James Davidson, Chief Operating Officer, Pacific Asset Management

Revenue pressure

In addition to continually identifying new products, new markets and new clients, the fund operator industry has a further challenge of downward revenue pressure. This has resulted from the increase in regulatory costs, homogeneity of core risk-rated products, and industrialisation by ETF providers who have the scale to undercut.

"Identifying and prioritising the use of technology and data to advance or differentiate an organisation is far from new. It does remain undervalued in the fund operator space."

These circumstances mean that firms need to consider what new opportunities they can use to reduce costs, vertically integrate, or differentiate their products to attract those willing to pay a premium.

Identifying and prioritising the use of technology and data to advance or differentiate an organisation is far from new. However, it does remain relatively undervalued in the fund operator space.

This lack of value recognition is partly the result of technology and data being considered a cost and not a profit centre, which means it takes a back seat in terms of prioritisation and funding. Many mid-sized firms continue to struggle with implementing the basics of tech such as cloud-based, integrated, scalable, and flexible architecture. Building data-driven solutions is just a pipe dream for these fund operators until these fundamental milestones are reached.

However, this situation will naturally correct one way or another, as new challenger firms enter the space unencumbered by legacy issues and fully focused on the opportunities they see.

New entrants

These new entrants have identified and designed their firms to be as much tech and data providers as they are core asset management solution providers. This is primarily driven by the issues mentioned earlier, which in turn require new entrants to consider how they can challenge incumbents and gain market share. In addition, vertical integration opportunities present themselves once an optimal operating level has been achieved. Take the Independent Financial Advisers (IFAs) market as an example, which seriously lacks automation, so opportunistic asset management firms, which are their main source of product, can use their tech and data capabilities to deliver automation alongside traditional investment solutions which attract a captive revenue stream.

These new entrants are best described as firms that see the opportunity presented by having technology and data as part of the culture, an above-average technology literate workforce, and that they only see segregation of these tasks where it is necessary and low bureaucracy. These qualities then converge to create a motivated and creative workforce, who directly contribute and understand the value of technology and data and automating away the mundane, which results in a scalable and flexible platform for the firm.

How to merge data and talent

The first step to create this culture, and a critically important one for the success of any initiative, is the tone from the top. The profile of tech and especially data need to be raised in all aspects of the firms' operational functions. Very few investment firms, when acquiring a new team or firm as an addition to existing investment capabilities, consider the data generated and what value it holds. This change in mindset will only happen with support from senior leaders.

"The target is to have a low operational versus investment team ratio. If you have to add support employees each time you add a new team then the platform has failed on scalability."

With support from the top established, the second step is having the right people participating in the right conversations to identify the opportunities. Many decisions made in investment management firms come with data opportunities – new teams, new strategies, new products – but they never identified. Converting those involved in key decisions to be as tech and data-minded, as they are commercially and client-minded, is one solution. This we have discovered for ourselves is rewarding but requires planning.

Employee ratio and skill balance – it may feel unnatural to overpay for support employees, but we have witnessed this practice yield desirable results if you find the winning combination. The target is to have a low operational versus investment team ratio. If you have to add support employees each time you add a new team then the platform has failed on scalability.

I would recommend paying more relative to the norm for those who are tech literate, as this ability to identify, code, and operate is an optimal balance, and by reducing bureaucracy it shortens the normal delivery time and results in an empowered workforce who also feel involved. This approach results in implemented automation and employee satisfaction as they can focus on the more interesting and challenging tasks. There are broader benefits as it reduces the reliance on the most volatile and expensive asset all firms have - people. 

"The expediency of onboarding a client is reduced when data and tech sit at the heart of the firm, and not in some siloed function."

Client capabilities and captivity - institutional clients, who are usually large on Assets Under Management (AUM) and influence, but low on headcount and budget, but lack the infrastructure spend to capture data and make timely informed decisions about the consolidated exposure they have. The expediency of onboarding a new client, all those bridges that must be built to exchange data, is dramatically reduced when data and tech sit at the heart of the firm, and not in some siloed function that is unsure what the purpose is of the process they have been asked to develop. Secondly, it is the ability for you to then manipulate the data to assist the client, or show them alternative opportunities, i.e., tagging of positions, trade risk, themes, all bespoke to them. Remember, they have little internal capability, so the more you do for them the more they consider it a value of the relationship in addition to core returns.

The IFA market – as the product provider, you sit on the information critical to the IFA business – positions, risk, performance. With this information, you can then vertically integrate this information into the existing IFA process and start to construct and present data that fits into their decision process and client-facing responsibilities, and in the case of my current firm, even start to automate them on behalf of the IFA, again resulting in a more captive relationship.

 

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