More Predictions for 2012

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Last week, Cutter and Associates offered their take on the year that passed and the one to come. We know the folks at Cutter pretty well and, while we would disagree with the “Fear” part of what they are seeing or concluding, we could not agree more with many of the points in their piece.

Data Management is no longer a back office or technology initiative – we agree with that. In fact, our firm views data management tools as an integral functionality component within our system equal to any other functional area that we automate (i.e. trading/OMS, compliance, accounting, reporting, etc.) Having data management tools embedded into core applications eliminates the inefficient “overlay” approach, in which firms seek to create a data warehouse that contains data management tools. For most investment management firms, we have seen the data warehousing approach to be a challenge to manage, not to mention expensive. The high costs for these add-on products could easily be better spent elsewhere.

Data management is also tightly integrated with risk management. Portfolio risk is certainly a key risk assessment measure within an investment management firm, but we also view operational risk as having equal importance to the investment management process. The old saying “garbage in, garbage out” applies here and if you have data management tools embedded into your core applications you mitigate the operational risk of having bad data upon which you are basing your investment decisions or performing your compliance monitoring.

In the area of performance measurement and attribution, data management plays a similarly important role. So if your firm is “picking and choosing” attribution or other analytical data from different vendors for use in client statements and presentation reports, how do you know the data is accurate? By having embedded data management tools, you can screen the data and check for accuracy prior to running any reports. Trading (i.e. OMS) and other front office functionality, including compliance, are also definitely continued areas of focus for the firms we are talking to and a number are planning on making changes to their OMS or moving different assets classes onto one platform.

One thing that Cutter didn’t discuss is the Cloud, which we see as a key technology initiative for our clients. This sentiment seems to be echoed by other industry sources (Cloud Computing Has Become a Dominant Force in Financial Services) who see the Cloud and Cloud services (also known as outsourcing) as a way to create operational efficiency while giving investment management firms the ability to rapidly increase their AUM without the traditional escalation of IT infrastructure and associated costs.

Lastly, Cutter points out that ROI is hard to measure (which may be true), however, we feel it is best measured as the firm grows. For example, we had one client tell us that they had the same number of traders at $30 Billion AUM as they did when they first deployed our integrated OMS and Back Office at $2 Billion. For us, there is no greater testament to ROI than this. As we discussed in our last blog post, every problem is an opportunity. Investment management firms that put aside their fears and instead approach the aforementioned issues with optimism and good decision making will come out ahead and outgrow their competitors.

What’s your take? Share your thoughts with us on LinkedIn.