Front-to-back is this season’s new black. Accelerated by the rapid rise of alternatives, which presents new costs and challenges, buy-side firms are now seeing the benefits of multi-asset, end-to-end solutions. With increased volumes of data and the complexity of alternatives instruments, the need to consolidate fragmented, inhibiting and costly investment operations, is now mission critical. The role of technology is integral to this and in a competitive market it is paramount that the buy side choose investment technology that provides the best scale and automation. The ideal operating model for that, is one supported by a core, front-to-back, multi-asset investment management platform.
Interestingly, every vendor worth their salt is entering this arena, with the aim of offering a suite of solutions that cover the investment lifecycle. According to Traders Magazine, technology vendors "have in aggregate spent nearly $10.5bn on seven major acquisitions since 2015". Last year, the industry witnessed the purchase of Charles River Development by asset servicer, State Street, where I addressed the very real differences between front-to-back strategies and what they mean for the buy side. And just weeks ago, BlackRock announced the purchase of alternative investments platform eFront, from owners Bridgepoint, at a reported $1.3bn.
In their press release, BlackRock claim the combination of “both Aladdin and eFront technologies, sets a new standard in investment management technology, by offering the industry’s most comprehensive whole portfolio investment operating platform.”
While we of course welcome the industry’s validation of our philosophy, ‘One system for a complex world’, SimCorp has already been delivering against it for nearly two decades now, setting the standard in investment management technology. Built as one system that spans front-to-back, it delivers one multi-asset data source, serving the whole office. Together with our heritage in accounting, it provides exhaustive coverage of multi-asset capabilities, across accounting and tax frameworks, local GAAPs and a range of currencies. The simplicity of the solution? The seamless integration of our Investment Book of Record (IBOR). It is no surprise then, that as BlackRock moves towards the market demand for front-to-back solutions, their success very much hinges on integration.
The integration gamble
When considering technology vendors who can partner in the journey to system consolidation, the buy side must ascertain if they have confidence in a technology provider that has only recently jumped on the consolidation bandwagon. More importantly, they need to consider whether these vendors can deliver on the promise of a truly integrated platform, in the same way a platform built as one system from inception can.
Of course, financial services vendors are not new to integration projects of this scale and buy-side operations leaders are also well aware of the risks, costs and the degree of effort involved in integrating best-of-breed solutions. In fact, many of SimCorp’s clients have chosen consolidation to one core system, after years of operating in a tangled architecture, with multiple systems, duplicitous interfaces and failed integration.
The critical challenge for BlackRock, will be unravelling eFront’s architecture, before it can be incorporated. When BlackRock acquired BGI from Barclays, Fortune magazine reported that "BGI proved a challenge for BlackRock to integrate…at a pace deeply frustrating" so much so that the "job wasn’t completed for three years." Often, in integration projects there will be significant obstacles in getting different technologies and architectures to truly integrate. The upcoming eFront project will undoubtedly feel like déjà vu for BlackRock and given what we’ve seen from past integrations in this industry, it’ll be interesting to see how they tackle this project.
As I see it, this will either be achieved by going the full course, which will take considerable time, money and resources, and presenting equally significant risks to interoperability and transparency of data. Or by simply integrating eFront technology through interfaces. While, the latter may be quicker, it will likely only solve a few workflow challenges and not the broader issues of accounting, a consolidated overview, or compliance, particularly for alternatives.
More importantly, they will have to do this without disruption to clients live on either platform. As Kevin McPartland, head of research at Greenwich Associates Market Structure and Technology Group summarises in a recent article on the subject, “integration of newly acquired products with existing ones will be critical to success. The trick is to allow innovation while still limiting risk. You have to change the tires while the car is still moving”.
Building a value-added ecosystem
In addition to integrating new technologies, we are now seeing the start of strategic alliances between custodians and vendors, such as BNY Mellon and BlackRock. These partnerships, while not exclusive, aim to optimize the custodian-asset manager relationship, targeting inefficient workflows. Much of the current operational frustration asset managers face, is around the reconciliation required between outsourced data and their own. This has forced many firms to shadow outsourced workflows, such as NAV calculation – a burden on both operating costs and resources. Only time will tell if these two entities with somewhat competing offerings, can work together harmoniously and with a shared roadmap, to truly solve these challenges.
In our opinion, a consolidated platform powered by an Investment Book of Record (IBOR), provides the best solution to address the current drag on operational costs and agility. Using one source of data across the front, middle and back office, eliminates the operational challenges of data inaccuracy in accounting workflows, while the transparency it brings, enables the use of value-added tools such as business intelligence, for more informed investment decisions. From a compliance point of view, there is very real need for clients to have absolute control and trust in the data they hold. When part of the investment lifecycle is outsourced or processed on third party technology, it is difficult to see how that control is kept or how operational efficiency will be gained, to address the current inefficiencies.
While we strongly believe the integrated front-to-back solution to be the optimum solution for the buy side, we acknowledge that there will always be a rationale for custodial services. However, it is our belief that powering the operations of outsourcing entities, rather than being supported by them, better serves the buy side’s interests and builds a more value-added investment ecosystem for the buy side. It delivers the best of both worlds; feature-rich investment technology, within an outsourced model. There are already front-runners in the custodian world, recognizing the value in this approach. Kas Bank and Société Générale are just some of the entities SimCorp has partnered with, to provide seamless integration to SimCorp Dimension. These partnerships deliver clients a superior service and access to new technologies and offerings from multi-asset accounting, to front office functionality.
The final word
The race is on and though the contenders are getting fewer, the solutions, though seemingly similar, offer very diverse opportunities. It is now for the buy side to decide which solution will best simplify and streamline their investment operations, to deliver the highest level of efficiency. In my estimation, vendors who invest in innovation and deliver the most comprehensive end-to-end solutions, with proven and seamless integration from portfolio management through to accounting, will provide the best partnership for the buy side going forward.