Global Custodian Fall 2018 | Page 32

[ I N - D E P T H | C L I E N T C H A N G E S ] I n chaos theory, the butterfly effect is a phenomenon whereby a localised change in a complex system can have large effects elsewhere. The theory is that a single occurrence, no matter how small, can change the course of the universe forever. If we take this theory and look for an example of it within the financial services industry, one such illustration arises in the localised changes with investment managers, which are having a wide im- pact on the entire service provider model. The world of asset management is coming to terms with a new normal as fee pressures, an ever-changing definition of alternative products and investor de- mands take hold. New asset classes such as private capital, infrastructure and real estate are requiring different services, while ethical investing is creeping into many strategies. At the same time, regulations on enhanced transparency have become en- trenched in the day-to-day workings for investment firms, meaning they require a sophisticated set of tools to ensure they comply. These changes are impacting the oper- ating model of investment managers, who rely heavily on outsourcing providers for middle- and back-office functions. Simplicity, scalability and value “For a growing number of asset managers, it may no longer be possible to carry on simplicity, scalability and value. With technology infrastructure where possible their third-par- ty partner needs to give them a simple and scalable platform that provides an end-to-end view on the data needed to run their business efficiently. One chief operating officer for a European asset manager explained at a recent event that they have begun a processing of outsourcing, where they decided to extend their mandate be- yond custody to include securities lending and other investment operations. They explained the outsourcing deal will be a key component of their operating model going forward, with the decision to do so being driven by cost, time-to-market and regulation. “We had to look at things like our time-to-market, can we do it faster if we give other activities to third-parties? And we want to leverage our technology spend with service providers. My opin- ion is you do not need to own your technology to be successful, especially with infrastructure, and definitely with the applica- tion of cloud computing on the front-office side,” said the COO. “Leveraging the regulatory investments with third-parties is also very important. That has led us to decide a wide-spread outsourcing journey - with the first milestone expected to be at the end of 2019, which has a scope of fund accounting, stock lending and investment operations.” Accounting changes At the same event, another investment operations head ex- plained they are more comfortable managing certain functions in-house, particularly the middle-office which they feel is nec- essary to manage the change for their portfolio and investment managers. “We have our core operations at the investment accounting, reconciliation, pricing, trade settlement all aligned. Of the func- tions we keep in-house, they are the ones that we want to keep close to the investment managers,” said the head of European investment operations. “For a growing number of asset managers, it may no longer be possible to carry on tweaking the operational model and market forces are dictating they may have to completely reassess it.” ANN DOHERTY, REGIONAL SALES EXECUTIVE EMEA, INVESTOR SERVICES, JP MORGAN tweaking the operational model and mar- ket forces are dictating they may have to completely reassess it,” says Ann Doherty, regional sales executive EMEA, investor services, JP Morgan. “This is driving work for companies like ours. Our drive to achieve greater scale and standardisa- tion is vital to develop a flexible, global operational model,” Operating models for asset managers are largely driven by three key buzzwords: 32 Global Custodian Fall 2018 “We have placed our middle-office teams with the investment businesses as they understand the data requirements, and are closer to the change. I think agility of people is more important than the agility of the tech.” The fact is that changes are occurring throughout the chain, and for asset managers to stay current with investors they need all to adapt their operating model to best suit their strategies. These pressures facing asset managers to enhance efficiency are being passed onto service providers who in turn are having to provide the tools needed to achieve those targets. “To deliver the best client service, as a service provider we