The investment management industry has historically had one way to design its technology stack: best-of-breed. Unfortunately, the resulting system landscape created a set of challenges, such as:
- Fragmented workflows, i.e. jumping between systems
- Higher costs from multiple license fees
- Integration issues, such as transaction or cash data not flowing in real-time between systems
A second option has emerged over the past decade: single system spanning front, middle and back office for asset managers. This article focuses on what a front-to-back system is and what features and benefits it offers. We also list examples such systems as well as alternatives.
Limina was started by investment managers as a reaction to problems with existing systems. This includes fragmented workflows and high system costs. While Limina's Investment Management System isn’t a front-to-back platform, it can help address the same challenges.
This article isn’t a pitch for our solution however, not any other solution. If you’d like to explore when Limina is a great fit, we have a separate article for that. Equally important is when Limina isn’t the best choice, which we’re equally transparent with.
What is a Front to Back Office System (F2B)?
A front-to-back system offers a complete suite of solutions for buy-side firms covering the entire investment process. This spans from portfolio management and order management to accounting and reporting. It offers capabilities for front, middle and back office.
Features of Front and Back Office systems
Adopting a single system to service your front office, middle office and back office functions can significantly enhance efficiency and reduce costs for investment firms. However, not all systems are front to back despite marketing claims made. We recommend looking out for the following features to make sure you’re really considering an end-to-end solution:
1. Seamless Integration
True front to back solutions are developed as a single code base, allowing for seamless integration across the entire investment lifecycle. There is just one data model which simplifies data management between applications. The effect is reduced risk of data errors and less time spent investigating discrepancies between systems.
2. Comprehensive Suite of Solutions
A complete platform should offer a broad range of solution applications covering the entire investment process. It should include the following capabilities within each:
- To support the front office: portfolio management system, order management system and execution management system.
- To support the middle office: Investment Book of Record (IBOR), performance attribution and portfolio risk management.
- To support the back office: general ledger, billing, and reporting. Both regulatory and client-facing reporting.
An ideal platform should be able to evolve with changing market and regulatory conditions. If should able have the ability to handle an increasingly diverse range of asset classes and investment products. Finally, it should handle the volumes of large-scale asset managers including rebalancing across hundreds or even thousands of portfolios.
4. User Friendliness
The platform should be easy to use and intuitive, with an effective user interface. This is a key component because it proves that the system is built holistically as one platform. A system that’s a patchwork of various solutions integrated together will struggle to provide seamless workflows.
Capabilities not covered by Front to Back Office Systems
Investment support tools, such as portfolio modelling software, are typically not included in a front to back office system. These tools are used by portfolio managers and traders to help with portfolio construction and trade idea generation. As separate tools, they feed into a F2B system, Investment Management System (IMS) or Trade Order Management System (OMS).
Another capability that’s typically not included in a F2B system is accounting software for the fund management company. The accounting capabilities usually ends with portfolio accounting which will then feed into a generic accounting software.
The Benefits of Front to Back Office Investment Management Systems
The use of fully-integrated front-to-back office trading systems can streamline front, middle and back office investment management workflows. It allows asset managers to manage larger and more diverse asset pools with fewer resources. Implementing front-to-back office systems can help firms reduce manual errors, improve data quality, and enhance investment decision capabilities.
Firms can benefit from increased efficiency, cost-effective operations, and higher operational alpha as they adapt to the changing industry landscape.
Investment managers should understand the potential hurdles involved, such as flexibility, and technical complexity. In other words; it’s not clear that a platform is always superior to best-of-breed. There are also hybrid alternatives, such as a Investment Management System.
Overall, implementing a fully-integrated front-to-back office system can be a valuable option for firms. At the same time, it's crucial to weigh the pros and cons of different target operating models before deciding.
Examples of Front-to-Back Office Systems
Several vendors offer front-to-back office systems, and some of the leading platforms include BlackRock Aladdin and SimCorp Dimension.
BlackRock Aladdin offers a range of features, including portfolio management, trading, risk management, and client reporting. The modular architecture allows firms to tailor the system to their specific needs. It also offers a flexible open API for easy integration with other systems.
SimCorp Dimension is another leading integrated platform that offers comprehensive functionality across the entire investment management lifecycle. It includes a range of modules for portfolio management, trading, compliance, and risk management. The platform is built on a single codebase, allowing for seamless integration across the entire investment process.
Problems with Front-to-Back Office Systems
There are operational risks with buying everything from one vendor, such as:
- Mobility is hindered: The integration of back-to-front systems can make it difficult for clients to switch providers.
- Technological risks increase: As the product expands its scope and connectivity grows, the potential for technological risks also rises.
- Flexibility is decreased: Your business development is capped within the realms of what the vendor can support. If you need a change made to the software, your vendor better be willing to help you.
- Change management challenges: With increased product coverage, managing changes becomes more complex. This in turn leads to potential conflicts between deadlines, especially concerning infrastructure changes.
- Inadequate contingency plans: A single hot standby or parallel processor may not be sufficient. The back-to-front provider's contingency plans need to be thoroughly examined.
- Outsourcing becomes trickier: There is a trend of outsourcing more internal functions in the buy-side industry. It’s unclear if an F2B system has a role to play in the future as more functions are outsourced.
It can also be a challenge to pick which system to use. A platform has typically emerged either from the front office to the back office or vice versa. Hence, it can be a battle of front office vs back office which solution is preferred.
Alternatives to Front-to-Back Systems
The best-of-breed approach to system landscape is certainly one option. There is however an emerging alternative: a Front to Middle Office System. This is also called an Investment Management Platform.
Such a system delivers most of the value from a back-to-front system. It does so without causing the full extent of the challenges discussed above. It’s for example more compatible with the outsourcing trend as it’s focused primarily on supporting the alpha-generating activities within front office and investment operations.
A front-to-back system (F2B) is a fully integrated solution that streamlines operations. It reduces total cost of ownership, and eliminates challenges of outdated software. The key benefit of F2B systems is a comprehensive suite of solutions covering the entire investment process from one vendor. That benefit is also the key concern with such systems. I.e. the lock-in effect to one vendor.
An alternative model that’s more balanced is to adopt an Investment Management Solution, such as Limina’s IMS.
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