Tech delivers efficiencies, better client experiences
Digital transformation is providing asset management firms with tools to satisfy many of the global, universal, constant objectives that they face in their operations:
- Investors always want more detailed information about their investments and the ability to stress test different market risks.
- Investment managers constantly are looking for ways to improve their investment decisions.
- Legacy systems often need upgrading while operations need to be improved to help firms serve clients effectively and provide more timely and relevant insight.
Finding a way
Digital investments can make sense in any economy
These aren’t the easiest times for asset management firms to come up with the funding for digital transformation. The market downturn experienced over the past year and recent weeks has taken a heavy toll on firms’ revenue and has made it tempting to move technology investments down on the list of immediate priorities.
But Michael Patanella, National Managing Partner, Asset Management for Grant Thornton LLP, cautions against an impulsive reaction that could leave a firm at a competitive disadvantage.
“Getting some of that initial cash outlay and then over time getting the ROI from that investment can make better sense for the long term,” Patanella said. “We’ve seen firms get technology investments approved in good and bad markets, where you’re able to show ROI and also repurpose individuals’ responsibilities to make them more additive to the firm’s business and satisfied with their day-to-day activities.”
Finance leaders — regardless of industry — concur with that view. Four out of five respondents to Grant Thornton’s CFO survey for the fourth quarter of 2022 said they plan to increase investments in digital transformation over the next year.
Mike Pilch, a Managing Director in Grant Thornton’s Transformation practice, said that in this economic climate, firms are assessing and mapping out their large-scale digital transformation priorities so that they’ll be ready for deployment when the downturn abates. Rather than tackling large projects, they are spending on modestly priced technology initiatives that can provide incremental value through the automation of certain processes.
“How can they gain efficiencies so that when they’re coming out of this downturn, they’re ready to operate as efficiently as possible?” Pilch said. “As you know, organizations are looking to cut operating expenses. Sometimes that means cutting people, and sometimes the systems you put in place can drive automation and drive efficiencies and processes that will move those synergies forward from a cost perspective.”
Investment firms get ahead with innovation
16:42 | Transcript
Focus on clients
Giving investors what they want
The increasing availability of data, quickly changing market conditions and rising investor sophistication has led to greater demand from asset management clients for information on their portfolios, risk profile, strategies and opportunities.
Meanwhile, investors in private equity and hedge funds who are doing diligence when evaluating fundraising opportunities are looking to scrutinize more data.
As a result, firms throughout the asset management industry and private equity are carefully examining the interfaces they use to provide this data to investors. These interfaces need to be built carefully so they don’t overwhelm the clients, providing access to huge quantities of detailed information in a format that’s easy to use.
“It’s important to give [clients] the high level of detail needed to satisfy their interest and give them the functionality they need to go through the data that’s available.”
“You don’t want to have a menu of 100 different types of reports they can run,” Patanella said. “But having the ability within these systems to customize a report for your specific needs is important.”
Typical user experiences will provide investors with the ability to sort by country or type of investment so they can more fully understand performance, forecasts and opportunities. A well-designed interface that’s easy to use can put an almost limitless wealth of information at a client’s fingertips.
By giving investors the ability to search for their own information, asset management firms may free up staff time that otherwise would have been spent researching and providing those details to the clients. A more educated consumer is a better consumer, and the right interface can go a long way toward educating investors.
Influence on trading
Informing investment decisions
Asset management firms also are turning to digital transformation to improve the way they do business.
Predictive analytics in particular holds promise in a couple areas. First, asset managers are using it to influence trading decisions and how they invest clients’ assets.
In markets that are rife with uncertainty, predictive analytics are being used to:
- Better understand market dynamics.
- Define the range of potential outcomes related to risks and opportunities in the market.
- Support optimal investing decisions in light of the risks and opportunities identified.
The technology won’t provide a blinking green light that will suggest investing in Opportunity X or a red-light warning to divest from Holding Y; however, it will provide valuable information that can be used to make smart investments.
Take investments in hybrid, private funds that contain illiquid Level 3 assets, for example. The competition to win the opportunity to make these investments can be fierce.
Some leading asset managers are using automation to examine many hundreds of such investments to isolate the reasons why they were won or lost. This helps them understand how they can win such deals in the present and the future.
“There are certain situations where an asset manager can use technology to help make good investment decisions in cases where perhaps a group didn’t see something or didn’t work on a certain type of deal before,” Patanella said.
Getting more efficient
Automation also is enabling firms to increase effectiveness and decrease costs related to compliance, administrative functions and sales and marketing. Predictive analytics is having a significant impact on sales and marketing at firms.
“It’s a matter of having a well-thought-out approach to analytics and what you’re trying to arrive at as an outcome.”
“There are analytics that can be deployed that look at the ways in which they perform marketing activities and then use digital marketing to attack different demographics as well as look at ways to prospect clients,” Pilch said. “There are different ways to use predictive analytics in the space, and it’s a matter of having a well-thought-out approach to analytics and what you’re trying to arrive at as an outcome.”
Related to compliance, firms are turning to digital platforms to transform the reporting they do for internal users, regulators and even the public at large.
In many cases, firms have legacy systems that were deployed before significant organizational change occurred or the markets evolved. The legacy systems may be insufficient because of a diversification of products the firm is offering, or because adjacent systems and data models have been updated.
Band-aid or workaround approaches that are deployed to support different reports only work for so long and create risk that critical context may be missing that could lead to a gap in reporting. Digital transformation provides an opportunity to eliminate the gaps for a seamless, integrated reporting experience with a limited number of manual inputs or data enrichment.
“To support what you’re ultimately trying to produce, you align yourself to the master data requirements and the operational requirements to get to the ultimate output that you’re trying to document to portray to either executive management or even the outward market,” Pilch said.
Automation reduces the risk of manual errors, and with the proper controls, it can validate and reconcile data between systems so it’s reported appropriately in the financial statements. For internal reporting, automation can reduce or eliminate delays that can lead to missed strategic opportunities.
Engaging the workforce
Solving the people equation
Of course, all this transformation and automation requires expertise that can be costly.
Patanella said larger asset management firms may be more likely to build this expertise internally, while smaller firms may turn to third parties for at least some of the automation.
“From a smaller firm perspective, just from the levels of scale, the dollars may not necessarily be there for them to internally develop or have the resources to run these types of projects,” Patanella said. “So there’s going to be a higher focus on third-party outsourcing.”
At the same time, firms need to address cultural issues so they can retain the right people as they implement technology. Some employees will welcome the change immediately, while others will be concerned that the technology will cause them to lose their jobs or become less important to their firm.
Patanella said it’s important for asset management leaders to communicate successfully throughout the different groups and levels of the firm. He said some firms have seen success in digital transformation by starting with just one segment of their business.
They get the right individuals on board in that segment in both senior leadership and middle management to lead the way.
“It is very important go give your teams the opportunity to ask questions in an open forum and get their buy-in, and they can add value to the process and/or identify possible improvements that weren’t initially contemplated,” Patanella said. “And then as that segment rolls out and the benefits are seen, you’ll see other segments looking to make changes to those functionalities.”
With the right people motivated to pursue digital transformation, the technology can help firms serve clients better, improve operations and ultimately become more profitable in the future.
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