Investment managers have historically viewed operations as “must-have functionalities” that are irrelevant to sales or marketing agendas, but this is changing, says Ross Ellis of SEI.

Investment managers have historically viewed operations as “must-have functionalities” that are irrelevant to sales or marketing agendas, but this is changing, says Ross Ellis of SEI.

SEI yesterday released findings from a poll conducted at the firm’s 11th annual Executive Conference, highlighting that operational capabilities are becoming a “key competitive advantage” for investment managers.

Ellis, vice president of knowledge partnership for SEI’s investment manager services division, told Family Wealth Report that this has been changing over time - but “certainly post-crisis and post-Madoff.”

“The focus on back-office functionality and the desire of investors and regulators to look under the covers at the portfolio has been exponentially critical,” he said.

The poll of some 100 attendees showed that over three-quarters (77 per cent) of investment managers believe there is a “somewhat strong” or “very strong” link between their operational capabilities and their business competitiveness and performance. Moreover, 69 per cent believe that their investors also see a “somewhat strong” or “very strong” link.

For the purpose of the study, SEI defined “operational capabilities” as everything except for investor relations/client service and portfolio management - including back-office and investment operations, regulatory and compliance functions, performance and risk analytics.

Challenges

Unsurprisingly, respondents identified a number of key operational challenges, namely in the areas of data and information management (33 per cent), operational complexity (31 per cent) and growing regulatory or compliance demands (22 per cent). 

Looking at the latter in more detail, Ellis said he thought the level of 22 per cent would be higher, but noted that it makes sense given that data management and operational complexity were also choices.

When asked if he had any insight on what specific regulatory or compliance demands he thought respondents had in mind when answering, he cited AIFMD in Europe, Form PF, the Custody rule, Form COP-PQR and FATCA.

“Each require different data (which the firm may or may not have in-house and at their disposal), in different formats, with penalties for incomplete or inaccurate responses…and the requirements continually change,” Ellis said.

“Then we add on the requirements imposed by the industry, by the investors – all the increased due diligence, the visits, the questionnaires, etc. All told, managers need to allocate more resources, and provide such data requests in a faster, more concise and more informative manner than ever before,” he said.

Meanwhile, unpicking the issue of operational complexity and what exactly this entails, Ellis said that asset managers are facing “a variety of escalating challenges.” Namely, these are: costs rising at a faster rate than fees and revenues; a global trend of investors demanding more choice, customization, transparency and risk management data; and managers requiring product innovation and a high-quality investor experience to ensure they stand out.

“All of these lead to increased complexity – there cannot be a one-size-fits-all solution – not in terms of investor needs, regulator needs, distribution channel requirements, etc – so managers need to have a much more flexible operating model so they can adjust quicker and respond to inquiries and interest in a much quicker timeframe,” Ellis said.

Ongoing themes

The poll confirmed that the desire for customization continues to be a theme in the investment management space, with respondents reporting that 33 per cent of clients are increasingly asking about customized portfolios – a relatively small percentage at a glance, but one which highlights that clients are being proactive and asking such questions. 

Participants were also asked about the most important factor in their ongoing operations success, in response to which over two-thirds (68 per cent) said that advanced operating technologies, together with having the most knowledgeable people advising you, were equally important.

“This integrated mix of technology and expertise was consistent with what managers said was their greatest challenge, apart from delivering expected performance,” SEI said.

For example, the highest ranked answer (36 per cent) was “providing investors with education and consulting above and beyond my firm's specific mandate.”