatory measures. What advice can you give to companies, in order to boost internal robustness when faced with these decisions?

Interviewer Interviewee

• Ensuring appropriate oversight and governance by asset managers

• Establishing comprehensive due diligence exercises

• Reasons for liaising in the early stages

• Concerns about the amount of outsourcing across the industry

• Role technology will play in the future

Susan Wright, Senior Regulatory Advisor, Investment Management Association

SUMMARY




Susan: When an asset manager considers they may want to outsource a specific activity, they should carry out a risk-based assessment in order to consider what is proportionate and appropriate for the outsourcing of all or some of their specific operating models. There are many different operating models within asset management firms and there remains no one solution for all, which is why an initial assessment when considering moving an activity out of their firm should be carefully considered and documented. Included in this assessment should be any expectations of the role of a new service provider.

Indeed, asset managers should not rely solely on attestations from service providers without due consideration of the risks, supported by documentation. As highlighted in the OWG report, asset managers are reminded that whilst they may outsource an activity, they may not outsource their responsibility for that function.

Perhaps a question for asset managers to consider before deciding to outsource is whether the asset manager fully understands what is being outsourced. Service providers will negotiate terms for carrying out specific processes, but often such activities are process driven – e.g. administration or trade matching. In some cases, these types of high-volume activities may not be done in exactly the same way as an asset manager would do them, but this should be fully understood at the start of a relationship where one party outsources activities to another.

Any manual workarounds at the service provider must be documented with details of when or if the activity will be automated. Also where a service provider sub-delegates to another party, this must be fully documented with details of the location and competence of this other provider.

Therefore it is important to ensure initial due diligence exercises are comprehensive to ensure there are no future misunderstandings between the two parties – the asset manager and service provider.

Zara: Within the industry, what do you view as the key regulatory concerns currently, and how should they be addressed?

Susan: Asset managers must remain mindful of the obligations within the FCA’s Senior Management System and Controls (SYSC) rules – in particular Chapter 8 of SYSC.

Any breaches or shortfalls of required service remain the responsibility of the asset manager and should be recorded in the asset manager’s breach Register. Such events can be discussed with the service provider to establish whether any agreed controls failed and what actions are required to mitigate any future issues or breaches.

Where an asset manager wishes to launch a new product or consider some changes to its current operating model, the asset manager must engage with their service provider before the project becomes too advanced.

There are two reasons for liaising in the early stages: the service provider may not be able to carry out the activity – either due to a lack of capacity or expertise; alternatively early engagement may allow the service provider to provide some of their own know-how and experience in relation to the project. It is possible the service provider may already have assisted in a similar project previously for another client/firm and this can be helpful in overcoming some issues.

ASSET MANAGERS SHOULD NOT RELY SOLELY ON ATTESTATIONS FROM SERVICE PROVIDERS WITHOUT DUE CONSIDERATION OF THE RISKS, SUPPORTED BY DOCUMENTATION



Zara: Often the question on many people’s lips is how are regulations likely to evolve in the short to medium future? Given your position at the forefront of developments, what is your view?

Susan: The regulator remains concerned about the amount of outsourcing across the industry and it remains their prerogative to ask whether there is appropriate oversight and governance by those choosing to outsource various activities. As new technology and strategies become the norm, asset managers may receive further requests to show they remain on top of their outsourced activities.

One area in particular will always be whether there will be any implications for the end client, who must remain of paramount importance in all decisions relating to outsourcing.

Therefore firms should remember the main concern of the regulator is whether an asset manager has fully considered the implications of outsourcing an activity to a service provider – and the impact on investors (clients) if there is a subsequent failure of that third party.

Zara: Can you suggest any innovative strategies moving forwards, or industry motions that you would like to see come into play? By this I mean initiatives that will ease pressure on the industry and encourage more profitable working partnerships.

Susan: Technological change will continue to play a key role in the outsourcing of the future, with the creation of fintech solutions such as Blockchain bringing more pressure on asset managers and their service providers – trading and transactions will probably become faster and there will surely be new players to the industry offering their own particular brand of automation.

Asset managers should not be dazzled by such technology, but they must also not be scared to change some of the fundamental ways in which business is done. A useful way to explore such technology is through attendance at user groups and other networking groups.

We have already seen the regulator asking about firms’ use of the Cloud, which offers vast storage solutions, but sometimes without any clearly documented practices should there be a failure of this innovative solution.

Some firms are still considering options to move to a ‘warm’ site, should their own service provider fail, but this may turn out to be expensive, a long-term arrangement and without any real benefit to the business or clients.

Industry initiatives such as the OWG have successfully brought together expertise and knowledge from across all parts of the industry, including asset managers, service providers and consultants. Although such initiatives have a finite existence, they offer some real opportunities by providing some industry considerations and alternatives for firms to deliberate in relation to their own business models.

Zara: Thank you for sharing your views on this topic.

References: OWG Report: http://www.theinvestmentassociation.org/assets/files/press/2013/20131209-owgreport.pdf

http://www.theinvestmentassociation.org/assets/files/press/2013/20131209-owgreport.pdf

SECTION 3MANAGING INCREASING REGULATORY COMPLEXITY

3.1 INTERVIEW

What steps can be taken to ensure offshore outsourcing strategies are successful?

3.2 INTERVIEW

Which areas of the value chain respond most effectively to outsourcing strategies?

3.3 INTERVIEW

What is the key to building successful and long-lasting relationships when outsourcing? A service provider’s perspective.



What steps can be taken to ensure offshore outsourcing strategies are successful?

3.1 INTERVIEW

Zara Amer: What is your personal experience with offshore outsourcing strategies?

William Jenkins: I’d like to start by putting my comments into context. I talk as the co-head for operational due diligence in the part of Amundi that invests into onshore EU hedge funds; but these comments could be viewed in a wider context.

Without fail all of the businesses in which we invest will outsource various aspects of their business, to a greater or lesser degree. The functions of the manager’s business that are commonly outsourced include middle office processes, legal/compliance, IT, fund administration and corporate accounting activities.

We buy into (pun intended) investment managers who take a ‘stick to the knitting’ type approach and focus on managing money. Managing money is largely what they are paid to do and outsourcing can help them focus on this. Many boutique investment managers have come out of large corporate institutions and typically they don’t want to recreate that type of environment. Instead, they want to take advantage of the scale and resources of specialist providers at a relatively modest cost. However even very large institutionalised money managers frequently outsouce functions for reasons of operational flexibility and access to specialist resources.

As the regulators regularly remind us, it is important to note that investment managers do not outsource the responsibility for

outsourced functions, merely the operation of said function. The oversight and responsibility remains with the regulated entity – the investment manager.

Zara: How do you view initial ‘lining up’ processes or identification of opportunities when it comes to offshore outsourcing strategies?

William: It is the investment manager’s choice with regards to which tasks to outsource. I mentioned some example of areas that we frequently see outsourced above. What is extremely important to us is that the rationale for outsourcing and the process to appoint and monitor is both transparent and sensible.

We see many examples of businesses outsourcing in various contexts and this enables us to benchmark differing approaches. We can quickly identify when outsourcing is being under-taken for the wrong reasons; for example a complete lack of regard for the task to be outsourced or blind pursuit of cost reduction.

We have encountered instances when the process to appoint outsourcing agents was flawed. Examples would include when the process was rushed, a sub-optimal provider appointed or lack of documentation - such as an Service Level Agreement (SLA). We have also seen instances where the ongoing monitoring of such outsourcing arrangements is not appropriately monitored and expect to see documentary evidence of monitoring the SLA as an example.


• Functions commonly outsourced

• Rationale for outsourcing and the process to appoint and monitor

• Factors that play to outsourcing opportunities

• Opportunities/ threats posed by the online world

• Outsourcing gone wrong

William Jenkins, Director, Amundi

SUMMARY




Zara: Where do you view the most exciting opportunities to be and why?

William: One of the paradoxes of outsourcing is that a task/process that looks rather mundane to one business can create a great opportunity for outsourcing. Corporate accounting, company secretarial and middle office processes are some of the areas we see most frequently outsourced, even in companies which clearly have the scale to perform such tasks themselves.

The evolution of regulation and the necessity to increase operational efficiency in a cost conscious environment play to outsourcing opportunities. Managers are looking to take advantage of specific ‘niche’ technologies, which may well pay for themselves in a relatively short period of time. They are also looking to gain economies of scale wherever possible; part of this may involve moving some processes offshore to specialist providers.

Outsourcing providers themselves increasingly utilise near-shore or offshore offices in order to make elements of their businesses more efficient. Offshoring the outsourcing!

Against these tremendous opportunities are some downsides, an obvious example is cyber security. Cyber security’s potential impact on a business goes without saying; reputational impact, regulatory event, data protection violations and potential liability for criminal acts are all potential outcomes. Performing tasks on an outsourced/offshore basis creates data transfer and access issues. Cyber security concerns create an additional layer of complexity over the outsourcing arrangements. Whilst these are not insurmountable, they need to be carefully managed by using appropriate documentation and procedures.

Zara: What does the future hold in terms of offshore outsourcing strategies?

William: As society/businesses develop and the pace of technological change increases, additional opportunities for outsourcers are constantly being created. We can already see this and the trend will surely continue.

Opportunities are being created through the provision of specialist software to enhance existing businesses’ operational capability in the face of regulatory/legislative change. Solutions to address Basel III and Solvency II are examples of this. Technology is already enabling managers to add scale and efficiency to their organisation by outsourcing some processes to specialist providers. Subject to legal constraints there is no apparent reason why this should not continue.

On a broader note, so-called ‘disruptive’ technologies may replace some traditional type businesses or certain products all together; Fintech is an obvious example. Banks, venture capital, insurance companies and asset managers all face an opportunity/threat from the online world, for part of or all of their product set.

Zara: Your final thoughts on the future of the industry and the vital ingredients for success?

William: Outsourcing firms have generally done a good job of marketing their product to decision makers. They have also learned to cross sell across product groups. Fund administrators are now as interested in selling processing capabilities to insurance companies and private equity firms as they are to traditional asset managers or hedge funds.

However, a word of caution; outsourcing firms need to focus on the quality of the product as well as the selling of the product. There are too many high profile examples of outsourcing going wrong in industries from fund administration to government outsourcing contracts. These detract from the value proposition for the whole outsourcing industry.

Recently we have seen that the regulators are also willing to sanction the outsourcing firms, for example fund administrators, as well as the regulated entity, the investment manager, where standards have fallen short of what the regulator expects.

There needs to be a focus on delivery and managing expectations on both sides. Outsourcing is in many ways a partnership between two businesses. As in any successful partnership transparency and honesty are paramount.


TECHNOLOGY IS ALREADY ENABLING MANAGERS TO ADD SCALE AND EFFICIENCY TO THEIR ORGANISATION



Which areas of the value chain respond most effectively to outsourcing strategies?

3.2 INTERVIEW

Zara Amer: In your opinion which areas of the value chain respond best to outsourcing strategies?

Olivia Vinden: The outsourcing of ‘core’ back office functions (such as custody, fund accounting and transfer agency) is long established, with fewer asset managers looking to maintain such functions in-house. Middle office outsourcing is also well established across the asset management industry, although some asset managers remain cautious of relinquishing control of their investment records. In general, the process starts with a period of increasing maturity in which services move along a continuum from innovation, then through a period of growth and finally towards commoditisation. Services that are highly commoditised are the best candidates for outsourcing but it is reasonable to expect that all services will eventually increase in commoditisation and therefore respond well to outsourcing.

Another benefit of outsourcing is global reach. There are parts of the value chain that can benefit from a partnership with a large scale outsourced service providers with a global footprint. An asset manager can access global markets without needing to make expensive investment in multiple locations by partnering with a much larger service provider. They can also access a ‘follow the sun’ model without necessarily needing to replicate full operations teams in multiple time-zones.

Looking to the future we expect to see more options being offered by the service providers as they move up the value chain towards the front office and start to deliver new service lines outside of the traditional value chain. This might include services such as

performance and risk, or even execution. We are also seeing large scale investment in new service lines such as enhanced data offerings and integrated FinTech solutions.

Zara: Can you talk us through your experience of implementing an integrated supply chain management process for a fund? What advice would you give, for example, to ensure that the required experience is in place?

Olivia: Alpha has migrated over £1tr AUM to outsourced service providers in the last decade and so has a strong understanding of what makes for a successful outsourcing initiative. Selecting the right partner is the first important step to building a successful relationship. We advise our clients to undertake a thorough RFI/RFP process and Alpha has a great deal of experience running these on behalf of our clients. The basic requirement of any RFI/RFP process is an extended questionnaire to determine whether the partners meet the functional requirements. However, Alpha recommends some additional qualitative assessments as well. In particular, we include a number of demonstrations, site visits and interviews with operations SMEs to reach beyond the pure sales messages. We also consider additional factors such as the existing delivery pipeline of the provider or the ability of the provider to meet future needs. One very useful tool in selecting a provider is to seek industry references from similar clients who use the service and have experience of implementing it. This way clients can see evidence of past success or highlight areas for further probing.


• Large scale investments in new service lines

• Simplifying the overall supply chain

• Future proofing the operating model

• Benefits for the overall supply chain

Olivia Vinden, Principal, Alpha Financial Markets Consulting

SUMMARY




In addition to ensuring that the service provider has the appropriate experience, we also advise clients to focus on their own operating models and in particular the decisions that can seriously affect the outcome. One such area is to focus on simplifying the overall supply chain. This can be achieved by consolidating with one or two global providers where possible, using industry protocols to communicate and limiting bespoke requirements. These decisions lead to a greater opportunity for automation and batch processing, which can reduce risk and

cost. Similarly, we also advise clients to avoid over-customisation. In many cases, clients will have a better service level and more consistently green KPIs if they take the service providers standard model. Over-customisation can make the service more difficult for the service provider to deliver with limited benefit to the client.

Zara: What are some of the other risks you’ve encountered and the steps you employed to manage those risks?

Olivia: Outsourcing programmes are, by nature, large and challenging. They will often run over a number of years and will be the major focus of the business for the full lifecycle of the project. Generally speaking, most internal employees at an asset manager will not have experience of an outsourcing project, especially if it is a first generation deal. Alpha has a great deal of experience running projects of this kind and there are some common risks that can be anticipated and mitigated. One of the most common risks is that both parties have different expectations of the requirements to be delivered by the programme. Alpha emphasises the need for thorough due diligence both pre-contract and post-contract to ensure that everyone has a common understanding of what will be delivered. This should be supported by a clear and open change control process which allows for scope changes to be incorporated but without making delivery a constantly moving target.

Linked to the importance of clear requirements is the need to future proof the operating model. If a client plans to launch a new product or a new office location in the next five years, we try to ensure that this need had been predicted and considered during the selection process. This prevents the risk of selecting a service provider and then finding at the end of a long on-boarding process that there are requirements that the provider cannot support. This is another area where a clear change control process can anticipate changes in requirement and build them into the delivery pipeline.

Commercials also represent a key risk. During contract negotiation it’s important to compare apples and apples and to prevent a race to the bottom that results in an uncommercial deal. Alpha has over a decade of tariff and service benchmarking data so we are able to advise clients on the structure and value of the proposed rate cards against the market as a whole, but we also emphasise that the deal should be equitable and that it should cater for all business scenarios. At a basic level, both sides should feel that the commercials are fair and a good foundation for a long partnership, and in addition it should protect

both sides as much as possible from changes in circumstance.

Planning is clearly of key importance to any project. In the context of outsourcing, it represents a key risk as timeline can be used as a negotiating tool during the contract stages before the full requirements are understood. As mentioned earlier, asset managers rarely have experience of these programmes and so Alpha strongly advise listening to the service provider and trying (where possible) to view the timeline as a point to be negotiated down. Ensuring a joint understanding of the planning drivers and visibility of the plan and status tracking will prevent significant overruns.

Zara: What are the strategic effects that offshoring has on value chains?

Olivia: When implemented successfully, offshoring can have very positive benefits for the overall supply chain, particularly in accessing low cost centres of excellence. This should allow asset managers to reduce their overall run costs and, when done best, to improve overall service levels. The outsourced model allows asset managers to share the benefits of a service provider operating model, which will include regular investment and cost-sharing for regulatory or other market changes.

Offshoring works best in highly commoditised value chains with defined repeatable processes. It is therefore desirable to standardise and simplify where possible to access the widest benefits.


When implemented successfully, offshoring can have very positive benefits for the overall supply chain, particularly

in accessing low cost centres of excellence



What is the key to building successful and long-lasting relationships when outsourcing? A service provider’s perspective.

3.3 INTERVIEW

Zara Amer: From your perspective what relationships have you engaged with in the past; client to supplier, and how did these come about?

Matthew Davey: I have worked on about a dozen major outsourcing deals over the past 15 years and have experience of each stage of the outsourcing lifecycle. I have worked on large deals for three of the leading service providers, often as Deal Manager. This has included deals all over the world, including; the U.S., Europe and Asia, typically with multiple locations in scope. In all cases, these were either asset managers or insurance companies, both looking to outsource their back and middle office operations. In many instances, the deal included people, systems and premises as part of the business to be outsourced.

In terms of motivation, there are several reasons that firms look to outsource their back office operations, but early market surveys showed that cost reduction was the main driver 15 years ago. I think it remains a key driver today, as firms are faced with a number of challenges that tend to increase the cost of technology and operations required to run their core business.

Zara: What do clients most value when seeking outsourcing? What gaps are they looking to fill?

Matthew: One of the key benefits of outsourcing operations is that firms can achieve predictable operational costs over the life of the

contract. Associated improvements in operational efficiency and reduction in errors is sometimes referred to as “operational alpha”, which highlights the importance of efficient operations to overall fund performance.

There has been a long term trend over the past 20 years away from equity-based investment into increasing levels of alternative assets and more solution-oriented products. The system functionality required to support these investment strategies can require costly upgrade or replacement of legacy systems.

Firms can gain access to new and more scalable capabilities by outsourcing operational functions to a third party service provider. Whilst outsourcing is often triggered by specific legacy system constraints, it allows access to a much broader set of functions from third parties.

The relentless demands of regulatory reporting continue to put pressure on a firm’s back office systems and operational processes. Piecemeal responses to specific regulations are inefficient and firms are increasingly looking for more holistic data solutions to provide a more robust infrastructure, or simply to outsource the reporting process to their service provider.

Aside from reporting to regulators, firms also need to provide internal risk reporting across multiple asset classes and investment strategies, such as multi-asset funds which have become increasingly popular


• Key reasons to outsource

• Demands of regulatory reporting

• Constructing a cost efficient yet profitable win-win deal

• Improvements of oversight arrangements

• Factors helping to accelerate outsourcing in financial services

Matthew Davey, Former Senior Vice President and Head of Asset Managers at State Street Bank, UKMEA

SUMMARY




in recent years. A robust data architecture is typically required for an effective reporting solution and is often a key driver for firms looking to outsource.

Lastly, firms are also active in M&A and can end up with the challenge of having to integrate disparate back office systems acquired from multiple firms and having to deal with much higher aggregate volumes. Several deals I have worked on involved the transfer and consolidation of multiple operations to an outsource service provider with a broader set of functionality and more robust infrastructure.

Zara: As relationships develop, what factors ensure that the relationship is long-lasting and satisfactory on both sides?

Matthew: After some early failures, I believe there is a more pragmatic understanding than for an outsource relationship to be successful, it needs to work for both partners. The arrangement needs to be a ‘win-win’ deal that is cost efficient for the asset manager, but still profitable for the service provider. It is essential to have performance incentives, as both parties need to work together to ensure satisfactory service delivery and also to accommodate changes through the life of the deal. Both sides need to invest in building trust early on to form a successful partnership that will last the life of the deal.

Secondly, clients should aim to use the provider’s standard operating model, which will typically provide the most robust and reliable solutions. Having bespoke operational processes can leave firms exposed to an isolated development path which is likely to incur higher costs and take longer to deliver.

The best partnerships are formed when there is a joint understanding of a client’s requirements and an open discussion of how these can best be met by service provider solutions. Some clients are so focused on not wanting a ‘sales-pitch’ from potential providers that they don’t hear about the full range of capabilities that are available. Conversely, providers need to be up-front in stating when a requested service is not currently supported.

These pre-contract interactions help to build personal relationships between key individuals in each organisation and quickly show if there is a good cultural fit. This discussion of key requirements also helps provide the basis for later agreement on Service Levels and Key Performance Indicators to manage the operational delivery.

A similar discussion is the best approach to agreeing a suitable contract structure for what may be a large and complicated deal. Because our Legal system is based on an adversarial process, there is a risk that this early phase of the deal slips into this mode. There needs to be agreement between business owners on a contract structure that works for both parties.

Finally, it is important to acknowledge that all relationships are personal and that sometimes two individuals simply don’t get along. If there is a personality clash, then it needs to be dealt with early on: there is too much at stake for both organisations.

Zara: What does the future hold in terms of client expectations?

Matthew: Clients are expecting a greater level of transparency from their service providers and are developing increasingly structured ways to oversee their outsourced relationships. This is an area that regulators have been focused on since the failure of Lehman Brothers and the recent proposed rule by the SEC shows that this issue is not going away. This is a topic I have been involved with in my work for the Outsourcing Working Group, which made industry recommendations on how to oversee service provider relationships in response to a ‘Dear CEO’ letter from the FSA.

Oversight arrangements have improved and we are seeing more firms employing individuals specifically to manage their service provider relationships, as well as some vendor software designed specifically for this purpose. In general, I think there has been a shift in emphasis from one of monitoring service quality to more of a focus on risk management. Clients will continue to expect their service providers to report on outsourced operations in a way that supports their oversight and monitoring process.

Zara: Your final thoughts on the future of the industry and the vital ingredients for success?

Matthew: There are a number of challenges facing the asset management industry and I think we will see some significant changes over the next five years as firms compete to provide investment products at a lower cost, whilst coping with incoming regulations and new competitors.

Whilst the industry is focussed on becoming more efficient, the technology spend required to meet new regulations works against that and increases costs for asset managers and service providers alike. Given this continued pressure on operational costs, I think we will see more firms look to outsource functions to reduce cost and gain functionality.

Finally, it is worth noting the rapid uptake of cloud computing by businesses more generally. The recent guidance published by the FCA in this regard is very helpful and contains many familiar ‘oversight’ themes. I think both these factors will help to accelerate outsourcing in financial services.


SECTION 4CURRENT BUSINESS TRENDS

4.1 INTERVIEW

Three technology enabled business trends to follow

4.2 WHITEPAPER

For effective global management should all data be centralised?



Three technology enabled business trends to follow

4.1 INTERVIEW

Zara Amer: Which three trends would you rate as being the most important and how have they impacted the market so far?

Neil Curham: The investment management industry is undergoing unprecedented levels of stress and change at present, and you can only see it getting even more complex. In terms of trends, we’ve had lots of turbulence at the macro-level, that are well covered by the market and economy in general.

To name just a few of the obvious factors that will affect the industry, our clients are monitoring and developing strategies for some of the larger topics that are playing out globally. Brexit and European distribution, developing an industry proposition in a global low-return economy, and the increasing challenges of product development within the active vs. passive investment debate; there is a wide range of factors that the industry is faced with over the coming months and years.

Looking at the trends that emerge from these, I’ve selected three technology enabled business trends that we see as particularly significant in the face of these headwinds. The first is a hidden trend that’s already taken hold, namely the emergence of digital technology across the workplace. One such example is the adoption of ‘bots’ to automate processes and transform communications throughout organisations. Integration of these new digital solutions has the capacity to take significant costs out of the industry while

increasing transparency and responsiveness. This should see the cost of financial services falling for customers and hopefully also an improved customer experience. ‘Bots’ also represent a small step on a path to much more sophisticated AI solutions – such as AI investing and dealing, which could see a big reduction in fees. This has to be the long-term strategic objective of any manager looking to survive over the next 5 – 10 years.

My second choice is one that will be largely driven by clients, who are becoming more demanding regarding the transparency and availability of investment information and data. Investors and distributors require a rapidly expanding set of information to be provided on ever more pressing timescales – sometimes going to the heart of the investment process and beyond the standard capability of funds and companies to support. Increasing demands for data are not easily serviced by legacy technology so we expect to see continued significant investment in streamlining data architecture and developing more sophisticated data reporting solutions.

Meanwhile, the appetite for timely content that provides clients with relevant, insightful commentary, while meeting the reporting and suitability requirements of the regulators that we see emerging through initiatives such as MIFID II, grows month by month. Increasingly, this requires firms to radically change the way they communicate with clients. Over the next few years, the need for investment managers to quickly and securely develop new ways to


• 3 most significant trends

• Role of millennial workforce in adopting digital technology

• The guessing game

• Inability of the industry to embrace long lasting change

Neil Curham, Executive Director, Alpha Financial Markets Consulting

SUMMARY




engage with clients will pose challenges that look more like they fit with a publishing house than an investment manager.

Finally, the trend that is much talked about but has yet to hit - in an industry that has basically stayed the same for the last 40 years - is the adoption of blockchain technology. Blockchain as a way of processing, storing and sharing information has the potential to make a clean sweep of the legacy of inflexible systems, inefficient data structures and lack of integration that exists across the custody, administration and investment operating models. There are so many potential uses for blockchain technology in financial services that it’s difficult to know which will break through first but I’m particularly excited about the transformation of the customer experience – both in terms of reduced cost and increased simplicity – for example if the technology can successfully negate the need for prolonged and duplicated KYC/AML checks.

Similar to the impact of open banking in the retail banking sector, the capacity of blockchain technology to allow for much greater sharing

and integration of data and processes could be revolutionary for the way that firms manage investments, fund and client data and processes – to the significant benefit of clients and firms alike.

Zara: What are the forces at work driving these trends?

Neil: As I mentioned before, there are an unparalleled number of forces buffeting the industry and driving these trends. The traditional motivations of creating greater efficiency or effectiveness are ever-increasingly important as the pressure on fees and margin grows day by day. In the past few months, we’ve seen firms have their fees cut by 35 or 30% and consolidation in the market around distribution is only going to increase this downward pressure.

Also, in the industry at the moment, we are seeing a build-up of market forces that feel like they could erupt over the next few years. These address the fundamental structures that the industry has been built around over the past few decades. The challenge to the value of active management, the demands of an increasingly stressed pension’s structure, and the challenge of creating returns in a low-return economy are all putting the industry under real scrutiny. The effect on the status quo significantly increases the chances of real and transformational changes taking place. As we say this, we must always remember the Bill Gates’ comment that we over-estimate what happens in 2 years but underestimate what happens over 10. We’re several years in to these factors being real challenges to the industry now and the risk grows of underestimating their effect rather than the overestimation or hype that we’ve seen for a couple of years now.

At the coal face, these forces are seen as being financial, cultural and political pressures. Regulators will be increasingly focused on the revenue, value and rewards across the industry, particularly as it becomes clear that the current industry model won’t be sufficient for future economic or political needs. On a functional level, the millennial workforce and client base will increase the adoption of digital technology. You just need to think back a decade to the clamour of bank branches shutting and compare it to the hypothetical effects of online banking being withdrawn for an hour.

And the industry will need to adapt to a world where fees are cut by 30-50% across institutional and retail markets compared with today. This type of pressure – where the larger incumbents find their historical business models no longer generating the revenue or margin of last year or even last quarter – will only increase over the next few years.

Finally, the technology is advancing at a fantastic pace – solutions are increasingly cloud based, or can be configured with other systems via APIs. Big data, AI, blockchain, cloud – these are all technologies that are just beginning to find their footing in the industry. Furthermore, bespoke builds and lengthy developments are becoming a thing of the past as technology becomes cheaper and more flexible, this encourages more dynamic solutions to problems which have previously not been solvable.

REGULATORS WILL BE

INCREASINGLY FOCUSED

ON THE REVENUE, VALUE

AND REWARDS ACROSS THE

INDUSTRY, PARTICULARLY

AS IT BECOMES CLEAR THAT

THE CURRENT INDUSTRY

MODEL WON’T BE SUFFICIENT

FOR FUTURE ECONOMIC OR

POLITICAL NEEDS.



Zara: Thinking about 2016 and beyond, what are the evolving client needs and digital trends that you foresee disrupting the market?

Neil: This involves what we call “the guessing game”. Guessing why the investment management industry has resisted the onslaught of digital business models while other industries have seen real transformation. There is a standard model that successfully describes the impact of digital technologies across a range of industries. Put simply, if there is an imbalance between the information available to both sides of a market (the suppliers and the consumers),

this leads to a monopoly of the markets, skewed against the consumer. But the internet and digital technologies have consistently disrupted this information monopoly, and at a speed that has caught out many market incumbents – often causing their demise.

Advertising, taxis, music, videos, hotels; the transformation of industries due to a new entrant addressing this information asymmetry has been breath-taking with Google, Uber, Apple, Netflix and AirBnB, all decimating existing players to establish a new business model, that’s entirely built around client needs and digital trends. The question is when will the investment management industry experience this level of change.

To predict where client needs and digital trends will disrupt the market in the same way is definitely a guessing game. However, as the spotlight is shone on ineffective aspects of the industry via market competition, new entrants and regulatory scrutiny, it feels like the asymmetric world that has seen other industries fall, might be taking shape. This can create real opportunities for new approaches either from new or existing industry participants. We expect this disruption to deliver greater transparency, improved efficiency and real-time support for clients trying to meet their increasingly challenging investment objectives.

Zara: How have you managed the strategic challenges that come with implementing new trends?

Neil: The biggest challenge to implementing these new approaches and trends is an issue that has long affected our industry – the inability of the industry to embrace long-lasting change. The fungibility of the products, processes and operating model (that is, the ability for them to shift shape before your very eyes), alongside the constant innovation and change within the markets, has meant that strategic change has floundered, as it constantly chases an ever-evolving industry and changing business models. At the same time, the tendency for programmes and projects to be measured in quarters and years rather than weeks and months has meant that strategic change has always been running to keep up.

However, new technology that enables more rapid change by not being so technically complex is changing this. We have worked with numerous clients where successful change projects have been reduced from years or months to just weeks. This has dramatically improved the take-up of new processes and approaches, whilst also allowing long-term strategic change to be achieved in incremental steps, aligning with the prevailing market or client wind.

The key factor to enable this is the presence of vision, allied with a robust approach to “being agile”. Hundreds of millions of pounds have been wasted in the industry, and will continue to be wasted on initiatives where “being agile” has been an excuse for a lack of sound strategy, design or planning. Instead, our clients’ (and our) success has been built around having a clear vision of what the future can look like, a detailed design for how the outcome should operate, and a proven approach to delivering alongside and to meet the business strategic objectives. This is the experience of more than a decade working with digital technologies coming to fruition in an industry that has yet to really take advantage of the competitive, operational and financial opportunities that they present.



Section 4 - Whitepaper

For effective global management should all data be centralised?

4.2 WHITEPAPER

“No problem can be solved from the same level of consciousness that created it.” - Albert Einstein

Haider Mannan, EMEA Head of Buy-Side, GoldenSource Corporation

Striking the balance between cost and income is the key for any business. In the current regulatory environment, businesses need to operate with well-defined data management strategies – but the benefits of defining such a strategy must outweigh the costs.

Post the global financial crisis of 2008, more than 40 proposals have been tabled by the European Commission for laws pertaining to the financial services sector – a good number of which are currently in force and which are “aimed at restoring market confidence, financial stability, and the integrity and efficiency of the European financial system.” 1

The global financial crisis impacted the majority of financial services firms, not least asset management firms, into breaking new ground by improving their technology platforms with dramatically constrained costs. Their interrogation of business processes is continuous in trying to determine how regulatory demands can be met with effective data management. The case for centralised data management is motivated by a culmination of source data challenges, data quality issues and flexible reporting rquirements.

By implementing a centralised data management solution for the acquisition, aggregation, storage, and distribution of investment information, buy side firms are able to make extensive use of information to step up operational efficiency, reduce operational risk and to drive change for greater competitive advantage.

Dynamic Regulatory Environment

The extraordinary consequences of the global financial crisis have already shown an impact on the financial services industry that will last well beyond 2020. Competitive advantage for asset management firms can be attributed to a multitude of factors. Significantly, one such factor is the ability with which the firm reacts to meeting regulatory requirements that impact an investor or a group of investors.

At a time when growth opportunities are limited, attracting investors is a challenge that could be overcome with enhanced regulatory reporting capabilities, which in turn is underpinned by efficient data management.

Investors, such as insurers are now requiring greater transparency on their investments – to comply with stringent rules set by national supervisory authorities, such as minimum capital requirements. Supervisory authorities have set out investors’ obligations in clear terms: “Firms should be aware that undertaking specific parameters must be calibrated based on the firm’s internal data or on the basis of data which is directly relevant for the operations of the firm using standardised methods.” 2 For these investors it is becoming more important to delegate their assets to managers who have established centralised data processes to provide access to data and reporting in a timely and flexible manner.

1 European Commission, ‘A reformed financial sector for Europe’, Communication COM(2014) 279, 15 May 2014 - http://ec.europa.eu/internal_market/finances/docs/general/20140515-erfra-communication_en.pdf 2 Bank of England – PRA, Supervisory Statement SS4/15, March 2015

http://ec.europa.eu/internal_market/finances/docs/general/20140515-erfra-communication_en.pdf

Fund Technology, Data & Administrator Operations, Europe 2016 26

Section 4 - Whitepaper

In the federated data management model and mostly because of siloed data systems, internal functions, such as compliance, risk or performance consume data from a variety of service providers and sources. The recent report from FIMA highlights: “It’s often the case that firms initially construct regulatory data sets from disparate sources until the data vendors are able to offer them as consolidated feeds. Data management capabilities need to cope with overall scaling for regulatory growth in addition to accommodating ongoing shifts in data sources and related workflows and rules required to sustain data quality stewardship and governance.” 3

Traditionally the centralised data management model has accommodated a quick response to changing regulations. This is largely due to a single source of truth that offers a high degree of control with centralised processing.

From Fragmentation to Centralisation

For many asset management firms the creation of a single version of the truth across the enterprise continues to be the goal. The process can best be described as the integration of data. It begins with the construction of an enterprise data warehouse, where source systems feed into a single unified data store. From the data store, information can then be sourced into analytical engines or their respective repositories.

A key aspect of the move to centralisation is the ability to create multiple views of the data for functional data consumers such as risk or performance. This enables firms to move away from tactical data solutions while being able to monitor the integrity of the data as it flows to the data consumers.

In an age where compliance with regulatory requirements has to be at the forefront of any data management strategy, equally so for investors and asset managers, having such a strategy will ensure accurate and timely delivery of quality-assured information across the enterprise.

The challenge has become greater because the demands of additional regulatory compliance and its associated reporting are requiring buy-side firms to source more data feeds from a variety of data vendors. This trend is likely to continue, so the scalability of any approach to centralisation of data is critical.

Enabling Data Management Change

Almost every aspect of an asset management firm’s business is supported by data management – starting at the investment decision, to managing risk, and reporting on performance, and supporting the development of investment products all the way through to their

distribution. However, the cost of implementing a centralised data management model remains high and to-date only mid-large tier asset managers have been able to afford this capability. In terms of data quality and establishing standards to support an enterprise-wide approach to data management, there are relatively a few firms who have succeeded in making this a reality.

In terms of a firm’s approach to centralising data management, the principal steps to creating a “framework for data governance and control” 4 are:

1. Identify ownership

2. Establish a single source of truth

3. Establish processes for data management

4. Define controls and monitoring and establish quality metrics for such standards as timeliness and frequency

5. Establish repositories to consolidate data and trace lineage and quality

6. Improve the design and implementation of new data solutions

7. Define an implementation plan based on discrete, measureable data sets

When implementing this in the firm it is unlikely that a big bang approach will be welcomed by internal or external stakeholders, so a natural migration path is necessary from current silos and fragmented systems to a centralised capability, which, as the migration progresses, satisfies the needs of onboarding, pricing, risk, portfolio management, performance and attribution, compliance and reporting, marketing and sales.

The FIMA report quoted earlier also states that “81% of respondents agree that implementing a centralised client data hub across all business units is worth the investment.” The key enabler for a successful migration is a comprehensive data model that also interlinks relevant data types to enable the different views of gold copy data that are essential to the various functional disciplines in the firm. Data regarding securities, pricing, products, entities, customers, corporate actions and positions and transactions must all be cross-referenced. The rules attaining the gold copy data sets must also be flexible to reflect the differing complexity, uses and quality demands across the firm.

Whether these capabilities are delivered onsite or in the cloud a thorough plan is required to ensure that each new step or module to improve a current data management or data distribution process contributes to the centralised end goal.

3 A snapshot of challenges in financial data management – FIMA Whitepaper, September 20164 EY – Managing complexity and change in a new landscape, 2014

SECTION 5FUTURE THREATS AND OPPORTUNITIES

5.1 INTERVIEW

How do companies satisfy and empower the ‘millennial’ workforce whilst simultaneously improving their bottom line

5.2 WHITEPAPER

Constructing efficient and effective operational capabilities in order to meet critical business competencies



How do companies satisfy and empower the ‘millennial’ workforce whilst simultaneously improving their bottom line

5.1 INTERVIEW

Zara Amer: How do you see the industry currently in terms of employee demographic, specifically relating to age group, and is this something that is changing? Are the old guard giving way to new talent?

Denise Thomas: Speaking for my own area we have a broad age range of employees working within investment operations. Ranging from late teens to early sixties and everything in between. It’s a great blend and it means that we get a wide range of views, experiences and skillsets. The different age groups can learn a lot from each other. New talent is not defined by age. Talent comes in many disguises and it’s great to have diversity in the team. Diversity of thinking brings with it innovation and endless possibilities.

Zara: Is the industry attracting youngsters into graduate positions? What is attractive about this industry to fresh talent?

Denise: Financial services remains a popular choice for graduates from a wide range of disciplines, attracting ambitious and energetic new talent. The financial services industry is one of the UK’s largest and most prominent industries and offers graduates fantastic opportunities for career advancements. In the past it was seen as old fashioned, stale, inflexible and rigid. It has become fast paced, dynamic and most certainly a global industry where people really do make a difference. We have seen a dramatic change in culture within the large financial services organisations but we still have a way to go in a couple areas such as work life balance and diversity and inclusion.

Zara: How are graduates trained and encouraged to stay long-term?

Denise: Our operations graduates go through a two year program which includes four six month placements in different parts of the operations function. This allows the graduates to get a wide variety of experience of the different roles within the operational function of a large investment management company. As well as on the job training all of our graduate also undertake a variety of both in-house training such as Presenting with Confidence, Critical Conversations, Effective Report writing to name but a few as well as professional training such as IOC (Investment Operations Certificate) and IMC (The Investment Management Certificate). The breadth and training and development opportunities available is one of the key factors that the new workforce generation are looking to be in place at potential employers.

We encourage staff to build team skills through taking on a challenge at a local community group or charity. There are lots of good causes and the tasks have ranged from painting railings and clearing playgrounds to running a Marie Curie charity shop for the day. It’s all about helping people in need and at the same time providing a team-building opportunity for employees and our graduates. Social responsibility is important to millennials and this gives them a great opportunity to help others and also develop new skills that they may not have been able to develop in the office environment,


• Benefits of working with a blended employee demographic

• Financial services attract ambitious new talent

• Graduate training programmes

• What are millennials looking for?

Denise Thomas, Head of Operations, Standard Life

SUMMARY




We see our graduates as one of the industry’s future leaders and we work with them to reach their highest potential. Training and development does not stop at the end of the two year program it is on-going throughout their career. Graduates complete the scheme well equipped to take on valuable roles within the organisation. As I mentioned before Financial Services is dynamic, fast paced and most certainly global, meaning that there are many exciting opportunities for graduates.

Zara: What should companies look to set in place in order to satisfy the millennials?

Denise: There are a number of things that companies could look to put in place in order to satisfy the millennials. Flexible work patterns are very important to have in place. Work life balance is something that

many millennials expect to have in place. Along with flexible working, sits flexible working spaces and mobile technology – the ability to work in different locations / environments that suit the tasks they are undertaking. Having the mobile / flexible technology is also important, allowing people access systems and information from anywhere in the world.

Millennials are not looking for bosses they are looking for coaches. They want to work with you not for you so it’s really important to have strong coaching culture in the organisation along with extensive learning and development opportunities – it is all about breadth of learning and the sense of achievement gained from learning new things. Mentoring programs and access to internal and external coaching are great ways to continue to develop new talent. They are looking for collaboration and teamwork and moving away from rigid hierarchical structures. They want to be team players and part of a team working towards a common goal.

Millennials are more mobile than previous generations, they don’t feel the need to own homes / cars etc. when you can hire / rent them. This means that many are looking for opportunities to travel more and work overseas. Companies that have Global secondment opportunities and opportunities for people to work within different cultural environments will be looked on favourably by millennials.

It’s no longer just about financial reward, Millennials want to work for a purpose, something that is bigger than them, and they want to work for a company with vision, purpose and a social conscious. Social and environmental impacts are very important to millennials. They want to work for an organisation that shares their values, they want their employers to care about the environment, take an active role in local communities, and support worthwhile causes. Some companies reward employees by giving them paid leave to work in the local community and volunteer for charities and local groups, other offer secondment opportunities.

Diversity and inclusion is another important area for millennials, they want to feel fulfilment at home and at work and want to be able to bring their whole self to work – not having to leave anything behind. Allowing employees to have the space to be who they truly are allows them to maximise their potential.

Millennials are loyal to the job and not the company so ensuring that there are many opportunities within organisations for new roles, project work and secondments will help keep millennials engaged and motivated. Having initiatives within the workplace that encourage baby boomers and millennials to work together can be very powerful. Baby boomers bring experience and millennials s bring potential, getting them to work together and collaborate will brings endless possibilities.


IT’S NO LONGER JUST ABOUT FINANCIAL REWARD, MILLENNIALS WANT TO WORK FOR A PURPOSE, SOMETHING THAT IS BIGGER THAN THEM, AND THEY WANT TO WORK FOR A COMPANY WITH VISION, PURPOSE AND A SOCIAL CONSCIOUS.



Constructing efficient and effective operational capabilities in order to meet critical business competencies

5.2 WHITEPAPER

Introduction

Creating and advancing a scalable, agile and efficient infrastructure capability is critical to a firm’s ability to grow and meet evolving requirements from clients, business partners and regulators. Today’s sourcing strategies supplement internal capabilities and capacities with external talent, services and technology. Future sourcing strategies will need to take into account opportunities deriving from technological progress, such as machine-learning and artificial intelligence. While this evolution will take place over many years, it will materially and fundamentally impact the type of talent required in the future. Operations must also gear up to meet demands arising from business strategies which are solely based on one strategic deliverable – client-centric ubiquity.

Operational Alpha

Modern infrastructure capabilities create Operational Alpha by ensuring that the launch of new investment instruments or products is

supported in a timely, secure and scalable fashion. Operational Alpha is also generated by accurately forecasting and then speedily processing transactions which impact cash flows. For example, the values of corporate actions and dividend payments to be handled during a day must be notified to the fund manager in the morning prior to the clients’ custodians completing their processing cycle. This allows timely investment decision making, but necessitates a competent workforce as well as an effective IT architecture. The latter will need to support near real-time intra-day cash flow forecasting, typically based on an Investment Book-of-Record (IBOR) system solution. Effective cost management is also contributing to Operational Alpha. Strategies must be developed for Operations departments to simplify, automate and converge core processes. This will also facilitate further outsourcing or co-sourcing as opportunities arise or are dictated by commercial considerations.

Emerging Ecosystem

Increasing operating costs and risks as well as prescriptive regulations and the ongoing digital transformation will force global securities services providers, fund distributors and asset managers to adjust their future operating models. While the timeframe is difficult to predict, it is likely that target operating models will be built on three critical capabilities:

Markus Reutimann, Former Group Chief Operating Officer, Schroders

• Future sourcing strategies and what they need to take into account

• Creating and generating operational alpha

• Adjusting future operating models

• Is the industry being challenges by new innovations?

• Data-as-a-service

SUMMARY



TALENT

Apart from ensuring a basic level of operational expertise and experience, operations will need to supplement these skills with computer and data scientists. This is important in order to make collaboration with internal users and technologists, as well as with external providers, more effective and focused in terms of aligning business and project priorities.

Future online client servicing platforms will aim to provide clients and internal users with near real-time access to portfolios, funds, investment performance attribution and other core data. The speed and the transparency will challenge Operations departments which must make an even more concerted effort to ensure data accuracy and availability. It also necessitates the employment of technology-savvy operations personnel to build the bridge between core processing of data and the delivery of data through systems.

Over time, it is therefore likely that talent pools in operations will become highly specialised as well as much more mobile and location-agnostic, particularly in an organisation of global reach. The associated challenges with respect to talent recruitment, retention and development are obvious.

TECHNOLOGY

Long overdue, the financial services industry is currently being challenged by new innovations – often described as FinTech. Technology is lowering the barriers for new entrants and, arguably, artificial intelligence will level the playing field between large and small players. Information security is also becoming a differentiating factor as the “black economy” of cybercrime expands.

Operations and IT departments will play a central offensive and defensive role. Offensive, as enablers for the delivery of new client data and service requirements - and defensive, as guardians of a firm’s operating platform against external and internal threats.

Technology is and will undoubtedly remain a differentiating factor no financial services company can underestimate. A potentially revolutionary ecosystem which might emerge is one where services, data, technology, information security and risk management capabilities are co-sourced through a private cloud shared by a fund manager, a global securities services provider and a technology & data services provider. Such an approach would substantially reduce operating costs, duplication of effort and technology spend. Time will tell.

INSIGHTS

Many companies have already created data insight teams, embedded in investment, distribution and/or operations. Predictive machine learning is gradually impacting investment decisions (stock selection, asset allocation and risk analytics). Some hedge fund managers are using multiple forms of artificial intelligence for identifying and executing trades – what is known as super-algorithms. Fund managers and their distributors also increasingly share core fund data on shared platforms.

In operations, data curation capabilities are fast becoming critical to measure operational efficiencies, manage operational risks and assemble data which is required for regulatory compliance. Data captured includes insights into the causes of failed trades or settlements, inefficiencies at client-appointed custodians as well as internal deficiencies of data flows and increasing operating costs. Data is fast becoming an “asset” and operations is very much at the heart of the concept of “Data-as-a-Service”.

CONCLUSION

The talent, the technology solutions and the insights embedded in operations will become even more important in the future as the financial services industry experiences “the perfect storm”. Economic, political and social uncertainty inevitably impacts firms so that operations must continue to ensure reliability, security and stability at all times. A substantial responsibility which requires progress and firm leadership.

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