While the Covid-19 pandemic thrust asset managers into uncharted territory, they’ve proved themselves remarkably resilient. Faced with the prospect of adapting quickly or not doing business for the foreseeable future, the industry made 5 years’ worth of digital progress in just a few months.
But if 2020 — and the first part of 2021 — have shown it’s possible to digitalise successfully even if you’re a traditional firm with legacy issues, that doesn’t mean it’s going to be plain sailing from here on out. Even as physical restrictions are lifted and vaccine rollouts are giving us hope of a return to normality.
So what are the key issues asset managers will face during the remainder of 2021 and beyond? And what steps do they need to take to tackle them?
1. New routines, new risks
Lockdowns, self-isolation, and other curbs on face-to-face interactions have forced tens of millions of us to work from home. But while this may have made us happier and more productive, it has also created new challenges for firms.
As senior compliance professional John Moffatt notes, staff training and monitoring conduct are a lot harder when people aren’t under the same roof.
“You can no longer bring employees to a meeting room, tell them about your policies and procedures, and quiz them.”
A distributed workforce has also made it easier for fraud and other security risks to fly under the radar. As Protiviti’s managing director Sean Gleason explains:
“In a typical environment, you’d be able to say “OK, no phones at the trading desk.” Now, you can’t do that.”
Lastly, working remotely has also made it harder for junior staff to learn and grow. As Will Lough, a London-based portfolio manager, notes:
“…a huge amount is picked up almost by osmosis from listening to conversations over the desk, or from the five-minute conversation with a colleague to explain a particular problem or piece of industry jargon.”
That can no longer happen when people spend their working day alone at their dining table. Or the desk in the spare bedroom.
With 70% of workers wanting to continue working from home at least some of the time moving forward, keeping up with technology — but, most importantly, choosing the right digital tools — will become more and more critical over the next few years. And not just when it comes to doing the day job.
Firms need to find new, more effective ways to communicate and keep data secure, as well as training the younger generations so they can learn and grow.
2. Keeping operational costs in check
Communication, security, and upskilling aside, remote working and the volatility caused by the pandemic’s economic impact have also shone a spotlight on costs.
According to a report by consultancy Oliver Wyman, around 50% of middle and back-office costs are still linked to staffing. And this is mainly because operational processes like data collection, reporting, and reconciliation tend to be inherently manual and require constant human intervention.
Automation, machine learning, and other API-driven technologies can slash these costs by 30% and free up your staff so they can work on more valuable tasks.
More to the point, using technology means there are fewer opportunities for human error and, so, less risk of reputational damage and regulatory fines.
Fundipedia, for instance, automatically collects,. verifies, and populates data in the format you need, whether that’s FinDatEx, OpenFunds, or FundsXML. You can also schedule regular reconciliations and get alerted through First Responder if anything is out of sync, so your data stays accurate at every stage in its journey upstream to downstream.
3. Brexit bites
The Covid-19 pandemic may have been dominating the news cycle, but that doesn’t mean the B-word’s gone away.
The UK’s transitional period — and, with it, the UK’s EU membership — formally ended on 31 December 2020. And while the government secured a deal at the last minute, this doesn’t cover financial services. Nor does it seem likely that the UK and EU will reach a comprehensive financial services agreement, including decisions on equivalence, any time soon.
The key Brexit issue for asset managers — as for other financial services firms — is the loss of passporting rights.
Because the UK is now a third country, UK-based firms no longer have the automatic right to offer their services in the EU. They need a licence from an EU-based regulator.
Similarly, UCITS and MiFID distributors have to be EU-based. And the EU is also looking at toughening up delegation rules, which currently allow asset managers outside the EU to manage EU-based funds.
As a result, many UK-based asset managers have moved at least part of their operations to the EU.
That said, Brexit challenges go beyond the logistical difficulties of relocating to a new country and sourcing the right talent. Or persuading staff to uproot their lives and move.
Firstly, investment management mandates, service contracts, and other agreements all have to be repapered.
Secondly, with operations spread across different jurisdictions, there’s a greater potential for communication breakdowns and silos.
Thirdly, and most significantly, if the UK decides to diverge from EU rules, it’ll increase the reporting burden for firms that operate in the UK and EU.
Here again, technology is going to be critical.
Our platform, for instance, not only collects, cleans up, and organises data from multiple sources, but is also designed to incorporate rule changes automatically, so you don’t have to worry about updates or regulatory divergence when you generate a report.
4. Proving good governance
From the Senior Managers and Certification Regime, to MiFID II and the Stewardship Code, regulators are demanding ever more accountability, to the point where senior managers risk personal fines and jail time.
But the most significant change is that it’s no longer enough to have a compliance programme in place. As the Serious Fraud Office puts it:
“A key feature of any compliance programme is that it needs to be effective, not just a paper exercise.”
In other words, firms need to be able to show exactly how they’re staying compliant in their day-to-day operations.
The bottom line is that tick-box approaches are a thing of the past. Moving forward, keeping regulators on side requires a comprehensive system of record, accurate reporting, and the ability to respond quickly and efficiently to changes. And, at the risk of repeating ourselves, that simply won’t be achievable unless firms replace manual processes with smart digital technologies.
5. Sustainability in the spotlight
One of the biggest trends of the past few years has been sustainability, including sustainable investments. More and more investors are rebalancing their portfolios to make them sustainable. And regulators have stepped in to make sure ‘sustainability’ isn’t just a buzzword with no substance.
The biggest piece of legislation regulating sustainable investments — the EU’s Sustainable Finance Disclosure Regulation — creates a number of challenges and risks for asset managers.
Firstly, the pressure to comply — phase 1 came into force on 10 March 2021. And while phase 2, the technical implementation, has been postponed to July 2022, that’s less than a year from now — could lead many firms to rely on stop-gap and ultimately inadequate tools like Word and Excel.
Secondly, there’s a risk that getting to grips with the regulation will make it difficult for firms to innovate quickly enough to become first-movers.
Lastly, compliance will require access to an overwhelming amount of data. And since, as things stand, only 30% of firms track sustainability metrics, even simply figuring out what data they need and where to find it may prove to be an uphill struggle.
Sustainable investments aren’t a fad. By 2025, it’s expected they’ll make up 33% of the world’s total assets under management. So it’s going to be critical for firms to have the technology in place to source the right data and, more importantly, keep up with rules that, in all likelihood, are going to evolve and become more complex.
You can’t thrive without technology in 2021
From the emergence of new risks to higher expectations from regulators, the reality of Brexit kicking in, and a greater focus on sustainability, it’s going to be a turbulent few years for the asset management industry.
That is unless you invest in the right mix of technologies.
Technology increases transparency and makes it easier to access the right data at the right time.
It increases efficiency and cuts out tedious, laborious, low value work.
But most importantly, challenges also bring new opportunities. And technology makes it easier to adapt quickly so you can catch the wave.
Want to learn more about how Fundipedia can help you tackle the challenges the next few years will throw your way?