Combining regulatory demands and digital innovation needs is the trend that is reshaping how back offices operate.
This year will see an acceleration of back office automation as asset management firms adjust to data management challenges posed by new requirements, says Todd Moyer, executive vice president for business development at technology services provider Confluence.
"Regulatory challenges are driving timelines and driving the amount and types of data that asset managers and service providers are being asked to manage," Moyer told Money Management Executive. "They have no option any longer but to make a change in the adoption."
Moyer predicts that this year many firms will begin moving to adopt full-scale automation in the back office.
An edited transcript of the conversation follows.
How should asset managers view the nature of regulation and technology merging?
We really saw the emergence, and have been tracking the term regtech, as early as March 2015.
A report from the U.K. government came out and started speaking about the need for technology to help meet a lot of these data-intensive regulatory challenges.
Being a subset of fintech, it was much more specific to the fact that these markets and investors were really looking to get to the next level of transparency as it relates to the data that managed portfolios have.
Whether that's the traditional 40-Act funds in North America or UCITS throughout Europe; or really into some of the alternative fund challenges that we've seen come out around Form PF, the commodity pools at PQR, the changes with the ANNEX and AIFMD throughout the European regime, you really saw the bubbling up of these challenges and the concept of regtech brewing. But, I would say it started in the U.K., and very quickly spread. Australia, Canada, Japan and Singapore have all started to engage with that concept.
Most recently, in mid-December, the SEC proposed an office of data strategy around the concept of structured data. We have a general momentum of adopting this concept. It's interesting that it led to this idea of a disruptive technology which helps to meet some needs, and the fact that we're at a tipping point in this industry.
We release a survey to our customers every two years, and this September, for the fourth straight time, their number one priority was to help automate back office processes. But, they never really get around to that as a key initiative, nor prioritized it to the extent that they would solve their back office automation challenges to any great degree.
We really see that regulatory challenges are now driving timelines, driving the amount and types of data that asset managers and service providers are being asked to manage. They have no option any longer but to make a change in the adoption.
We have seen the adoption of technology at a greater pace than even what we had anticipated. The fourth quarter of 2016 was a tremendous quarter for fund flows, and looking at our clients we had some of the largest service providers commit to adopt regulatory reporting. We also saw asset managers commit to leveraging technology to meet these needs - and so it has been a very interesting time in the market.
From serving that landscape, what are some of the factors that are helping some firms be more agile in their response to technological change?
Over the last 12 to 18 months, we have seen a cycle just for traditional reporting go from 60 to maybe 45 days.
Now, with SEC modernization in particular in the North American market, what we term N-PORT and N-CEN in specific forms are required every 30 days. The ability to do that manually is no longer possible. You have really cut the timeframe in half from what you were traditionally used to doing.
Ironically enough, we sat down with one of our largest service providers just prior to the holidays, and they said if they were going all the way down to filing every 30 days, why not make it five?
So, the concept is to use these challenges as a means to do more than just meet the regulation, but to really transform the back office.
They weren't the only firm to tell us that, but it was really their beginning to look at regulatory reporting as a functional role within the organization. They really are looking at how to change their operational efficiencies as a functional role within my group.
That really said to me that there are going to be winners and losers in the adoption of this technology. The ones that embrace it early and are able to provide solutions that are much more exception-based, much more efficient and only really managing the things that they need to in order to do their job, they're going to be the winners in all of this and ultimately provide transparency that the markets demanding.
That goes well beyond the regulatory demands. But I think it is investor pressure as well. People want to know what they're holding, how it's being held and where it sits.
So I think all of those pressures - although we talk about it as regulatory pressures - are just creating a general desire by investors as well to have that transparency into the investments.
Can you speak to investor demand for the ability to have asset class convergence on a single automated platform?
One of the trends we're seeing is around digitization and really looking to be more agile in the way that firms receive and consume data.
When I talk about transparency for the investor, and really looking at the underlying investments, they want to look at how more can be done with the output if it's in a digital form.
Output can be uploaded to websites and it can be sent via electronic means in a much simpler fashion. So not only is the market contemplating the reduction of paper - and I know the SEC originally held off on adopting that rule as part of the initial modernization - but it's really looking at this concept of moving toward a better long-term position of digitalization as the larger journey.
The journey has just begun, but I think it's going to take some time. We will begin to see this shift looking at this challenge holistically.
However, the idea of being able to provide content, whether that's asset classes and the convergence of those or not, it's around fee disclosures. It's around understanding what the expenses are of a fund, it's around the understanding of what the underlying holdings are, as well as the ability to absorb that in a more digital form.
That is all obviously something we expect to see continue to be a great importance, not only in 2017, but beyond.
What's the effect of sovereign wealth and pension funds on large institutional investors?
I think large institutional investors have been looking for more consistency and transparency across the way they evaluate their investments, so I think you are going to continue to see that.
We saw a little of that in Europe with the OPERA Standards formatting, which was really around trying to create a more standard output so that evaluation of that transparency and those assets could be done in a more organized fashion.
It's hard to see the adoption because there's no need to file or indicate how many people adopted OPERA, but it's those types of initiatives that are working in that type of manner.
When considering the uniqueness of UCITS and 40-Act funds, one of the things that we're seeing is the concept of data reuse as being key.
Having a single platform that manages your regulatory technology is important for these firms that are looking for global distribution.
The reason for that is the similarity of data between these regions is very high, but there are unique differences in individual areas and components.
In order to truly be a global firm and leverage the data on a single platform is quite powerful. I think you will continue to see a real need for a single global platform, and I think that's what we're really beginning to hear from the market and will start to see in 2017.
How do these firms still turn these pressures into net income?
When I think of the banks in our space, we are talking about service providers - the larger service providers - that are actually providing new services and solutions to asset managers, maybe where they hadn't previously. So, they are looking at this as an opportunity to do more for their customers.
This is really creating an opportunity to service providers It is also being presented as a large business opportunity because these are areas where they traditionally stayed away from because they haven't been able to either service effectively or hadn't had technology in place.
With the adoption of technology, they are now going back their asset manager clients and saying, "This is something we can actually solve for in a meaningful fashion, therefore we're going to offer it up as a solution to the market."
How does this need for increased automation affect the individual firms when it comes to marrying their front, middle and back office approach for managing products?
Interestingly enough, we saw this trend last year. In our release in 2016 we actually talked about the concept of the chief data officer, and that does span the front, middle and back office.
As these demands have come about, we have seen several of our customers adopt this concept and actually hire chief data officers.
I think this is going to continue. There is a demand to look at data holistically, and it's not necessarily in the front, middle or back offices, but throughout the organization and really viewing data as an asset. I think that has been a key differentiator that we've seen.
The firms that are looking at this data, the image that they can provide to their investors, those are the firms that we see putting themselves in the right position to win.