In this article, we’ll dive into the most pressing investment management problems in 2024. More specifically:
- Operational challenges
- Data management and integration hurdles
- Market developments
Most importantly, we’ll explore practical solutions to help investment managers overcome these obstacles and position your firm for growth in the coming year.
Operational Problems in Investment Management
Investment management firms face numerous operational challenges. The most severe is manual processes. Manual processes might sometimes hide in plain sight. Clues to find them is to look for:
- Calendar reminders
Any calendar task is a reminder to do something or check something. In other words, a manual task - Tasks that can be described as “Check that …” or “Do … “
Manual processes result in errors and don’t scale. You need to add more people as you grow in complexity. Errors from manual processes are likely to increase exponentially with the size of your team.
Solution: exception-based investment workflows
Software is well-suited to perform routine tasks. Such tasks can be obvious, like sending trades to the custodian or running a NAV process. If something goes wrong that can’t be automatically resolved, the system alerts a human to resolve the issue. This is an exception-based workflow.
Other less obvious examples of exception-based workflows are “Check that …” tasks. These are more complicated, but the right system can run checks such as “check that carbon data is available on instruments before Front Office is allowed to trade them in our article-9 fund”.
Data Management and Integration Issues
Another problem that investment managers face is managing and integrating data from disparate sources. We know quality data is crucial for making informed investment decisions, but why does it seem nearly impossible to resolve?
There are two reasons why data quality is difficult to achieve:
- Systems and service providers don’t have a standard data model
For example, a dividend might be represented as an instrument event in one system, as a cash flow in another and at the custodian it might be included in just all cash movements on a day. - Data changes rapidly, so what version did you receive?
A dividend wasn’t part of a cash balance, but today it is. Or did we have a settlement issue and it’s not?
Another example is a position, that had a fill just came in. Both position and projected cash will have changed since a second ago.
An obvious suggestion to solve the problems listed, is to have fewer systems. However, a single system isn’t possible to achieve; you’ll at least have to integrate it with custodians and brokers. Also, with just one system, you’re losing flexibility – you’re stuck with just the functionality your chosen vendor has.
Solution example: an IMS with a groundbreaking approach to integrations
The best solution we’ve seen is a combination of two tactical decisions
- Pick one central investment workflow system. Everything that happens, from order simulation through post-trade processing, should be controlled by this system. It doesn’t have to do everything. Execution management, risk management and performance measurement don’t have to reside in this system – just the investment workflow needs to connect to it.
- Ensure that the system has a configurable tool to get data into and out of the system. Not just APIs, not just “export to excel” buttons and not just “it can be done with code”. Instead, it’s a purpose-built tool that business users can configure to create virtually any logic to get data into or out of the investment workflow system.
Adapting to Market Changes
Investor risk preferences have shifted fast in the past years. For example, one survey found that 50% of individual investors now prioritise cash flow, and only 20% are willing to take high investment risk. Institutional capital hasn’t moved this fast, but allocations have changed.
A solution to retain investor capital as investment preferences change is to broaden the suite of products offered to investors. This “solution” is, in reality, the start of new problems:
- Attracting new investment teams for the new investment vehicles
- Ensuring system support, if e.g. asset classes are added
The challenge is made worse by the long lead times to launch new products, primarily due to the regulatory burden investment managers face.
Solution: external managers
Some investment managers have looked to external managers as a solution to the problem of attracting investment teams and quickly getting a new offering to market. One example is Avanza fonder.
They did so by first putting investment management software in place where they could centrally control operations and compliance. The external managers are given a login to see their portfolio and enter orders.
Additional challenges facing the investment management industry
The asset management industry as a whole is troubled with economic uncertainty and increased regulation at the forefront. You have fixed costs, but your revenues vary with Assets under Management (AuM).
Fee pressure remains high, and regulation continues to increase. Investing in operational efficiency is often an upfront expense, expected to yield a return only one or several years into the future.
