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Digitisation of the investment sector

By George Ralph, RFA – As a technologist, it’s apparent to me that the road to success lies with digitisation, but it can be hard to bring a traditional industry into the digital age. The alternative investment industry is one which is still heavily reliant on tried and tested and partially manual processes throughout the front and back office. However, I think we’ve reached a tipping point whereby not digitising, or using technology to best effect is actually harming profits, and increasing the levels of risk that a firm is exposed to. 

From a simple improving efficiency perspective, technology can enable firms to run more workloads in less time using the same storage footprint. Firms can optimise their workload’s location based on its business value, not framework or configuration and by using public or hybrid cloud services, firms can complement and extend existing physical infrastructure according to their needs. An elastic cloud service offers flexibility and cost efficiency where infrastructure is concerned and allows firms to accelerate access to data, and speed up the process of investor onboarding, decision making and compliance reporting.
Looking outside of a firm’s infrastructure, technology can even do the job of a human advisor. Robo-advisers are not uncommon and can offer lower fees, lower minimums and solid returns to investors. Many traditional firms are investigating the ways that automated advice could cut costs and improve returns, whilst not losing the human touch, which many investors still want and need.

Model based trading methods are already common, and follow trends, price cycles, price clusters and statistics, and new algorithms which use machine learning technology are emerging. They look for repeating patterns and try to fit a trading algorithm to them. They can process large data sets to find patterns, but lack the human element of interpretation and don’t make any assumptions, or take into account models or market conditions, so it can be difficult to distinguish real patterns. It is a growth area however, and one which could drive greater returns. For firms using algorithmic trading, there is a requirement under the impending MiFID II for trading firms to adopt effective testing frameworks for the algorithms they deploy to ensure that they do not create or contribute to disorderly trading conditions before being deployed in live markets. 

Blockchain is also making waves in the wider finance sector and there is scope for it to disrupt the alternative investment sector. The belief is that blockchain could lower transaction costs, increase access to capital markets globally, and enhance security throughout the whole transaction process.

Digital services are essential throughout the whole operation in an investment firm, but are particularly beneficial in the front office where firms can use retail trading platforms which provide algorithmic trading capabilities, and “copy trading” which allows less experienced investors to replicate the trades of more experienced investors.

By digitising the onboarding of clients, firms can achieve significant front-office cost savings. Enabling consumers to open accounts remotely frees staff to spend more time on tasks that cannot yet be automated, making them more productive, and helping them to generate more revenue per employee.

CRM systems are incredibly comprehensive and can be integrated into other systems so that clients are fed targeted information at the right time, in the right way. CRM systems can be maintained and secured in line with emerging data protection regulations like GDPR, to ensure continued opt in.

Most firms’ marketing teams benefit from digital services and there are new digital tools available to allow them to launch new products and to present information digitally to potential investors quickly, easily and compliantly.

When looking at equity research, firms are increasingly looking to alternative sources of data to help them make data driven decisions on investments. By buying data sets, big data analytics solutions and data insights personnel firms can capitalise on these new data sources. By using the right tools, data can be found on the web and social media channels, product reviews and search data, credit card data, commercial transaction data and data generated by sensors, such as geolocation data and IoT device sensors. If the data can be analysed it can be invaluable in evaluating public opinions, reputations, footfall and real transaction data. Alternative data is one of the most transformative new trends impacting investment research.

In the middle and back office, technology can transform the way risk is managed, and is now evolving to deliver accurate and real-time enabled information, particularly for the risk and portfolio reporting that is needed for real-time decision making. This requires capabilities to pull disparate data sets quickly and accurately from multiple sources. Robo advisors and AI driven models are also able to calculate risk profiles and provide a formulaic financial plan or investment portfolio based on that risk rating. 

Automated workflows can streamlining back office operations and automating repetitive administrative tasks and by installing robots on to systems like an ERP system for example, firms can automate repetitive tasks and ensure they are running 24 hours a day. Firms with customised workflows may also find that they are better able to meet the time critical reporting requirements of regional regulations such as AIFMD, FCA reporting, OTC clearing and reporting, Short Selling Regulation and the imminent MiFID II directive. By streamlining and automating workflows, only the data that is needed will be reported, minimising manual interventions and reducing the burden on individuals.

Hand in hand with the benefits of digitisation however, goes the need for even greater cybersecurity defences, and considering the tens of millions of transactions, trades, and sensitive data transferred every day, the cybersecurity challenges for the investment sector and wider financial services industry are immense. Reconciling cybersecurity concerns with new, innovative applications and systems can be a formidable undertaking, but one which has to be done.

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