Getting a better handle on investment performance through the cloud

Setting a stage for the performance: how wealth managers can achieve business advantage through cloud-based performance software.

With increasing client concern over investment strategy and rising levels of due diligence, wealth managers need to be continually monitoring performance at client, portfolio and even holding level. Yet the cost of traditional installed performance and attribution applications for many small and medium-sized firms is prohibitively expensive, running into hundreds of thousands of pounds for implementation costs alone. With cloud-based systems, there is now a cost effective method for providing this assurance to investors, writes Mick Brant, MD of Teknometry.

Responding to more demanding investors
The problem for investors is that there is no accepted standard for performance reporting among wealth managers and some firms have been getting away with the bare minimum for a long time. The financial crisis changed all of that forever and clients are now becoming far more demanding in terms of their understanding of their portfolios’ performance and risk. Some commentators suggest that investors are demanding real-time mobile apps and while I am sure that this is true for a small proportion, I am not convinced that this need is commonplace.

What I am certain of, however, is that investors are asking for more detail on how their portfolio is performing, where that performance has come from (‘attribution’) and how the risk is being managed. This is particularly the case in the UHNW market, where the managers have discretionary portfolios, as opposed to the high-end IFA that only has a small number of holdings in several unitised vehicles.

Cloud providing an opportunity for smaller firms
Despite this growing need for detailed performance figures, cost is still a major factor for wealth managers when it comes to IT spend. For a firm managing five hundred portfolios, requiring full performance and attribution functionality (particularly where that functionality requires multiple attribution models), the COO could be looking hundreds of thousand pounds in licence fees alone. In addition, there can be significant upfront implementation costs and ongoing operational running costs.

On the other hand, cloud technology enables the wealth manager access to this capability on a service, pay-as-you-go, per portfolio basis, where the annual charge for a portfolio is as low as a few hundred pounds. Many wealth managers currently pay that amount for a WebEx facility without a second thought.

The cost of cloud-based performance solutions is service and volume based, so adding more users may not increase the running cost – creating an opportunity to provide wider internal, or even external, access to performance analysis tools, dashboards and reports.

Improving the monitoring of investment strategies
Forward-thinking wealth managers are also deriving other business benefits from cloud-based performance systems. One such advantage is the ability to enable the front office to see the impact that their transactions have had on performance, using the same tools across the front to back office by providing different views of the portfolios they manage.

The front office requirement is different to client reporting: whereas client reporting is more concerned with periodic, investment book of records (IBOR) style of analysis, the front office wants to know if a particular investment strategy is working – almost in real-time, not just at the end of the reporting period. If the firm can supply the trading data in a timely fashion then the front office can have access to performance and risk analysis based on portfolios, strategies or indeed any other breakdown. Any concerns about performance information being based on unreconciled accounting and trading data can be mitigated by using query tools that can distinguish between this data and locked data.

The net result is that the portfolio manager can keep tabs on how his strategy is delivering, without having to wait weeks for reporting information or maintaining their own book in spreadsheets.

Operational risk that you can now afford to avoid
Smaller wealth managers that don’t have the budget to spend significant sums on a performance system often have relatively small holdings and limited numbers of portfolios. These firms may argue that they can handle the performance measurement function themselves, through the manual manipulation of a multitude of spreadsheets or internally developed applications. The problem with this theory is that there is a significant cost of maintenance. When even a relatively minor change is made, that change has to cascade through multiple spreadsheets or applications – taking valuable time and increasing the likelihood of human error.

Another consideration for wealth managers is the operational risk associated with having one or two individuals that know the spreadsheets and applications. Staff leaving can result in the firm having a mission critical application grinding to a halt. Now, when you compare those risks against a high-end installed platform, it is easier to convince yourself that those risks are worth bearing. When you compare it to a low cost, constantly updated, secure piece of technology with multiple users that is being constantly developed and maintained, it’s a risk that is harder to justify.

Setting the scene
Offering timely, detailed information to investors; improving the monitoring of investment strategies; and the reduction of operational risk provides cloud-based performance measurement systems with a compelling business case, one that is attracting the attention of large established wealth managers and small boutiques alike. The stage is set for those firms looking for a new source of competitive advantage.

The above article first appeared in WealthBriefing on 15th August 2013