Author: Finbourne – finbourne.com
Read part one of our blog to understand how interoperability can build a bridge from the systems of the past, to an ecosystem of future innovation…
At the end of 2021, a year I’m acutely aware many would rather forget, I published an open letter commemorating FINBOURNE’s 5th year in industry. In that letter, I touched on the Right to fail, a concept that is unacceptable in Financial Services, given the vast sums of investor capital and fiduciary duty. As a consequence, it has encroached on the industry’s ability to innovate with any real conviction. An example of this is the cycle asset managers have found themselves in decade after decade, moving from an accumulation of best-in-class systems, to outsourcing and back again.
With each passing cycle, asset managers have become burdened with mounting Technical debt; a term coined by American computer programmer, Ward Cunningham, in 1992. Technical debt refers to the cost of workarounds associated with a shorter-term solution. In his example, “hastily shipping code before its ready to go out the door, without seeking a more efficient and long-term solution.”
“A little debt speeds development so long as it is paid back promptly…The danger occurs when the debt is not repaid. Entire organisations can be brought to a stand-still under the debt load”.
That sentiment is just as relevant for asset managers today, if not more acute. Years of oscillating between best-in-class solutions, outsourcing and quick fixes like throwing more bodies in the mix, have now taken their toll. Operating on legacy infrastructure with sticking plasters, working around inhibiting data silos and living with a fundamental inability to understand and access data daily, has created a surplus of interest that is now paralysing investment operations.
And it’s happening at a pretty inconvenient time for the global Buy Side. Survival is tough enough with the current wave of M&A sweeping the industry. Then there is the Great Resignation, which continues to dominate several industries, including Financial Services. Throwing people at the Technical debt they have inherited, can no longer be the silver bullet asset managers rely on. Instead, these firms now face considerable key-person risk, as burnt-out staff seek newer rewarding roles, taking their specialised knowledge with them.
Then there is the increasing democratisation of investment management itself. Through the grace of technology, more investors are not only going direct to market – either through cryptocurrency or direct indexing – but they are doing so without the need for traditional financial constructs, including in some cases, asset managers themselves.
So, what does this mean for asset managers in 2022, and how will they emerge from the Technical debt that is threatening their very survival today, to secure a thriving future?
Breaking the cycle
Responding to this latest threat and breaking from the cycle, with the current tangle of systems and silos is impossible without any real investment. That’s a bitter pill to swallow. Especially given the number of firms that bought into front-to-back systems and consolidation models, just over a decade ago. This operating architecture has since divided the industry between those that took action and those, for whom the risk of such large-scale change simply outweighed the benefits, leading to inaction and inertia.
However, what was true 10 years ago doesn’t reflect what many on the Buy Side face today and while the arguments for and against are plentiful, time is not. The reality is, the front-to-back model has failed to address asset managers Technical debt and add real value in as fast a time to market, as needed. Moreover, the added complexity and investment in time, money and resources has since drained already lean operations teams.
Out of this failure, we have been watching and understanding that the path forward is not to start all over again. What the industry needs is not a new way, it’s an alternative way to make sense of and work with the systems that are already in place today. With this logic, we believe interoperability can break through the chains that have tied the industry to the same narrative and cycle. Learning from the past, the operating model has been evolved to offer a bridge between the inhibiting systems of the past and an ecosystem of innovation and opportunity, that will fuel future growth.
While some may think this operating model is only just enjoying its debut, it has in fact been working its way here for some time; from the creation of open-source software, to the mass of APIs that now exist in the industry. In fact, the Sell Side are already riding the interoperability wave, with bank systems talking to one another and interoperating on shared workflows, where this is little risk to competitive edge.
For the Buy Side, its emergence is a well-timed Hail Mary. An ultimate attempt to break ground where previous operating models have failed, and deliver the one construct that asset managers need to survive – data on demand. With markets moving at increasing pace, harnessing real-time data across positions, portfolio, risk and exposure is critical. Obtaining this is now made possible, with the advent of technology innovation, from public Cloud and SaaS technology, to the bubble of Fintechs challenging and disrupting the status quo, that incumbent providers have for many years benefited from.
Breaking the myth
So where do you start? When we talk to prospects, the pain points and challenges they raise all hinge on a common theme: the need to achieve a unified data layer. A foundation across the investment chain that can empower firms with a faster market response, meaningful analytics and inform decision-making.
Where front-to-back systems focused on achieving one ‘golden source of consolidated truth’ and set about on five-year-long implementations, Fintechs like FINBOURNE are leveraging interoperability, through SaaS technology and open APIs, to achieve that same truth at source – and not as batched reports – to deliver a complete data strategy.
What is the difference? The difference is being able to reproduce data with complete accuracy and confidence, every time. It is knowing exactly what you own and how much it is worth, which may seem a simple task, but is one of the biggest hurdles asset managers face on a daily basis. And in the case of one such monolithic data store that is presently gaining popularity, the difference is delivering built-in financial sense and a unified language, to understand and derive value from your data, rather than simply storing it in a tidy place.
These differences stem from our distinct approach. We have come at this, not as disruptors but as people who have lived in the world of operations. We have taken our blank slate and challenged traditional constructs, such as front-to-back change and buy Vs build, to design an interoperable solution that helps address legacy infrastructure. Not by replacing or consolidating it but by opening it up to tackle the fundamental problem of understanding, accessing and controlling the data you hold, from day one.
However, the time for change is now and while it needn’t be big bang it does require action. Being at the vanguard, asset managers will need to act now, if they are to unlock digital data management capabilities and make sense of the data they own. This is no longer a luxury, but a necessity.
Breaking the habit
Unlike disruptors that often come from outside of Financial Services, we’ve understood that preserving investor protection is imperative, and made no assumptions about how complex data management can be. Our understanding of the industry and its limitations is what has led us to a solution, that is sympathetic to and compatible with the ecosystem asset managers operate within.
Rather than being tied to the limited innovation of front-to-back platforms, we believe an interoperability can liberate asset managers to regain control of operational growth. This is particularly timely, given a new generation of investors demanding access to their investment data, and the increased scrutiny asset managers are facing from regulators on data collection and management.
Here, an interoperable platform eases the dilemma of optimising investment operations Vs boosting competitive ability, by providing a central hub that can achieve both. Delivering your stakeholders with real-time, reproducible data, securely and with the right entitlements, while also connecting to an ether of external innovation, to create your niche.
And while some incumbent front-to-back providers have caught on to the interoperability trend and are hastily opening up their systems – it is worth considering whether this is true interoperability? Are these providers offering access to publicly available APIs and genuinely innovating their solutions? Or are they simply playing catch-up in a bid to meet client demand, having spent years of the R&D budget maintaining legacy technology.
When we set out on this journey to create a new standard for investment data management, we recognised that true interoperability offers the Buy Side an incremental approach to address their infrastructure challenges. It de-risks operational change and allows asset managers to break free from an accumulation of best-in-class systems and interfaces, or even single vendor dependency.
Ultimately, it delivers the end-state many asset managers desire; flexible and seamless operations. Technology and process are only part of the equation and can only go so far. What interoperability offers, is something much more valuable to your greatest asset – your people. By addressing Technical debt through an interoperable platform, you increase motivation among existing employees. Enabling them to move on from fixing the shortcomings of outdated and inhibiting technology, to more fulfilling, high-value tasks that efficiently leverage their talent and skills.
As we do this, we aim to eliminate the burn out that is seriously affecting employees, and stagnating productivity and growth. At the same time, it gives firms a more formidable position to attract new talent, with the technology and processes that Generation Z expects from their workplace. This goes beyond delivering value to any one organisation. To us, this is an important mission with clear social impact.
If we look back over the decades and the various operating models and constructs that have dominated investment operations, the holy grail has never been about a golden or a singular truth, because no asset manager operates in a vacuum.
Having worked in the industry, we’ve known for some time, that it’s about understanding and making data usable and interactable across the ecosystem, whether that is with external counterparties, or with colleagues in the same organisation. It is about being able to interpret data in the same way and in the same language, to achieve resiliency each and every time.
Above all, it is about data quality. Asset managers often get distracted by cost optimisation or risk reduction as key objectives but effectively those are by-products that can only ever be achieved with a solid data foundation. Fusing together interoperability, deep technology and industry expertise, we have formed that foundation.
Having given ourselves permission to fail, we’ve been able to come at this a very different way to the solutions of the past. We’ve designed and redesigned, built, tested and tweaked our solution to where it is today. Collaborating with clients and industry, our platform delivers a bridge to future innovation, by first achieving a resilient data layer from existing systems.
Where one is about survival, the other is about thriving. In our view, it is the source of information from data, that will drive innovation into the future. Making investment operations not just an operational decision but an absolute business priority, that demands leadership attention and action now.
Don’t miss part two of Asset Management 2022 vs 2035: from surviving to thriving. In this second installment, we will be exploring the future impact of interoperability across emerging market trends, from ESG to Cryptocurrency, in 2035 and beyond.