In the eyes of many people, the investment world is a representation of the ultimate modern business. However, when it comes to adopting new technologies, investment management tends to be quite conservative.
The sector which is so dynamic and prone to fast reactions to changes on the market is extremely slow in changing its established operating methods in the wake of the digital age. This is especially evident with asset owners and many investment consultants, in the ways of managing their interactions with external investment managers.
The usual methods of performing external investment managers due diligence are outdated
Mailing lists, exchanging Word documents and Excel spreadsheets, manual data entry and analyzing non-structured information – these tools and practices for external fund managers due diligence maybe worked in the past, but for how long?
Manual manipulation of data and files always involves possible mistakes and makes the data and information flow tracking almost impossible. Data security, consistency and retrieval is questionable, and the overall length of the due diligence process excessive.
Instead of spending time and resources on collecting and organizing information, due diligence teams should focus on discovery, verification, and comparative analysis. Instead of only emphasizing quantitative information, they also need to concentrate on the screening and monitoring of qualitative information.
With hundreds of asset managers all over the world, thousands of strategies, complex market conditions, demanding sets of regulations, increased scrutiny, and the necessity to have always updated information, asset owners have to make the external investment manager due diligence much more efficient in all its aspects.
Reviewing the old systems and processes, looking for ways to optimize them should be done regularly. Digitization is definitely an aspect to be explored and adopted.
Why many asset owners and investment advisors are still stuck to the old working principles? Why has this dynamic sector been hesitant to make a change?
- Many investors and investment advisors are not aware of or don´t have up-to-date knowledge about the suitable technology options available on the market.
- The attitude “we´ve always done it this way” is often present among investors and advisors. Even though the current process is complicated or lengthy, sometimes it is difficult to admit that this usual practice is not the best possible way, and thus the change is inevitable.
- Sometimes much money and time have been spent in the development of some internal tools. Even though the usability of those tools is questionable, they often have reached their limits, the technology used to develop them is outdated, or significant resources are dedicated to their maintenance, changing this is still not an easy decision to take.
- It is also a common belief that the old systems would be difficult to upgrade. But the technology has significantly evolved in this area, and currently, many ways can facilitate such task (APIs, export/import files, mass-transfer of files, etc.).
- The worry of how fund managers would react to the change. However, the fact is, fund managers are more and more supportive for better and more efficient ways of communication. If they are not asked to share the information or interact with investors and investment advisors differently, they don´t have reason to do so.
- Many investors and consultants fear data breach and theft, especially when it comes to sharing sensitive data. Using software and hosting services which implemented the appropriate, advanced security measures is often more secure than exchanging data through emails or keeping data on internal servers.
Interestingly, according to a recent State Street’s Study, 48 percent of the respondents believe that emerging technology is a top growth enabler, which is a dramatic shift in mindset compared to the result of only 18 percent from 2017. At the same time, integrating new technology is seen as the biggest challenge among 49 percent of the survey respondents.
Why digitizing the external investment manager due diligence process is a “must-do”?
Applying technology solutions to investment manager due diligence should be the common interest of both sides “in the game” – investors and asset managers.
Reducing the due diligence time frame is one of the main benefits – for investors to select the appropriate manager faster, and for asset managers to respond promptly.
Digitizing due diligence process enables screening and monitoring of the qualitative information and facilitates scoring and final decision-making.
Avoiding mistakes that can cost time and energy is another significant benefit of the digitized due diligence.
Ability to track information and communication flow is a key for spotting crucial points at the exact time of interest, and not hours later.
At a time when information is power, information security is an extremely important issue in external investment manager due diligence. Only a quality technology solution can provide security for sensitive data exchanged during the due diligence process.
Due diligence process doesn´t end with the selection of the manager. It continues with the manager monitoring. Digitizing the process enables investors to get relevant and timely results of manager performance, and spot eventual deviations.
One more benefit of adopting technology solution and digitizing external investment manager due diligence is cost saving. Digitized due diligence is faster, more accurate, and requires less workforce (either internal or outsourced), thus bringing savings in more aspects.
In one of its researches related to the future of the asset management industry, PwC predicted that by 2020 technology and data management would become mission critical.
2020 is at the door, and if for some adopting technology is still an option, soon it will become prerequisite for performing external investment manager due diligence.