European buy-side firms look to Automation, not Artificial Intelligence, to slash operational costs

SimCorp has announced the findings of a new WBR Insights European Buy-Side report. According to the ‘Buy-Side Operations: Cutting through Complexity’ report, asset management firms are strategically addressing operational and data challenges, to dramatically cut the cost of operations.

The report finds buy-side Heads of Operations are opting for automation and consolidation, as their top cost-saving strategies for 2018. A staggering 91% of Heads of Operations are reducing manual processes, followed by 67% consolidating systems, to bring down their firms’ cost to income ratio. Surprisingly, this leaves trending technologies like robotics (Artificial Intelligence) and cloud strategies, trailing at the bottom of the list of investment priorities. The findings offer stimulating insight into the significant pressures facing the buy side, as high operating costs and low-margins continue to bite into revenues.

Produced by WBR Insights and commissioned by SimCorp, the report surveyed 100 European Heads of Operations from buy-side firms with over EUR 20 billion in AUM, across the UK, France, Germany and the Nordics. It reveals the majority of the European buy side are dialling back from the hype around fintech innovation, with 81% of buy-side firms overhauling legacy systems, as the top strategic priority for 2018. The results confirm an overwhelming concern amongst asset managers and institutional investors over cost control. The sentiment echoes an earlier WBR Insights report published in North America, signalling an industry-wide red flag on the current status of investment operations.

Highlights from the European WBR Insights report, include the following:

Front Office Frustrations

79% of European Heads of Operations’ biggest challenge is supporting front office staff with accurate data on firm-wide limits and counterpart exposure. In comparison, the equivalent North American survey found 89% struggling with the provision of timely and accurate start of day data on positions and cash. The issues raised on both sides of the pond are symptomatic of outdated systems, causing data gaps and fragmentation. These systems, which are now unsustainable for many firms, are causing bottlenecks to alpha generation. Their negative impact is further compounded by legacy infrastructure, leaner resources and tighter budgets.

Asset Class Access Denied  

At a time where investors are demanding affordable access to non-traditional asset classes, buy-side operations are finding it a challenge to support these in a cost-effective way. In Europe, Private debt (59%) and Alternatives (51%) reigned among the most costly and challenging asset classes to manage, following similar results in North America. Most popular alternatives amongst European firms include, Private Equity, Infrastructure and Hedge Funds. The findings are particularly worrying for asset managers’ efforts to retain and attract clients amidst the allure of cheaper and transparent passive investing, when it appears their core infrastructure has limited capabilities to support such business goals.

Mixed Reactions Over Market Disruption

If the surge of regulation, technology innovation and rapid proliferation of asset classes were not enough for the buy side to deal with, a new threat from non-traditional competitors, like Amazon and Google, is emerging in the market. Though, reactions on this were mixed across the two continents. Only 36% of the European buy side are concerned about disruption from non-traditional competitors. Conversely, 73% of the North American buy side are certain that non-traditional disruption from competitors with advanced data and analytics is incoming. The difference in responses may be explained by the timing in disruption, which is likely to affect the North American financial market first. It signals the importance of establishing a centralised, automated operational foundation now. Not only to leverage market disruption but also disruptive technologies, such as machine learning, robotics and AI, which without trusted core data management are rendered ineffective.

Stephen Butcher, Senior Vice President and Managing Director, UK, Middle East and Ireland, SimCorp: “The report makes it clear that the current status quo in investment operations needs to change fast. In today’s margin-pressured environment, buy-side firms must reduce their operating costs to compete effectively. Cutting through the complexity and consolidating investment data is key to this goal. Simplifying operations in this way will not only reduce a firms’ costs and risks, but more importantly will deliver the innovation that is vital in the search for returns and competitive edge.”