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Paying diligence its dues: Selecting the right systems for growth
Choosing the most appropriate technologies for a business is critical for ensuring optimal performance. But how do managers ensure they select the system of best fit? Trevor Headley, Global Product Strategy & Delivery Manager at Tradar, and Ian Howard, Head of Operational Due Diligence at Mediobanca, provide guidance on the essentials.
The days when fund managers could attract investors solely on the basis of the track record of their star traders are long gone. Instead, robust operational processes and risk management are the order of the day: having demonstrated the quality of their investment performance fund managers must also prove that they can run their businesses professionally.
As part of their own due diligence process, today’s investors will spend as much time investigating internal controls and reviewing operational structure as past performance. Faced with this level of scrutiny, funds are finding it increasingly difficult to elicit the necessary levels of investor confidence without the right technology.
This partly explains the dramatic increase in the number of vendors supplying specialised technology to the fund management community over the past ten years. Fund managers now face unprecedented choice. Ongoing developments and innovation mean that buyers must focus even more effort on the selection process, to ensure that the systems procured meet current and future needs. Making the wrong selection can be a difficult and costly decision to rectify.
The importance of correct system selection is acknowledged across industries. However, nowhere is it more important than in the fast-paced world of fund management, where even minor data errors can have far-reaching consequences and fund managers must maintain multiple interfaces with prime brokers, custodians, fund administrators and a plethora of other third parties.
Quite aside from the need to demonstrate appropriate operational controls to investors, the trading function is also under the glare of the regulatory spotlight and subject to complex and conditional client mandates. The need for robust audit trails that demonstrate that the agreed processes were adhered to at all stages of the workflow has never been more critical.
Getting the technology right should be regarded as a basic, minimum requirement. However it is important to remember that technology selection is not simply about doing the bare minimum. It provides a solid foundation on which to grow the business: and thus due diligence at the selection stage pays dividends long into the future.
Internal business analysis
So, what are the steps that firms need to go through to get the right system in place? The first step is to conduct strategic analysis regarding the size, nature and future plans of the firm and its funds. A small firm with ambitions for growth has just as much reason to invest in technology as a larger, more established firm: building a fund on solid technological foundations from the outset sends positive messages about the longevity of the fund and the firm’s commitment to it.
The fund manager must also examine and clarify the strategies being traded, and establish which vendor or vendors can accommodate these. A degree of scalability within the selected platform will almost inevitably be required: the question for fund managers is how rapidly the platform should be able to scale, and in which direction. If increased volumes, different asset classes, different regions, and new users are anticipated, then a high level of flexibility and adaptability will be necessary.
Having conducted a thorough internal examination, and created an accurate portrait of its own position, a firm is then ready to look externally for potential solutions, identify a shortlist, and establish a budget for procurement, licensing, implementation and support.
The functional and operational perspective
The due diligence process now moves on to examining the available systems that are vying for placement on the short list. For both the operational and functional perspectives an in-depth demonstration to analyse these factors in practise is vital.
In terms of functionality, the points to consider for an all encompassing portfolio management solution are: whether the work flow matches or can be adapted to fit the way the firm works, whether compliance checks are conducted on a pre-trade as well as post-trade basis, and how far risk management has been incorporated into the platform.
Firms also need to look at how far the system interoperates with third parties and other service providers, and the nature of the interfaces between internal and external systems. Then there are reporting capabilities to be considered as well as the level of detail and granularity offered in the audit trail, and how far the system supports issue resolution.
Although functional considerations are important, the decision on which system to work with should be taken in respect of operational requirements and business strategy as well. Managers should avoid the trap of having their future plans proscribed by the capabilities and inherent limitations of a specified technology.
And so there are a number of operational factors to consider, not least of which is whether the system performs what is required of it. Not all firms will need a functionally rich solution: for many, a simpler system with a lighter operational footprint may be more effective.
Firms should also review whether the system mirrors current workflow when determining the benefits it offers. At the same time it is important to consider levels of competence and IT awareness among potential users: if a system is counter-intuitive or complex to operate, users will find sub-optimal shortcuts through it and produce sub-optimal outcomes as a result. If lengthy training or workflow reorganisation is required, then the system may not deliver as expected.
Finally, scalability and ease of implementation are, of course, critical. There is a momentum behind successful implementations of new systems. If that is lost to inertia and complexity then the project can drag, enthusiasm erode and the desired results may end up being compromised.
Supplier service and strategy
The concluding consideration in system selection due diligence is the supplier itself. Do they offer a level of service and support that is compatible with the nature of the system on offer? How do they respond to queries and requests? How do they prioritise their clients? Do they understand the particular concerns of smaller, alternative or boutique fund managers?
The supplier’s future strategy is equally important. What are their plans for the product itself as well as their company? If they are expanding, will service be diluted? Will certain products or service contracts be sunset? How far are they committed to developing and investing in the product? The precise questions will depend on individual circumstances, but in all cases firms should seek out references and evidence for ongoing commitment to customer service and product development.
The supplier’s future strategy is equally important. What are their plans for the product itself as well as their company? If they are expanding, will service be diluted? Will certain products or service contracts be sunset? How far are they committed to developing and investing in the product? The precise questions will depend on individual circumstances, but in all cases firms should seek out references and evidence for ongoing commitment to customer service and product development.
Ultimately, implementing a new system will involve an initial, no doubt substantial, cost and, by its very nature, some upheaval. However, in the long term it will almost certainly deliver significant benefits in terms of increased efficiency, greater risk management, improved reporting functionality and transparency, and reduced operating costs. In turn this enables fund managers to dedicate resources to delivering alpha and making the best investment decisions, rather than technology management. Accuracy, speed, visibility and control: these are the benefits of appropriate technology selection and the just rewards of thorough due diligence.
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Since 1997 Tradar has been a leading provider of technology to the asset management community.
Our specialist portfolio management and accounting software has been designed to give you greater speed, flexibility, automation and the tools you require to be truly effective.
Over ten years of listening to your needs has resulted in Insight – a new, comprehensive suite of products developed to help you work to your full potential. Put simply, it’s technology you can trust to deliver.
Our specialist portfolio management and accounting software has been designed to give you greater speed, flexibility, automation and the tools you require to be truly effective.
Over ten years of listening to your needs has resulted in Insight – a new, comprehensive suite of products developed to help you work to your full potential. Put simply, it’s technology you can trust to deliver.