EY - Front-office transformation through technology

Front-office transformation through technology

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Facing pressure from investors and regulators, asset managers are leveraging new technology to develop front-office operating models that are cost-efficient, reliable, customizable and globally scalable.

What is driving the current wave of front-office transformation? How is technology playing a role? And what are the broader implications of front-office transformation?

Six drivers of front-office transformation

Six factors are stimulating a wave of front-office transformation across the asset management industry.

Product evolution and geographic growth
Front-office systems must support the development of complex new investments, such as multi-asset funds and structured products, within a global operating model.

Cost savings
Competition and fee transparency continue to pressure revenues, while costs related to regulation and product development rise.

Harnessing data
Technology in itself is rarely a differentiator. However, when linked with high-quality data, technology is increasingly seen as a key driver of investment decisions.

As investors increasingly scrutinize returns, technology is vital to consistent, cost-effective reporting across the firm.

Risk management
Many front-office systems are an inefficient mixture of technologies (custom, off-the-shelf, spreadsheets, manual processes and so on). Standardized, robust technology can help achieve more effective governance and risk management.

Shifting decision-making
Decisions on front-office technology are now as likely to be made by business managers as by fund managers. Input from the investment division, although vital, is now only part of the picture.

Latest technology developments

Front-office restructuring is often triggered by the need to upgrade or replace existing technology. The latest systems now provide automated trade capture with minimal manual entry, real-time risk analysis and compliance capabilities.

Vendors continue to develop new features. One example is the capability to combine front-office portfolio reporting with back-office accounting data in real time to produce an investment book of record (IBOR).

An IBOR can eliminate many problems associated with an accounting-based data architecture. It also offers a central aggregation point for users to view any type of data, for any instrument, at any time.

Front-office software also now offers good scalability. This includes the capability to handle multi-location, multi-jurisdiction portfolios. Many managers have used this technology in recent years as a springboard for diversified international growth.

Hosted front-office systems

Hosted or managed front-office software is becoming more common. In our experience, most firms can benefit from implementing a consistent front-office model across markets, geographies and business units. However, larger firms naturally offer the greatest potential for consolidation.

Regardless of the firm, the hosted approach has several potential benefits:

Hosted systems reduce the need for internal administration. Changes related to market and regulatory requirements (MiFID, Dodd-Frank and so on) can be incorporated more quickly.

Hosted systems let technology specialists focus on higher-value activities that provide a competitive advantage.

Most hosted systems require lower upfront investment and licensing costs. They also offer potentially significant reductions in technology staffing.

Finally, vendors have worked hard to reassure their customers about the security of proprietary data, intellectual property and identifiable investor information. Despite natural caution over sharing this type of data with a third party, we see this as a receding issue.

The broad reach of front-office transformation

Front-office transformation can have a major impact on asset management’s entire value chain. Because activities in the investment division touch on most aspects of an asset manager’s operations, changes to technology and operating models are felt widely.

Strengthening capabilities in the investment division makes it easier to deploy enterprise-wide improvements in areas such as risk management, client reporting, product development, compliance and settlement.

Creating a successful front-office transformation

Although transformation might begin with technology, upgraded systems must be matched by changes in process, products, third parties, governance and organization. The resulting upheavals need careful management, under the same sort of monitoring and central oversight as any other business change.

A second key to success is considering the process of transformation from an enterprise-wide perspective. Scope for complementary improvements in middle and back offices must be factored in from the start.

The third key is to avoid viewing new front-office technology as a one-off event. Tight, well-drafted service level agreements are vital.

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