A published industry report produced by Clear Path Analysis and commissioned by SimCorp, showcases some of the ways firms can update operational processes and technology to improve resiliency, in light of the current global pandemic and related business disruption. In a Q&A with DerivSource, Marc Schröter, Head of Global Product Management, SimCorp, and Noel Hillman, Founder and CEO of Clear Path Analysis share the key takeaways of this report for how buy-side firms, including asset managers, insurance companies,and pension funds, can start making changes now.
Q: Firstly, can you tell me a little why you commissioned this report and why you think this topic is important right now? What was the goal?
MarcSchröter, SimCorp: It’s important to look at the context of the report pre and post the Covid-19 pandemic. Pre-pandemic, we were already seeing a squeezed buy-side market strained by heightened market conditions and historically low interest rates, which left many investors grappling for yield, while a torrent of new regulations and standards has demanded substantial resources from managers that want to be not just compliant, but also successful, when competing against their peers.
Our primary goal was to understand how these shared challenges could be overcome by examining the roles played by technology, operational processes and a firm’s human resources, i.e. it’s people. Our aim was to investigate how these areas could be improved and leveraged upon, so that firms can be best-positioned in the face of the next market event.
The spread of the pandemic has effectively stress-tested the resiliency of financial firms, whilst also intensifying these pre-existing fundamental market challenges. But while adding increased complexity, it has also made it abundantly clear that all three areas are key to the operational priorities that need to be addressed and that the time is now.
The Covid-19 pandemic has shone a light on the inadequacies of many operating systems. For managers, there are broadly two options – use the knowledge as a catalyst for change, or stay as you are and risk falling behind competitors. Finding and eliminating the weaknesses and moving to a simplified, consolidated operating model needs to be a top priority for continued innovation as well as operational resilience for the next crisis. The report is therefore particularly timely, with shared learnings for industry guidance.
Q: Can you share a little about the report first? How many participants did you survey and how was the research conducted? Why was it important to cover all types of buy-side institutions?
Noel Hillman, Clear Path Analysis: In March we started initial research, requesting responses from representatives of over 300 investment groups – a mixture of third-party asset managers, pension funds, and insurance groups. We requested views to be shared on several questions, such as how the Coronavirus epidemic was effecting fund groups ability to operate, the impact on productivity, the challenges presented by maintaining team collaboration, and what this meant for serving clients and stakeholder interest. Just over 70 senior operational professionals were spoken to as part of this exercise, with individuals assessed on their suitability to share insights, interesting case study examples and best practice.
With any research into industry re-shaping, it’s important to get a range of participants input, to give those with varying backgrounds a chance to be heard. For any project, we’re always conscious of not creating ‘echo chambers’, covering just a narrow subset of industry participants views, be that by geography, organisation profile, or job responsibility. That’s why for the resulting report I’m proud we secured editorial input from 15 leading investment and operational executives, and from 10 different countries across three continents, showcasing the range of approaches to the reforming of operational departments across the globe.
Q: Looking at the top level findings, you mention stress testing, risk management model review and data access among the top themes. Can you briefly explore each section with the following questions?
Stress testing – what was the main finding here?
Marc Schröter, SimCorp: What the pandemic has shown is the need to stress-test the resilience of a firm’s operating model beyond traditional scenarios. Many firms have had BCP and disaster recovery protocols in place but testing of remote working capabilities and how to fully digitalize your processes and workforce have been an unforeseen hurdle for many. This is where, for instance, firms need to invest in digital tools in areas that require proactive engagement during a market event, such as client reporting and communication, and a cloud infrastructure to ensure smooth investment operations and access to accurate and timely data. These are measures that can be significantly influential in building resilience.
Effectively, firms need to ask themselves: ‘how do we build the resilience that we need to react to difficult situations, no matter what they are?’. You need to have strong enough straight-through processing (STP) rates and a secure enough operating model to not only survive in a crisis, but also to be able to leverage new opportunities and foster growth and competitive edge.
Q: Risk model reviews – what was the main finding here?
Marc Schröter, SimCorp: Times of crisis always leave financial firms asking themselves a lot of questions, that require quick, qualified decisions. What this market event has highlighted is that processes just aren’t as efficient or as optimized as senior management would ideally like. While this has challenged firms with intensified scrutiny of the availability and accuracy of data, it can also be seen as an opportunity for change. What we’ve seen is that the more complex the operating model, the more difficult it is to find answers to common questions such as:
- Can I see the exposure and risks for the entire portfolio quickly and easily?
- Can I see the exposure and risks for all my asset classes immediately?
- Can I forecast liquidity and cash?
- Do I have the ability to leverage new market models?
Quantifying portfolio exposure during market volatility requires a complete rethink of risk models. All the assumptions, market and credit outlook models and recent historical data are just not enough to deliver an accurate overview of a firm’s exposure. To add to this time pressure, stakeholders such as the firm’s board of directors, clients and investors are all beating the door down, demanding more frequent updates, more analysis and more stress-testing.
For asset owners in particular, the cash-in and outflows from their clients may not imply drastic changes during volatile times, but when the markets were most volatile in the first months of the COVID 19 pandemic, the value of the assets took a large hit and the returns will of course suffer from this. Insurance and Pension funds have been challenged on their coverage ratios, and the chance of becoming insolvent has obviously increased.
Even these long-term focused businesses have to take crisis periods very seriously, as they ultimately create a burden on middle and back office staff. This means taking a good long look at the risk management processes and assessing if they are fit enough to tide them through. Technology plays a big factor in risk management. Investing in the right technologies can prepare firms for the next crisis, deliver enhanced risk management processes and save significant operational costs during market distress.
Q: Data access – what was the main finding here?
Marc Schröter, SimCorp: Access to high quality, timely and granular, multi-asset data is always crucial for making sound investment decisions, but when markets are volatile, as they are now, firms need new levels of granularity and the ability to process information rapidly. Without a comprehensive data strategy augmented by a centralized investment book of record (IBOR), critical functions – such as multi asset exposure calculation, risk management, and performance attribution – become impossible to do with precision.
But fast access to clean data is not possible when operating with multiple silos, across the front, middle and back office. As such, a resilient operating model requires increased platform consolidation, away from the fragmented models that have formed from best of breed systems, to reduce the data silo effect.
Regulatory scrutiny is another key driver to optimise data management processes across the value chain. Focus on responsible investment strategies has been accelerated by the crisis. Consequently, the integration of ESG data into the investment management process is expected to become more mainstream. This is one area where firms could potentially benefit from an expanded data management strategy which includes a data advisory service, where specialists are available to address data quality questions relating to, for example, ESG investments and other complex data sources.
Q: ESG is a trend that is on the rise generally. You mention ESG data is crucial for firms looking to continue to growth this investment area. What new lessons have we learned from recent months as they pertain to ESG? (E.g. the need for good data). What are the takeaways for firms?
Marc Schröter, SimCorp: The prominence of ESG has grown during the pandemic, where ESG funds have shown resilience in fund flows. Bringing ESG products and portfolios into the core data set, instead of standalone strategies, delivers firms a complete view of assets across the investment lifecycle, from which they can better assess performance and exposure.
This unified approach provides an optimal portfolio overview that also responds to the growing client demand for ESG data. At the same time, combining financial and ESG perspectives will help to enrich investment decisions, relative to overall allocations, a particularly important advantage in market events.
Noel Hillman, Clear Path Analysis: The pandemic has served to re-enforce why ESG is integral to the long-term success of any investment group and why not endeavouring to be a ‘triple-A’ level ESG manager leaves a potentially large risk exposure. What we have definitely seen more talk of in the past 6 months since late February, is a focus on mental health in the workplace, as employees came to work from home, many for the first time for such long periods. This has been a new ESG factor companies have had to address and investment groups have needed to consider, when assessing how well a company is responding to the pandemic. It also serves as a prime example of how the theme of ESG is ever-evolving.
Q: Digitalisation – do you have views on how the pandemic has shed light on any changes firms need to be considering now and as part of their wider digitalisation strategies?
Marc Schröter, SimCorp: Reporting and transparency is a key area that has become more critical during the pandemic. As investment managers are dealing with the crisis, their clients are demanding more ad hoc reporting. They expect updates that are fast, transparent, accurate, consistent and compliant – something which many organisations are not set up to provide. Traditional monthly or quarterly reporting schedules are no longer sufficient and relying on hastily compiled spreadsheets is not a long-term solution.
The consequences of getting reporting wrong can be severe. According to research by Deloitte, 76 per cent of investors say that client experience is a factor in choosing to change providers, so poor communications can easily impact the bottom line. This in turn can affect reputation and the ability to bring in new business.
On the other hand, firms that provide high levels of client servicing retain more business in times of crisis and have greater opportunities for cross-selling, onboarding new clients and ultimately increasing AUM. Achieving this requires an automated, workflow-driven client reporting and communications platform. When chosen well, the software should provide flexibility to view the same data in different layouts and formats to meet a client’s individual needs.
The result is the ability to quickly generate reports outside of the standard cycle. Getting this right, when coupled with streamlined processes, end-to-end automation and clean and accurate data will not only impress clients in the current crisis, but will also stand firms in good stead to win new business in the future.
Noel Hillman, Clear Path Analysis: We only need to look at the stock prices of the largest technology companies over the past year with Apple, Microsoft, and Amazon’s stock price all up circa 50% since the start of the year. This highlights the significant expectation that technology is seen as now even more critical to how an effective workforce operates then it was at the start of the year. The report highlighted that investment firms will need to consider what role technology plays in their businesses Unique Selling Point (USP) to clients, as increasing numbers will no doubt ask forensic level questions about their technology stack before making a decision.
Q: Surprises and advice – where there any surprise findings from the report? And given the findings, what is the most important takeaway for firms?
Marc Schröter, SimCorp: While there are many mission critical requirements, the report also highlights some of the positive change firms have observed, out of pandemic, such as a renewed and agile mindset among organizations, particularly towards remote and flexible working. So it’s particularly important for firms that want to continue with a more agile way of working, to eliminate the silos and fragmented systems that hinder this objective. Several firms in the report saw the value in investing in the right infrastructure to facilitate more permanent remote working and continued remote innovation. This mindset is what will separate those who survive, to those who will thrive, as it will enable them to leverage emerging opportunities and technologies, and to innovate and deliver new products and services.
Another positive finding, though not entirely unexpected, was that by digitalizing and automating processes, firms not only see benefits to their operations, but also recognize they can maximize employee motivation. This is especially true among younger workforce talent, who are accustomed to one-click, easily available data access, for instance Millennial and Gen Z generations, who tend to opt for jobs and organizations that embrace digital, not manual processes. Given the change to the global financial workforce over the coming years, digitalization will contribute to far more than technology and operations, and facilitating employee attraction and retention will be fundamental to a firm’s growth.
For more information and to access the full report please click here
Engaging the whole firm, Improving client experience in institutional and wholesales investment management, Deloitte 2019
Marc Schröter,Head of Global Product Management, SimCorp
Marc is Global Head of Product Management for SimCorp Dimension, a mission critical investment management platform, used by over 200 leading buy-side organisations around the world. With over 20 years of experience, working with asset managers and asset owners globally, and leading a global team at SimCorp, Marc heads up the development of investment management solutions across the front to back investment lifecycle, including data management and clients communications software and services. With in-depth knowledge of all aspects of software development, Marc’s key roles include the mapping of SimCorp’s product strategy and roadmaps, defined by larger market trends and individual business cases. He has also been responsible for implementation of SAFe Agile framework in a 500 people organization.
Noel Hillman, Founder and CEO of Clear Path Analysis
Noel founded Clear Path Analysis in 2009, bringing to the institutional finance sector a new approach to peer-to-peer media focused on merging deep level market research with curated insights from leading industry influencers. Prior to setting up Clear Path Analysis, Noel managed global events at the conference company Terrapinn, focusing on institutional asset allocation and alternative investment gatherings. Today, Clear Path Analysis produces over 25 annual opinion led Reports and industry Events for European, North American and APAC based financial institutions and providers.