March Madness & buy-side: Operations conference

Since the TSAM Boston and InvestOps USA buy-side industry events took place in the same month as the “March Madness” NCAA basketball season, it seemed fitting to see if I could draw any similarities between the world of investment operations and this pinnacle competition among America’s college teams.

A successful team is one that relies on unwavering support to ensure accuracy, efficiency, compliance and risk reduction. Collaboration with all stakeholders—including strategic partners—is also crucial to ensure everyone is effectively working their strategies towards the same goal. And attention to detail, precision and timeliness are critical to prevent errors or delays which can have significant consequences in terms of missed opportunities or increased risk.

A significant part of success comes from what goes on behind the scenes. Like a team’s coaches, trainers, equipment managers and other support staff, an asset manager’s operations function supports infrastructure, systems and processes facilitating transactions, cash, positions, settlements and compliance, and maintaining accurate records.

Here are some of the key themes that emerged from the March buy-side conferences.

Optimising the operating Model

Most firms are looking to modernise their operations. Firm culture, resources and executive buy-in were among the biggest blockers to turning their plans into reality. The consensus was that off-the-shelf tech is not ideal and that new tool stacks can require significant support from IT.

Operations leaders are aware of that strain on IT and want to make sure they’re not revisiting the same problems every budget cycle. As a result, more firms are focusing on empowering their users with more efficient, robust platforms versus having everything fall on the IT group.

In our recent global buy-side report and survey of 200 investment operations leaders, the second biggest challenge cited was “relying too heavily on IT.” The top challenge, unsurprisingly, was “reducing and controlling costs.”

More people are looking to outsource due to pressure to find and retain talent, get better performance, and scale to grow. Of the topics we discussed with operations executives at the March events, automating data aggregation and reconciliation as a one-stop shop, and leveraging managed services on top of that, resonated the most.

With ChatGPT on everyone’s mind, AI/ML was a hot topic at both events. However, most people we spoke with weren’t entirely sure of the best use cases for the back office. In our buy-side operations report, 82% of respondents expect AI/ML to generate the most ROI—yet less than 4% have it on their priority list for the next 12-18 months.

The Risk of Innovation

Innovation and risk management are at odds. Many asset managers resist change because innovation is seen as risky, and few people want to be accountable for project success or failure. And it’s no wonder, with many initiatives taking three to five years to implement, there’s not much incentive to innovate, and executives are more often punished for failure.

Some experts say the key to success is adding an innovation officer that has the support of the CEO or C-level executive. Getting that buy-in from the top and collaborating with stakeholders is better than falling into the typical sign-off/approval bureaucracy trap. Another key piece of advice was that if you think it will fail, then fail quickly; recognise a project is no longer worth it and kill it fast.

Data Governance and Reconciliation

One TSAM Boston panel speaker said, “Data is always the long pole in the tent.” That is an understatement. Data collection, normalisation and validation take the longest time to complete and are the most critical aspects of operations. But then again, data integrity is never really complete, is it?

In addition, more investment managers’ clients are asking about their data governance. On top of that, some firms are holding on to as much as 30 years of data. I heard questions like: Should we integrate data sets? Use APIs? Implement a virtualised data fabric?

Reconciliation can play a crucial role in data governance initiatives in three key ways. First, automating reconciliations between sources can improve data accuracy to ensure better impacts on decision-making and compliance. Second, automated reconciliation processes can save time, reduce errors and streamline better use of data assets across the organisation. And third, reconciliation tools help firms track changes to their data over time, which provides a more complete view of their data lineage.

Outsourcing in the Digital Age

Operational efficiency, scalability, growth, technology, flexibility. These are all the words used when heads of operations said they were taking a closer look at outsourcing certain functions. Some firms now use managed service providers to centralise data flow and control, reconciliation, client reporting, and fee billing.

There was one key recurring theme throughout the discussions: Firms seem to lack internal knowledge or insight of their own operational processes. Outsourcing goals common to all firms are to lower their total cost of ownership and achieve faster ROI and time to value.

While some companies see outsourcing as specialised “body shops,” the definition of outsourcing has evolved to encompass an ideal balance of data, technology, domain experts and other types of support that are flexible and easy to tune up or down. At its basic level, it means getting innovation and efficiency without the technology infrastructure, upgrade costs and strain on in-house teams. You start with a tech platform and add services on top of that.

The Cost of Compliance

With the pace, volume and complexity of new and changing regulations, navigating the landscape can be mindboggling. Regulators and end-investors expect that asset managers are spending more on technology and that their data is clean. The role of compliance talent has changed as a result—people have to be SMEs in technology as well and required skillsets are evolving quickly.

But firms are struggling with rising compliance costs amid budget pressures. One report from fintech consultancy, Tillistar, revealed that 65% of firms expect their compliance budgets to remain the same, but also expect their compliance costs to increase.

And then there’s the cost of doing compliance wrong. Problems that go undetected for weeks or months transcend the compliance group to deal with fines and remediations that can lead to other indirect, long-term hidden costs.

Advancing to the Next Round

Dealing with risks and uncertainties is no easy task. Market volatility and economic uncertainty make it hard to predict the future direction of asset value and prices and increase the risk of losses. In our buy-side operations report, it was the number-one challenge to turning operations and tech priorities into a reality.

Competition for clients and skilled talent is fierce. Investment managers must stay ahead of the curve with their strategies, client service, operations and technology to remain competitive. But with the right strategic partner, advancing to the next round can be much more streamlined and successful.

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