Two steps forward, one step back
With asset managers under pressure from all angles, doing more with data can help them to thrive, says BNY Mellon’s Daron Pearce
Many asset managers are running to stand still at the moment, and their margins are being squeezed. Since the financial crisis we have seen a number of trends in the institutional space: the rise of alternative investments; a move from active to passive investment; the digitisation of the market; and a surge in regulation. This is taking its toll on the industry.
To meet this challenge, it is imperative that asset managers develop robust solutions and maintain a variable cost model to adapt to changing market conditions. This is why many of them are turning to organisations such as BNY Mellon for outsourcing and data analytics solutions. These solutions offer asset managers more efficient and effective distribution strategies, help them streamline business management and also enable them to make more informed investment decisions.
The pace of change
The flood of new regulations is putting pressure on discretionary spending that could otherwise be invested in innovation, technology and digitisation, which is encouraging institutions to streamline functions through outsourcing. Regulation has created more demand for outsourcing and has been an additional catalyst for the likes of BNY Mellon and other service providers to invest in its regulatory and compliance infrastructure.
The role of the service provider is to provide scalable solutions, and those doing this for multiple clients have sharpened their focus and invested in technology. It is more cost effective and efficient for investment services companies to help ensure multiple institutions are compliant than it is for each of them to do so on their own. In turn, investment services companies need to make sure they understand what regulation means for their clients and their underlying clients.
Managing the risks
The main risks that institutions outsourcing operations face are operational, client and regulatory.
From an operational perspective, institutions outsource the function but not the risk, because they are still accountable to the regulator for outsourcing functions. Institutions need to ensure they create a good oversight structure and understand the processes and the control environment of the organisation they have outsourced to. From BNY Mellon’s perspective, we aim to ensure that we give our clients the tools they need so they can see how we are performing. We continue to invest in our dashboards to ensure that our clients can track their underlying portfolios and services across multiple asset classes and time zones.
Sometimes the outsourcing provider will work directly for their client’s underlying clients. For example, the outsourcer could be working at the request of an asset manager to service a pension fund. If the outsourcer is providing a white-label service to the pension fund and provides them with inaccurate data, this puts the asset manager’s reputation at risk. Outsourcing providers must have a clear understanding of their client institutions’ risk appetite and the systems in place to address this.
Institutions must also ensure they have a good handle on regulatory risk. In particular, they must understand how their outsourcing partner is managing its own business. Institutions need to ensure the outsourcer’s approach to audit control and legal risk does not leave them exposed.
More and more of the provision of information in terms of control reports, data and dashboards is being outsourced, but the oversight of compliance stays with the institution.
A client can outsource a function but the client remains in control of that function and cannot ask the service provider to make it aware of compliance breaches. The regulator is clear on this. The outsourcing partner must ensure it provides as much information as possible in terms of dashboards and data reporting to make it easier for the asset manager or institution to be compliant.
BNY Mellon’s competitive advantage is that we have built a single integrated global platform for asset managers and institutions to manage their money. We are focused on investing in technology and innovation to help our clients access the data they need to manage their business. BNY Mellon has also been astute in the strategic choices it has made on who to partner with to build its global capabilities.
Some of BNY Mellon’s recent strategic outsourcing agreements provide a blueprint for the asset management industry. Last year, BNY Mellon agreed to provide the asset management firm T. Rowe Price with a range of fund accounting and middle-office services, including portfolio accounting services through our Eagle/OnCore platform. OnCore is a data-centric solution that combines back-office functions with middle-office servicing across multiple books of business via a single platform. It has the capability to support T. Rowe Price’s clients wherever they are in the world.
BNY Mellon has also entered a landmark agreement with Deutsche Asset Management. Deutsche has outsourced its real estate and infrastructure fund accounting and parts of its reporting functions to BNY Mellon, with members of Deutsche Asset Management’s team transferring to BNY Mellon’s alternative investment services business.
Both of the above transactions represent a new level of partnership between asset managers and their service providers, leveraging the strengths and capabilities of both to meet the expectations of regulators and institutional investors.
Advanced service provider partnerships are now providing asset managers with far greater control over one of their most important assets—their data. Good data analysis adds value for asset managers because it can inform their investment decision-making, their product design and their distribution priorities.
BNY Mellon is pioneering a number of new developments in investment decision-making, most notably a sentiment analysis solution available through NEXEN, our open-source, cloud-based technology platform. This is an excellent example of how BNY Mellon is using its global innovative centres to work with fintechs and clients to help shape the investment decisions of asset managers. BNY Mellon has eight innovations centres around the world. The solution is offered from Heckyl Technologies, a London-based fintech. Heckyl scans social media and the internet, covering more than 120,000 information sources, to enable asset managers to assess sentiments towards the companies in their portfolios. The app provides a sentiment score on each company and this is shared with clients in real-time through NEXEN.
BNY Mellon is also using data to transform product design and distribution by partnering with Albridge, a company that provides enterprise data management solutions and is an affiliate of Pershing. Albridge enables asset managers to analyse the different products investors are buying, and from where.
This is particularly relevant in the US, where you may have a dedicated sales force in every major city or state. An asset manager’s sales force in Chicago may be hugely successful in selling fixed income funds while its Boston team, which has a similar client reach and profile, is not selling many fixed income funds but is selling a high amount of equity funds.
Asset managers can use this data and talk to their teams in each city or state to determine which funds are selling successfully and why. This in turn will influence how asset managers market their products and help to ensure that they are not missing a selling opportunity.
Prioritising big data
Asset managers may face challenges when deciding which data streams to prioritise, particularly in the age of ‘big data’.
The relevance of certain data streams will depend on whether asset managers are analysing distribution, investment performance or business management. If they are looking at the latter in a scenario where investment operations are outsourced, organisations such as BNY Mellon can use their investment book of record capabilities to provide a holistic view of investment portfolios across an investment manager’s whole book of assets. This helps them to quickly ascertain their investment exposures. For example, if a single security requires attention an asset manager can review its global exposure to identify that security and take action to mitigate any risk.
Outsourcing can also help with cost management. For example, BNY Mellon’s Digital Pulse analytics platform gives managers data-driven insights that ensure evidence-based decisions are made in an efficient manner, as opposed to using manual processes, which are often slow and prone to more errors.
There is always a role for big data, whether it relates to distribution, investment performance or business management. Asset managers need to ensure they prioritise expenditure to minimise weaknesses and maximise returns. If an institution has excellent investment performance but poor distribution, data analytics resources should be channelled towards assessing this strategy. For institutions with excellent distribution and great investment performance but a very high cost base, analytics can help address business management challenges.
Doing more with data
All asset managers can enhance their businesses by doing more with data.
Some asset managers are advanced and have sophisticated distribution and performance analytics that already deliver real value. Others are behind. BNY Mellon is particularly effective in business management analytics, and we are developing our solutions to help our clients with investment performance and product distribution.
Asset managers may be running to stand still but there are ways they can keep ahead of the competition. The key to success is early adoption of new technologies, ensuring best practice, and maintaining a high rate of investment in technology either internally or through a third party such as BNY Mellon