As risk management processes become increasingly challenging, with asset managers caught in a pincer movement between greater regulatory burdens and more complex client demands, a well-run managed service solution can help investment firms meet the institutional standards of today’s allocators, according to a new white paper published by Landytech.
As risk management processes become increasingly challenging, with asset managers caught in a pincer movement between greater regulatory burdens and more complex client demands, a well-run managed service solution can help investment firms meet the institutional standards of today’s allocators, according to a new white paper published by Landytech.
The paper, ‘The True Cost of Risk for Asset Managers’, explores how asset managers’ due diligence and risk management processes face ever-greater scrutiny from investors and consultants, particularly in light of the Covid-19 pandemic, increased ESG focus, and a greater potential for future market dislocations.
Landytech – which provides customisable risk and performance analytics and reporting services to asset managers, family offices and fiduciaries – probes the assortment of risk management challenges confronting the investment management industry today, and maps out how an advanced service provider solution can help firms avoid the sizable burdens on cost and resources associated with developing in-house processes that can often fall short of client demands.
Although a strong risk management function is now considered a core component to asset management businesses following the 2008 global financial crisis, Landytech noted how many cost-constrained smaller fund managers still launch with “barebones” risk functions. Too often, these tend to lean on portfolio management systems and fund administrators to produce what Landytech called “rudimentary risk calculations and reporting”, built around Bloomberg-derived formulas and Excel spreadsheets to meet clients’ diverse reporting requirements.
“For today’s risk-conscious investor, this kind of non-dedicated, manually-oriented set up won’t pass muster,” the paper observed, noting how “standards are rising” and managers will struggle to attract capital in the absence of an institutional-grade risk management capability.
Delving deeper into investors’ and consultants’ requirements, the paper pointed to the need for a wide range of analytics capabilities – spanning portfolio sensitivities, scenarios, stress testing, risk contributions and liquidity – while transparency and timeliness, among other things, remain crucial.
It also noted how separately-managed accounts (SMAs) – a structure increasingly employed to attract institutional investor money – bring even greater reporting demands, owing to their bespoke nature. At the same time, regulatory burdens for wealth managers continue to stack up: the EU’s Sustainable Finance Disclosure Regulation, which took effect in March, requires firms to provide greater transparency on sustainability risks and investments. This comes on top of new European Securities and Markets Authority (ESMA) guidelines on liquidity stress testing, as well as extensive existing reporting rules for UCITS, AIFMD, MiFID, DTCC reconciliation under EMIR, among others.
The white paper also considered the costs of developing and implementing in-house risk functions.
“Without the right mix of human expertise, technology and data, the potential for calculation and reporting errors and delays is enormous,” Landytech said. “Such failures bring costs, and operational and reputational risks. Sub-standard processes have an opportunity cost as well in the lost allocations from investors that opt not to invest with the firm.”
It added: “Asset managers’ core emphasis should be on revenue-enhancing activities such as investment research, capital raising and investor relations. By directing resources to the mechanics of risk reporting and away from searching for new investment opportunities, implementing trades, monitoring investments and servicing investors, performance may suffer.”
Against that backdrop, Landytech believes a well-run managed service solution can help ease the costs and headaches of building an institutional-grade risk-analysis and reporting set-up – which grows ever-more complex each year – allowing managers to instead focus on those activities where they can add most value.
“A managed solution partner offers multiple benefits to asset and wealth managers. Quality and efficiency are essential though – and not all providers offer the same level of service,” it said.
“Proven quant risk expertise is vital. The provider needs a strong risk background and to show it has delivered results at scale. Risk experience must be accompanied by in-depth knowledge of the industry consultants, investors and their demands, to ensure the provider understands the best standard requirements and has the ability to meet them.”
Specifically, such a service provider can offer flexibility in portfolio modelling scenarios, as well as the automation of data feeds, high-quality and timely risk and performance analytics, robust cybersecurity protections and security protocols, and consolidation and cleansing of data, all within a flexible cost structure tailored towards specific manager size and requirements.
“A strong technology platform able to process huge amounts of data is another must-have,” Landytech said. “Open architecture connectivity will allow the platform to establish links and take in data from any relevant third-party sources – something most portfolio management systems struggle to do.
“One of the advantages of a managed solution is that the software and service are embedded together, so investment managers don’t need to deal with a risk system vendor. But because the end-to-end risk capability is integrated, it is imperative the managed solution provider can look after every client and give them high-quality, responsive support.”
Acknowledging the volume and complexity of regulatory reporting, Landytech suggested an automated and templated managed solution can accelerate the processing and filing, deliver the necessary quality and granularity and save time and cost for the asset manager.
“The right provider will have made the investments in a proven infrastructure, have the requisite risk and technology skillsets, and can deliver timely, high-quality results that meet the institutional standards of today’s allocators,” the paper added.
“Our simple onboarding process, automated data sourcing, expert modelling capabilities and high-quality reporting deliver the risk outputs today’s investment managers need without any of the strain.”
To download the white paper, click here.
