There was a time not too long ago when every decision was plain and simple.
Coke or Pepsi?
Cash or credit?
Chocolate or vanilla?
Then, technology entered the picture, changing every facet of our lives, from how we entertain ourselves and communicate to how we manage our time and money. Although the “information on demand” age has dramatically improved most aspects of our lives, harnessing all the data available to make smarter investment decisions has proven to be more challenging.
In just a few years, an asset manager’s job has become incredibly complicated. As the hunt for greater yield intensifies, it’s evolved from analyzing traditional assets—bonds or equities—in a given region to managing a wide array of alternatives like private equities, mortgage-backed securities and derivatives across multiple regions, numerous currencies and so much more.
Although the evolution of the asset management sector has become more global and complicated, legacy technology used to manage billions in assets hasn’t kept pace. This puts managers at risk of losing time and capital, as well as simply becoming noncompetitive.
The results of a recent Clearwater poll of institutional investors showed that more than 70% invest in credit (e.g., private debt, bank loans and collateralized loan obligations) and private equity, 68% invest in real estate and nearly 40% put their money in hedge funds and infrastructure. The expanding diversification and complexity of assets have ushered in a real need to simplify the understanding of portfolio performance and reporting and make sense of sophisticated, petabyte-sized data sets in seconds.
Manual, spreadsheet-based asset analysis simply can’t keep pace with today’s asset management realities. Many institutional investors still use outdated legacy technology to chase yield in today’s market. The findings of a recent McKinsey survey indicate that just 13% of financial services leaders have “half or more of their IT footprint in the cloud.”
Not only does this weigh down a manager’s performance, but it can mean significant cost for an institution—a typical organization spends 70% of its IT budget on keeping the system running. Imagine if those resources were instead spent on differentiating the company’s offering.
Navigating through spreadsheets and legacy systems is an antiquated foundation for overseeing billions of global investment dollars. Consider all the hours spent entering, updating and reporting on data for stakeholders—time a manager could better spend doing strategic work. Any human error can result in costly mistakes or, potentially, a massive capital loss.
There’s also a security concern. Internal teams struggling with integrating older legacy tech into the IT stack weaken an organization’s security posture and make it susceptible to costly cyberattacks. KPMG study results published by Institutional Investor found that a mere 11% of surveyed asset managers “were prepared for a cyberattack.” In the same study, 75% of respondents indicated an “appetite for digital transformations” to better sync the organization’s technology.
Modern software solutions are built with modern portfolios, regulatory reporting and market dynamics in mind. AI and machine learning have vastly upgraded data aggregation and reporting processes, making it easier to handle more asset classes, accounting bases, global currencies, complex reporting and regulatory requirements.
This is especially valuable considering the heightened demand for alternative assets, which are generally more complex to track than traditional assets. According to the results of a Clearwater Analytics survey, 53% of asset managers view reporting standardization as a challenge for alternative assets—further proving the need for cutting-edge technology systems.
Now more than ever, investment managers want to stay at the forefront of reporting technology, as that’s what the client sees. The reports a client sees (digital or not, on-demand or not, accurate or not, timely or not) influences how the investor views the asset manager—as either forward-looking and sophisticated or behind the times.
Although most managers want to digitally transform and leverage more advanced investment technology, getting started can be a challenge. I recommend managers use the following questions to evaluate their current tech stack. If you answer “yes” to any of these, it may indicate a system upgrade is required.
Does your team:
Alternative assets come with their own set of challenges, such as the availability of data, automation and combining alternative data with public portfolio data. But there are cloud-based solutions available for asset managers that can provide data aggregation, validation, reconciliation and reporting for private funds. Many of these solutions are fully integrated with standard accounting, compliance, performance and risk reporting.
As asset managers and corporate leaders fight to stay competitive and plan their IT budgets for 2023, they should evaluate their current systems for signs of outdated technology. Leveraging modern systems can help them seek greater yields and automate regulatory reporting at scale, especially in the event of market swings.
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