Nimbleness Required As Investment Managers Adjust Their Business Models
Attend any industry conference and you’ll hear how the “classic” mutual fund business model is changing based on growth of passive products, movement to omnibus and aggressive fee compression.
You will hear concerns about the impact of legacy technology on fund families’ ability to evolve and automate as they introduce new products and new distribution strategies.
But that’s not all you’ll hear. Those same conferences also feature outstanding examples of how long-established fund families are reinventing themselves to meet and conquer challenges to business models that may have served well for decades but no longer do.
Not surprisingly, you’ll also hear a great many buzzwords—many of which will be forgotten as fund families experiment with new ideas and discard ones that don’t work.
It is my own strong belief that when ideas flow, innovation follows—on the condition that truly outstanding people, of whom there are a great many in this industry, bring the wisdom of experience to the process of reinvention.
Imagine this very publication, the Mutual Fund Service Guide, 10 years from now. The articles will be different in their vocabulary around product types and technology. The “solutions” described will be different. Maybe even the regulatory context will be drastically different.
The one thing likely to be the same is the pace of change. Disruption is a new reality, not a phase to pass through. So, it stands to reason, fund industry leaders reading the Mutual Fund Service Guide in 10 years will have embraced that disruption. They will have abandoned what doesn’t work and taken up what does. They will be nimble.
Change is no small feat in the face of outdated workflows and burdensome technology. Fund families need to be emphasizing nimbleness in their technology so their leaders can much more quickly evaluate options, move forward and, when needed, change course.
Here are just a few areas I hear about in conversation with funds as they focus on positive change:
1. SERVING THE NEEDS OF THEIR DISTRIBUTION PARTNERS
Here, nimbleness means having ready access to the data your distribution partners need. Don’t make them hunt for their information. Rather, give them access to your data in tools they already use. Can your systems—and your vendors’ systems—easily integrate so data can flow in real time to where it needs to go?
2. MEETING CUSTOMER DEMAND FOR ALPHA
In a market saturated with “classic” mutual fund products, many mutual fund manufacturers are looking to be nimble and capitalize on business-affecting events using non-traditional mutual fund structures.
For example, they are creating and managing product structures such as opportunity zone funds, BDCs and private placements to take advantage of investing opportunities driven by investor demand and regulation changes. As they look to do so, they face questions about whether their existing technology stack will allow them to efficiently operate the new structure. If not, can in-place technology be modified, or do they purchase anew or create manual process?
In particular, fund families are facing questions about whether their legacy technology can:
• Support hybrid product and investor fee structures, and
• Automate historically manual operational processes
The bottom-line question will be how easily legacy systems adapt to the nuances of the investment, because if those systems aren’t up to the new structures, the burden of supporting differentiation always falls back on the sponsor.
3. CREATING OPERATIONAL EFFICIENCIES
Here, the great need is to keep focused on moving your business forward…by avoiding bogging down in cumbersome, error-prone processes. How do you ensure clean data? How much time does your back office spend chasing down not-in-good-order (NIGO) data because your legacy technology doesn’t support truly automated straight-through account on-boarding? By ensuring efficient workflows, you can keep your focus where it needs to be. The use of Application Programming Interfaces (APIs) to exchange data and automate upand downstream processes is paramount. Also, by using machine learning and other artificial intelligence tools, you can further automate manual processes to create efficiencies.
4. DERIVING VALUE FROM CUSTOMER DATA—SO YOU KNOW WHERE TO INNOVATE AND WHERE YOUR PROBLEMS ARE
Investment management is a highly data-intensive business. You likely have a tremendous untapped resource you can leverage to understand more about your investors—and therefore where your product and service innovations may be most likely to pay off. Unfettered access to your data, both in real time and file form, is essential to success.
These four areas of change are by no means the only major shifts underway at fund families, but they speak clearly to the need for flexible, nimble technology that can readily support new products and new workflows. As you plan what’s next for your firm’s evolution, be sure to zero in on legacy system interoperability, ease of integration and how you can best leverage one of your best resources: your own shareholder data.