Juggling an ever-tightening compliance burden, fending off technological challengers and satisfying customer expectation is a tall order for many established asset and investment managers.
As profit margins shrink, asset managers must find alternative avenues to generate income and remain competitive.
Europe’s second markets in financial instruments directive (Mifid II) and the general data protection regulation (GDPR) have brought wholesale change to the continent’s markets, and forced technological rethinks, while the Libor transition to alternative rates has also valuation models.
The same too can be said for customer demand. On the consumer side, customers expect 24/7 real-time access through mobile and online channels, with many newer entrants targeting micro-investing to suit the Gen Z and millennial generational preference.
On the institutional side, investors expect more portfolio transparency, global products and tailored investment solutions.
New regulations mean new technologies in the asset management arsenal
As of January 3, 2018, Mifid II set out to improve investor protection by boosting transparency through regulatory reporting and tests. Mifid II applies to equities, currencies, futures and options, commodities, exchange-traded funds, and debt instruments.
Mifid II also looks to regulate over-the-counter (OTC) trading and limit dark pool trading volume of stock (where an investor trades without revealing their identity) to 8% over 12 months. It also requires algotrading to be registered, tested and implemented with pre-established price circuit breakers, in a bid to lower market volatility.
The breadth and scope of Mifid II as well as the securities financing transactions regulation (SFTR) and reporting obligations under European market infrastructure regulation (Emir), proliferates the amount of data that must be relayed to national competent authorities, and presents an immense challenge to the technology and operations functions of investment firms.
According to a report from The Technanical Company, new Mifid reporting requirements will completely change the face of firms’ technology budget with an expected 0.15% of total operating spend in EU banks going towards Mifid II compliance. Asset and investment managers will now have to ensure infrastructure is in place to record and monitor all trade communication - be it by email, messenger, voice or face-to-face meetings.
Likewise, the transmission, reception and execution of trade data must be recorded and stored. This comes with data management challenges as firms look to the cloud and more agile data centres to record, store and monitor data.
GDPR - which came into effect on May 25, 2018 - also requires all EU operating companies to safely store, amend and delete user information, including information held on investors.
Likewise, asset managers, as data controllers (owners of data) under the regulation, must obtain valid customer consent and communicate more precisely how they intend to use their information and with which data processors (users of data) they are sharing it.
An EY roadmap advises a six step process to ensuring asset managers maintain data privacy under GDPR. First, it is important to enter into a written agreement with the data processor; second, appoint a data protection officer under who takes responsibility for the GDPR process; third, implement appropriate technical and organisational measures; fourth, carry out a privacy impact assessment (PIA); fifth, report data breaches duly; sixth, maintain the process documentation for audit.
Technology trends of asset management software
The data transformation project required in the lead up to Mifid II compliance removed firms’ reliance on siloed or warehoused data and pushes them towards retrievable, resilient, unified and elastic solutions.
Likewise the fluidity of data required under GDPR, particularly the mandate to retrieve data at customer or regulatory request, further illustrates the inadequacy of traditional mainframe and siloed data flows. It is why the vast majority of data management vendors in the asset management space offer cloud, either hybrid or private.
Aside from the technology, asset managers are also seeking more agile solutions to perform analytics on the vast quantities of data available to them, often integrating trading, portfolio and risk management into one. With asset managers needing to boost investment returns to remain competitive, real-time pricing and drilldowns within portfolio management are becoming increasingly common place.
The same can be said of automation, artificial intelligence and machine learning. If asset management technology has changed their structure and framework with cloud enhanced data flows, then it is automation that derives the real value from nonlinear relationships within data that allows firms to differentiate from peers.
The obvious example is algotrading, issuing algorithms with pre-established instructions and clauses to act in a particular way should a stock fall below a certain price. While algotrading has been heavily regulated in recent years for fear of market instability, the underlying technology of machine learning is nevertheless being employed by asset management software vendors. The primary uses of machine learning revolves around market impact analysis, execution and risk modelling within asset management.
It is also important to consider non-financial risk management as an increasingly core component of every asset manager’s tech stack. Cybersecurity breaches involving valuable or sensitive data or funds could prove existential on the reputational risk front. A CTO of a hedge fund recently said the firm was attacked on a daily basis resulting in a fivefold increase in the cybersecurity budget in the last four years.
An added expense that regulators are enforcing with heavy fines, cybersecurity considerations revolve around robust anti-malware and governance controls to secure data chains to external third parties.
Buying asset management software in 2019
The asset manager of today’s brave new world has an ever-growing list of requirements from their technology function, spanning trading, portfolio management, risk modelling, impact analysis and other diverse areas of the business.
Asset managers require solutions that bring these disparate functions into one convenient platform, relying on the vendor to pioneer emerging technologies to ensure they stay ahead of the game. Likewise, asset managers are increasingly expecting real-time information relay with infrastructure that can provide strong computing and analytical power while also processing vast quantities of data.
As the world’s most comprehensive financial technology directory, we’ve compiled a list of software every asset manager should be acquainted with. Simply hit search.
Alternative investment solutions
What: Non-traditional investment assets including commodities, private equity and cryptocurrencies.
Solutions can cover: deal management, portfolio analysis and performance and due diligence.
What: Securities, stock and bond markets and all other aspects of capital markets.
Solutions can cover: cross-asset trading, deal pricing, risk allocation, book running
Liability management software
What: The management of assets and cash flows to reduce the risk of firms’ liabilities.
Solutions can cover: liquid asset composition, gap analysis, interest sensitivity, maturity analysis reporting.
Wealth management / family office software
What: cross-asset portfolio and financial planning suites for wealth and family office managers.
Solutions can cover: relationship management, investment portfolio management, KYC and reporting.
What: determining strengths, weaknesses, opportunities and threats in a variety of investment options.
Solutions cover: portfolio drilldowns, limits monitoring and control, P&L values and greeks, and securities tracking and real-time pricing.