These days, it’s almost a cliché to say that the asset management industry is facing unprecedented change in scope, scale and pace. But there happens to be some truth in it. I believe that there are three interrelated drivers that account for the current need to change.

First, many asset managers—at least in the US—demonstrated strong revenue growth in 2021. But even with this strong financial performance, we are seeing firms continue to seek cost reductions, while also trying to pursue additional value by exploring new product structures, asset types and even services, such as offering their technology externally as-a-service.

Second, investors’ hunt for returns drives them to also consider alternative investments, as well as newly emerging digital assets and cryptocurrencies. This is coinciding with an inter-generational shift of assets to e.g., Gen Z. But Gen Z is plugged into the financial world’s less-traditional avenues and often has a different view of what investment means–including focusing more on ESG, thematic investing, and more personalized portfolios.

Third, the maturity of the technology and data capabilities in the market is continuing to accelerate—and any firm that isn’t looking to transform its architecture today will likely fall behind in the future. To keep pace, what’s needed are more cloud-native technology architectures and robust data strategies that can exploit innovations like Artificial Intelligence (AI) to support personalization at scale or new product and asset types.

Mapping out the focus areas for investment operations in 2022

In order to continue to grow and compete, where are we seeing asset managers and asset owners focus their attention for the rest of 2022 when it comes to investment operations? I believe there are three areas coming to the fore.

1. Defining a new purpose and set of competencies for investment operations

Historically, investment operations has been regarded by many as a processing engine that uses technology as a means to an end. It had an unglamorous, task-based responsibility around processing investments and funding transactions in support of the wider business.

This purpose is undergoing a radical shift: Many asset managers are looking now how to unlock value by turning operations into a value-generating service and freeing up their operations teams to focus on delivering insights across the business and to end-clients. We’re seeing a growing number of firms rethink the design of their operating model to be more service based in order to realize higher value from portfolio and underlying investment data. Take digital experience as an example: to maximize the value to customers, firms should plug in the underlying data and tease out personalized investment insights based on a customer’s values, risk profile, and financial goals.

At the same time, investment operations is being asked to support any new investment strategy, asset type, or product structure coming down the line. Investment operations is hence facing a reinvention, as the shift toward driving value across trading, portfolio, stewardship, and risk gathers pace. To join and capitalize on this development, firms need to rethink and recalibrate their operating model and data strategy to evolve alongside their investment ambitions. This also includes the talent profiles and organizational structure required to deliver on them.

2. Renewing attention on custodians and market services

Many firms used to take custodians and market services for granted as part of the “plumbing”—regarding those services as foundational, mature and standardized. No longer. Rapid evolution in areas such as distributed ledger technology, market infrastructures, and settlement cycles is generating a renewed interest and attention around custody services. Custody services are re-emerging as a prominent and exciting component of the industry, and an area characterized by rising investment and innovation.

One less-discussed aspect of this reinvention is that custodians are also attracting the attention of ESG and investment stewardship leadership in order to seek more transparent insights and alignment into proxy voting, corporate action impacts, and voting implications for securities on loan. Such insights could potentially be accessed through self-service applications, or more directly through data delivery.

Many asset managers are therefore trying to strengthen their partnerships across their custodians, working with them more closely to better understand the operational and client service implications of their new, evolving and future services. To make the most of these advances in the near term, asset managers need to evaluate their impacts across the investment lifecycle and collaborate with their custodians to, for example, identify and seize opportunities for enhanced data delivery, operational efficiencies and potential cost reductions.

3. Ensuring strategic partners and outsourcers are the ‘right fit’ for the long haul

For the past few decades, many asset managers have partnered with a select group of asset servicers only across the investment lifecycle in back-office services such as fund accounting and administration—with efficiency and cost being the main priorities. But today, as the industry evolves to cater for the next generation of technology, asset types, and investor demands, some firms are re-assessing their current outsourcing strategies through a different lens.
We observe the conversations between asset managers and their asset servicers moving up from operations to the C-level, as asset managers look to ensure their outsourcing partners are the “right fit” for their long-term strategies—even if firms’ respective strategies are not yet fully defined. This upward shift reflects the fact that these outsourcing partnerships are becoming more central to firms’ overall strategic ambitions, and that many asset servicers’ digital and data offerings are becoming more compelling, more tangible solutions getting developed and exciting near-term technology roadmaps taking shape.

Some asset managers are therefore deviating from the more traditional RFP process and implementing new kinds of due diligence and selection processes to better evaluate the strategic value and strength of their current providers’ capabilities. Firms should have the confidence that these capabilities could support their own long-term strategic ambitions.

Gauging your readiness: Three questions to ask

How well-prepared is your asset management firm to rethink investment operations and take the necessary steps? To find out, try asking yourself these simple questions.

  • Do we think that investment operations is moving towards value creation for the firm–or is it still on track to remain a cost center?
  • In partnership with our custodian(s), are we actively pursuing an understanding of market infrastructure changes and impacts expected to come in the next five to 10 years?
  • In the light of this understanding and our strategic ambitions, do we have the “right-fit” strategic outsourcing partners for the long term?

We’re helping many asset management firms to find answer to those questions and others. If you’d like to discuss the way forward for your firm, or anything else I’ve said in this blog, please get in touch. I’d love to hear from you.