Ever since the onset of the coronavirus led pandemic, the term “unprecedented” has become so common in our daily conversations, that in the After Covid-19 (AC) world order, “unprecedented” may sound like a new normal and most people will learn to live with it.
Likewise, in the post GFC era, margin compression driven by the rise of passive funds, and cost pressures driven by rising regulatory demands and data acquisition has become such a secular trend in the buy-side industry that asset managers have to make peace with it. These factors have turned investment management into a scale business, particularly in the listed assets space. The idea of managing significantly larger and more diverse asset pools with less resources and more computing power to achieve higher operational alpha seems to be a key survival mantra. This thought process has caused a major consolidation wave in the money management business and has also pushed the fintech vendor community serving these buy-side clients to accelerate the expansion of their functional offering. M&A deals like Invesco-Oppenheimer, Janus-Henderson, Standard Life-Aberdeen, Franklin Templeton-Legg Mason etc. in the past belong to the former category while Bloomberg-Barclays POINT, FactSet-Vermilion, SS&C-Advent, FactSet-BISAM, Confluence-StatPro etc. are deals which belong to the latter category. From the buy-side technology space, some of the marquee transactions closed in the last five years have been highlighted in exhibit 1 below.
In 2018, a separate wave was triggered with State Street’s acquisition of Charles River Development (CRD). Unlike the first couple of transformational waves which were primarily based on horizontal integration model, the third wave was driven by vertical integration objectives. This time, the M&A deals and strategic alliances were more focused around building open architecture, bringing interoperability between systems and integrating all key front, middle and back office functions in one system.
So, what’s the big deal about front-to-back office integration?
To understand the fuss and noise about the front, middle and back office system integration, it is imperative to first understand the incumbent state of affairs at buy-side firms. Many asset managers currently follow a best-of-breed system design in their front, middle and back office departments. Under this model, they engage multiple platforms and service providers for investment research, accounting, order and execution management, reconciliation, data management, performance, compliance, risk management and client reporting needs. These systems have to be aligned well within their enterprise architecture in order to support the client’s operating model. They also must rely on various excel spreadsheets to address any known gaps in the solution design and to respond to bespoke business requirements which are time sensitive in nature. Some popular best-of-breed choices has been highlighted in exhibit 2 below.
We know that each individual system entails license cost, implementation cost or professional services fee, and hosting cost. Clients have to grapple with vendor’s upgrade cycles and occasionally this may involve change management cost and efforts. Besides, they also need skilled in-house resources to support the BAU processes and the orchestration of data inflows and outflows in those systems. As the number of systems and data sources keep increasing for investment operations, the flow of data between these specialist systems tend to become convoluted and may demand manual intervention in order to support the client’s critical BAU processes. For certifying the quality of data in each system, datasets have to be validated at multiple stages of the workflow like the ETL step, data readiness step & post-calculation step, and data delivery delay in one system can have a domino impact on other downstream systems.
Sometimes a patchwork of disparate best-of-breed systems can also act as technical barriers for creating a top-level whole fund view of asset allocation and risk exposure for CIOs and Investment Heads. The best-of-breed system architecture can also spiral out of control for asset managers who have a legacy of inorganic growth. When clients end up with overlapping system functionalities, it often leads them to multiple sources of truth within their core datasets. In the past, we have seen that having multiple sources of truth doesn’t just build redundancies to an asset manager’s target operating model, but also adds direct cost with same datasets being acquired at multiple stages of their investment life cycle. No doubt, the best-of-breed system design offers an immersive user experience and tight control over business processes to clients, but it comes with those above-mentioned overheads.
Now imagine if some of these pains could be alleviated with one system consolidation.
An integrated front-to-back office connectivity for asset managers and asset owners can improve the Straight-through-Processing (STP) rates significantly, starting from trade order placement to client reporting. For investment managers, the rise in STP rates will result in operational cost savings and facilitate greater agility and speed to market. System consolidation also improves data transparency and data lineage across an asset manager’s enterprise architecture and helps in reducing operational risk.
An all-in-one front-to-back office system can improve an asset manager’s investment decision-making process with a single source of truth. It also offers the front office team an accurate and real-time view of cash, which improves the effectiveness of their daily portfolio management work. Besides, clients have to manage fewer vendor relationships instead of many.
So, who is best positioned to offer these integrated capabilities?
At the moment, the race to build a comprehensive single front-to-back office solution is still on and being championed by various vendors, but the big three Portfolio Management System (PMS) vendors have gained more media traction than others.
- State Street’s Alpha: The combination of State Street and Charles River Development (CRD) is building a cutting-edge global interoperable platform connecting the front, middle and back office with one provider. Their new platform, Alpha helps asset managers connect their choice of data providers and services to drive real-time business intelligence across the investment lifecycle to help their Portfolio Managers make effective decisions and deliver superior performance for their clients.
In essence, Alpha is trying to leverage the front-office capabilities of CRD like Portfolio Modelling, Order & Execution Management, Post-trade Compliance, Investment Risk, Investment Book of Record (IBOR), Data Management etc. and integrate it with State Street’s legacy back and middle office offerings like Custody, Fund Accounting & Administration, Performance Measurement Attribution & Risk solutions. They want to offer a comprehensive servicing platform across the investment life cycle to buy-side clients. Through Alpha’s interoperable framework, clients should be able to integrate and align their preferred systems, data sources and technology infrastructure.
- Blackrock’s Aladdin: Aladdin was natively a risk management system which eventually expanded to all aspects of asset management functions like order and execution management, accounting, collateral management, compliance, performance etc. Its influence has surged since the GFC. Today, it acts as the central nervous system for many of the largest players in the investment management industry including Blackrock’s archrival Vanguard.
In its efforts to build a comprehensive front-to-back office system serving both listed and unlisted assets seamlessly, Blackrock Solutions (BRS) has been leading the integration efforts on two fronts. It acquired eFront to uplift its functional OMS and EMS capabilities for Alternatives and it has also formed key alliances with leading custodian banks to harmonise its data offering for common clients on the Aladdin platform. It has struck three strategic but non-exclusive alliances with three big global custodians like BNY Mellon, BNP Paribas and Northern Trust in the last couple of years. Through these partnerships, BRS is trying to optimise the custodian-asset owner and custodian-asset manager relationships by removing inefficiencies from the data management layers.
Historically, many buy-side firms have faced data reconciliation challenges between custodian and their proprietary datasets. The alliance helps custodian banks to offer their fund accounting, fund administration, asset servicing, and middle office capabilities via Blackrock’s Aladdin platform, with Aladdin creating greater connectivity between asset managers and asset servicers. By forging non-exclusive alliances with the custody service providers and offering their datasets via Aladdin platform, BRS is also making Aladdin clients agnostic to custodian banks in a limited way. Northern Trust has a similar integration alliance with another OMS vendor i.e. Bloomberg AIM. At this juncture, both parties are familiar with each other’s game plan and are willing to work together with a shared roadmap.
However, we should bear in mind that systems built on different programming language, data models and architectures are not so easy to integrate. It usually takes at least a couple of years’ worth of effort to integrate the key pieces together. In the case of both BRS Aladdin and State Street’s Alpha, their integrated platforms are already serving many clients while under the hood, they are trying to streamline a firm handshake of all acquired components.
- SimCorp Dimension: SimCorp is one of the oldest solution providers in the buy-side business, their flagship product, SimCorp Dimension (SCD) was probably one of the first front to back integrated investment management systems. Although back then, “front-to-back office integration” as a buzzword was ahead of its time. SCD’s sweet-spot lies in its Investment Book of Records (IBOR) technology which extends from front-to-back office across asset classes.
While SCD can be offered as one complete solution, clients can also cherry-pick some modules like Order Manager, Compliance Manager, Data Warehouse Manager etc. together to make the overall implementation effort less taxing in a single phase. Sometimes the module selection choice can also align well with client’s existing best-of-breed system architecture. The modular choice also improves the affordability of the platform to a broad range of clients. This key modular functionality is a result of single database design. This kind of architectural design has been consciously driven by less focus on inorganic growth, a strategy that its parent company had pursued over the years, which makes it quite different from other vendors.
SCD offers deep technical integration, diverse functionality and ease of use in running data operations for asset managers and asset owners. With a single database design, clients can achieve huge gains in their straight-through processing (STP) rates for post-trade activities like settlements, corporate actions and compliance processing.
How are other vendors responding to this challenge?
There are more vendors in the market who are building similar integration capabilities. Last month, Bloomberg announced a front-to-back office collaboration with J.P. Morgan via its AIM OMS platform. SS&C has been building its proprietary front-to-back office integration capabilities. They are trying to bundle their core accounting and OMS platforms via Advent and Eze. Both Advent and Eze were acquired by SS&C Technologies in 2015 and 2018 respectively. Their efforts have gained a lot of traction amongst their Hedge Funds clientele. Likewise, FactSet which is famous for its award-winning suite of applications for Performance Measurement, Attribution and Risk, Client Reporting and Market Data, is building its next-generation Portfolio Lifecycle Solution (PLS) by closely integrating its OMS, EMS, Market Data, Portfolio & Risk Analytics, Regulatory Compliance and Client Reporting solutions. Through PLS, FactSet is trying to offer an end to end, flexible and modular enterprise data solution to bring economies of scale for buy-side firms.
Some unanswered questions at this stage
Barring SimCorp, other PMS vendor are still marching through their integration roadmaps. This leads us to some open questions.
- Will the big fintech vendors pursue a full-scale integration path with data model, system architecture and platform standardisation or confine their integration approach to interfaces and API linking while leaving native architecture untouched, or will they take a hybrid approach?
- Will these vendors be able to deliver real-time single source of truth investment data to front office teams as promised at a reasonable cost?
- Will the big PMS platforms begin to resemble an Android or iPhone type of investment ecosystems in the next five years?
- Will Aladdin expand its alliances with custodian banks beyond BNY Mellon, BNP Paribas and Northern Trust?
At this stage, we may not have all the answers. But we know that the overall future-state is going to look quite interesting.
What we think?
While an all-in-one package to support front, middle and back-office processes offers various advantages in terms of a simplified technology infrastructure, data transparency, reduced operational risk and bottom-line improvement, it must not come at the expense of core functional limitations. Some asset managers have highly customised calculation, entity aggregation and client reporting requirements which can only be fulfilled by specialist systems. Some clients have complex legacy enterprise architecture supported by smart and reliable techno-functional resources who have to cater to transcontinental portfolio management and trading desks. These clients may still be served better with best-of-breed systems. Nevertheless, asset managers and asset owners should have a fundamental understanding of their target operating model (TOM) and their selection of system vendors should be tightly driven by their TOM design.
Also, front-to-back office system integration should not be construed as a panacea to all types of business process related ailments of buy-side firms. When the initial dialogue between a vendor and buy-side client begins with what the vendor can offer rather than the other way around, it often leads the client to a tangential path to project failure. To take the best foot forward for any technology transformation initiative, clients should have a well-defined data integration strategy and data governance policy in place. They should know what they need from a solution before engaging the vendor.
How Shoreline can help?
Our subject matter expertise in front, middle and back office target operating model design combined with our deep understanding of fintech vendor’s offerings in the buy-side industry allows us to set you up for success in your front-to-back office system selection and integration journey. With our unparalleled knowledge of asset management operating models, system architecture, technology landscape, data service providers and program management, we have assisted many asset managers and asset owners in developing fit-for-purpose operating models to achieve industry best practice in the APAC region.