In the wake of hurricane Sandy and other environmental calamities, investment consultants are now savvy to explore the individual investment management firm’s own capabilities with the fundamental question in mind being whether or not the firm’s business continuity plans are adequate to maintain ongoing operations in the event of a disaster.

That’s where the Cloud comes in.  By selecting Cloud-based solutions for mission-critical systems, investment managers can eliminate business risk and excel over their competitors with regards to consultant RFPs. In addition, Cloud-based solutions also help with other key areas of consultant due diligence such as compliance, since mission critical systems for compliance, trading, reporting and other areas are also cloud-based in this model. By utilizing Cloud-based solutions, investment management firms can gain a competitive advantage over their less nimble peers and also demonstrate a culture of compliance and transparency.

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As a general rule with regards to technology, legacy systems in whatever form they exist will ultimately be replaced.  It’s just a matter of time.  For buy-side investment management firms, the ongoing maintenance of legacy systems has another negative residual effect that is extremely significant: it ties up otherwise very intelligent people who often use their keen intellects to manage fundamentally inefficient processes.  The result is often a gross mismatch of skill sets, not to mention it is a complete waste of resources for the firm.  It goes without saying that “smart” people’s energy should be primarily focused on the firm’s organizational goals of managing investments, servicing clients, maintaining compliance and growing assets.

In our experience, replacing legacy systems not only has the positive effect of improving operational efficiency, enhancing compliance and reducing long term costs, it also has the positive effect of freeing up the time of smart people in operations, technology, compliance and trading to do what they do best.  The end result is most often a happier and more competitive organization.  Saving money is important, but having happy and productive employees is priceless.

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What was surprising from the Tabb Group’s research findings was that a majority of the buy-side firms surveyed considered switching OMS’s as “very difficult.” While the cost of the new OMS might be an issue with some vendors, the actual conversion and implementation of an OMS is really not that difficult, especially compared with an endeavor like switching portfolio accounting systems (we at INDATA have the pleasure of doing both).   For example, the data aspect of the OMS conversion is relatively easy and so is the end user training, assuming that the OMS a firm is switching to has comparable or better functionality than the vendor being replaced. As we have also noted in past blogs, there is a convergence of functionality amongst major OMS providers and key functionality is also becoming commoditized from vendor to vendor.  Putting all of this together, buy-side firms should not be intimidated when considering switching OMS providers, especially if there is significant long-term cost savings to be achieved by switching providers.

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The article also points out the recent trend of compliance being maintained in-house rather than outsourced. Especially key for a new breed of compliance officers to manage effectively will be the role of technology. Without a centralized technology platform, demonstrating transparency of the investment process is next to impossible. Managing from multiple systems, or even worse, from spreadsheets points to the need for technology platforms that take an expansive view of the investment process so as to create an audit trail of all events in the investment process to demonstrate true transparency.

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Happy New Year!

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Long an entrenched system, the buy-side OMS has evolved to the point where functionality is no longer the dominant factor for most purchasing decisions, with the majority of vendors now having comparable functionality. With no more room to grow, it makes sense that private equity investors would want to “cash out” of a system like BNY Convergex’s EzeCastle, which may precipitate the further scrutiny on stand-alone OMS providers that we are arguing should be an industry best-practice for the buy side manager. The old maxim predominantly used by larger asset managers that “bigger is better” may no longer be in vogue for the large OMS providers.

Based on these business realities, another factor that buy-side investment managers should look at is cost, which, by and large, has surprisingly been largely overlooked to date with regards to OMS systems. Investment managers should evaluate the cost in percentage terms that the OMS represents relative to their overall third-party investment technology expenses. By doing so they will generally find that the initial cost that they paid for their stand-alone OMS has sky-rocketed to levels that may make them want to think twice about keeping their existing provider for the long term, especially in today’s investment management environment where margins have been compressed and alpha is hard to come by. All of these factors do not even make mention of the fact that a stand-alone OMS is generally much less efficient than an integrated front-to-back office system, which some specialist buy-side technology vendors now provide.

All of the above trends should have the smarter buy-side firms, especially institutional managers, giving as much scrutiny to their existing OMS providers as they do to other back office accounting and related investment systems. After all, like the markets, the history of technology typically shows the movement towards efficiency and, based on current industry trends, the stand-alone buy-side OMS may not be the most efficient nor the most cost effective solution for the current and future needs of most institutional asset managers.

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To say the least, this indicates a high overall level of dissatisfaction with portfolio accounting solutions in general, which is something that we see out in the marketplace quite a bit. I think the primary reason for this is that many of the firms surveyed might be using the dominant industry providers who market themselves as having “cutting edge” technology when they, in fact, do not.

For the most part, these providers either have solutions with multiple silos, i.e. different databases, which increases operational and compliance risks and leads to many of the problems cited in the survey, such as lack of data visualization tools, limitations in setting up new securities, reporting, intraday account setup, etc., or they are the financial conglomerate companies that we have referenced in past posts that are really just placeholders within the company’s overall product offering. This does not even include the outright legacy systems out there, i.e. the “blue screens of death”, that have not been updated in 20 years and never will be because they have not kept up with changing technology, let alone changing industry needs, and are now impossible to modernize due to the costs involved in doing so.

What this says about the overall state of portfolio accounting solutions on the buy-side is that, given all of the importance in having a strong foundation in place to cope with greater regulatory requirements, transparency, and the competitive nature of money management business, savvy firms will look to specialist providers whilst seeing beyond the marketing “hype” perpetuated by the large industry vendors.

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This begs the question: Do apps really make a difference? The answer is yes and no. In the space for institutional investment management systems, apps can be useful tools for portfolio managers and client servicing personnel and other “tablet-preferred” users, but they are only as good as the underlying system(s) they come from.

More important than the app itself is the scope of what the underlying system does and how the data can be accessed. So if you have a front to back office system, it goes to follow that you can build a much better app than if the underlying system only handles one piece of the investment process. If you don’t handle all of the key pieces of the investment management process, then you probably have to partner with someone to build it for you (apparently what Eagle did), rather than doing it yourself because the systems you have to work with are not your own.

While apps can be useful tools and very few would question the appeal of the tablet device for personal and professional use, savvy consumers in the institutional investment management space will look beyond the novelty of apps and instead look at what the underlying system provides.

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