Investment management industry used to be a relatively quiet haven. Until the financial storm of 2008 happened.

Since then, the industry has been changing at a pace it has never seen before: new strict regulations; shift in market environment, and emerging technology. These changes follow each other rapidly, in shorter cycles. And investment professionals need to deal with all that. ASAP.

But here’s the problem: it appears that their current operating models, core processes and software are redundant. So on top of dealing with the new market reality, they need to fix their past inefficiencies. And they better do: their ability to do so will either make or break their businesses in the next decades.

If investment managers decide to keep it the way it is today, they might get inaccurate internal records of trading and settlement activity. This would put their trading positions into uncertainty, making it hard to settle trades timely, eventually, it will become problematic to verify securities and cash held within custodians.

Why is it a problem? Because these inefficiencies – mainly deriving from such activities as reconciliation, accounting and reporting – would lead to higher operational costs. This subsequently would result into lower profits. Someone might get fired.

Therefore, the investment managers’ success will not depend solely on their investment capabilities, but also on adaptability of their service to new market realms, without getting distracted from the primary defined investment goals and profitability.

Current business landscape

It’s the general expectation that the industry will have to face massive changes in the economic and investment landscapes. Numerous opportunities are anticipated in emerging markets; and major challenges will arise in existing developed markets. Increased market volatility, aging societies (and outflow of pensions and life insurance funds) in diverse parts of the Western world will determine whether investment managers are capable to deal with these changes efficiently.

Regulatory authorities are not resting either, and they keep coming up with regulations like the Foreign Account Tax Compliance Act (FATCA), Alternative Investment Fund Managers Directive (AIFMD), European Market Infrastructure Regulation (EMIR) and Dodd-Frank Act. These policies are not helping with cutting down operational costs.

These new approaches, once applied successfully, will inevitably transform business models and strategies, (risk) policies, procedures and accounting of investment firms. They will need to become lean and agile again.

Back to the roots

To start with, investment managers have to reconsider primary investment objectives: their strategies. These newly defined strategies will be focused on absolute returns, accepting minimal risk with an extended investment horizon to deliver long-term results.

To cope with these changes on a strategic level, investment managers will have to adjust and align together their fund structures, fee models, asset allocations, valuation cycles and organisational layers.

The core operational process of an investment manager can be summed up with the ‘trade management cycle’. If it is fully automated, it would enable the investment manager to remain in full control of cash and investment positions at all times.

However, it requires up-to-date internal records of portfolio modelling, trading activity, confirmation, settlement, reconciliation, valuation, accounting, NAV calculation, reporting, performance management and risk management.

Operational processes should be aligned with new investment strategies. It will also be easier to adjust internal operations for future adjustments, because challenges are experienced market-wide, not by just one investment manager. By making use of the best IT systems and market data, investment managers will be able to improve efficiency and agility of their companies. This way, they will be able to focus on providing above-market returns to investors at a lower cost.

Market developments defy old standards

Recent market developments have a direct impact on the ‘trade management cycle’. Historically, developed structures are not able to cope with these new developments.

For example, the front-, middle- and back offices are no longer considered as being separate departments when discussing the operating model. Increasingly, order and trading staff are aware of downstream processing, avoiding trade exceptions and settlement or reconciliation failures.

World-wide initiatives for sharing best practices and setting new market standards are already being implemented. They are focused on improving and standardising industry’s operational infrastructure for investment managers and other types of financial institutions. New stable market standards are expected to improve transparency, flexibility and simplicity of operations among investment managers.

Optimising the trade management cycle

Investment managers capable of implementing an optimised, fully automated ‘trade management cycle’, supported by best market practices, will have better odds of staying in business in the long term. Despite the fact that market conditions, regulations and financial frameworks are somewhat similar, it will be a different journey for every investment manager.

Ultimately, the investment philosophy, strategies, organisational culture and a long-term vision will influence decisions taken by investment managers. In my opinion, they will be forced to pursue one of the following strategic approaches:

Collaboration with an innovative IT partner

Investment managers will investigate possibilities and solutions, which are currently not available on the market, but will lead to a significantly more efficient ‘trade management cycle’. The IT solution which will result out of it is in line with the most recent market practices and new expected protocols. This strategic approach is characterised by an intensive collaboration with an innovative software vendor which has an in-depth knowledge of specific and complex market developments.

Advantage: both parties investigate and analyse the market based on their own background perspective and specialities and synthesize their results into one solution.

Disadvantage: collaborating parties might not agree on the direction in which to develop the solution. An unclear vision may eventually lead to an inefficient operational process of the investment manager.

Innovation by internal developments

Investment managers might change the structure by establishing an in-house software developers which would have as mission to re-design and re-build the required functions into the ‘trade management cycle’.

Advantage: better control over the developers workflow, quality of the end-product and somewhat improved communication, though it might not always be the case.

Disadvantage: the in-house division need to stay in line with the current and future market developments and standards. In case of a miscalculation, the developer team will have to reverse engineer the solution that was successfully implemented by other market players.

This can lead, especially in this constantly changing and complex market, to unexpected expenses. Another challenge for this strategic approach is that operational departments should focus on their key operational objectives and not be distracted by re-defining the solutions’ business requirements.

Standardised software

A common strategic approach is the implementation of business-specific applications which support the ‘trade management cycle’, known as off-the-shelf solutions. These business solutions, often offered by well-known vendors, are specialised in a part of the operational process of the complex investment management market.

Advantage: the software vendor will follow the market developments based on their specialised experience and a wide range of clients’ requirements.

Disadvantages: a software vendor might be specialised only in a small part of the ‘trade management cycle’, and therefore cannot foresee the challenges on the complete process level. Also when discrepancies between software packages and protocols appear, specialist vendors will be reluctant to change their own structure or processing and are likely to advise other vendors to do so.


Last but not least strategic approach is the outsourcing of secondary organisational processes which allow organisation to fully focus on their primary objectives and processes.

In case of investment managers, the primary process functionalities are portfolio modelling, trading activity, confirmation, settlement, reconciliation, valuation, performance management and risk management. The supporting processes, such as transaction and security processing, NAV calculation, accounting and reporting do not directly fall into the primary processes category, and they generally don’t differentiate an investment manager from competitors.

Advantage: it could achieve operational efficiencies and reduce cost associated with technology, staff and real estate. However, whenever new instrument classes, products or services are requested, they must be enabled by the service provider without any extra implementation costs.

Disadvantage: both parties need to have a close partnership based on a mutual collaboration so potential (transition) problems could be tackled should they occur.


The past years have been turbulent for investment managers. These financial service organisations were not fully equipped to effectively respond to the highly volatile financial markets, while missing clients’ expectations on their financial performance.

Investment managers must be prepared to adapt to the structural shifts in the markets, regulations and investment landscape whilst focussing on their investment philosophy and strategies. To effectively support these primary processes, the ‘trade management cycle’ must be aligned with both current and future market standards and best market practices.

Two strategic approaches are advisable to optimise the ‘trade management cycle’. Given the prompt speed of change in environmental and technological areas, it is expected that the investment management industry will be strengthened by intensive long-term mutual collaboration with innovative software partners or outsourcing parties.

Intensive mutual collaboration would secure that both parties are committed for the long term, improving the quality of the ‘trade management cycle’. By making operational investment management processes accurate, fast and securing fully accessible financial positions, investment managers would be able to generate superior performance for its investors over the long run.

To sum up:

  • Best prepared investment management companies are those which can quickly react and adapt to the environmental, regulatory and technological developments of the next decade.
  • Well-developed investment strategies and philosophies are vital, but investment managers must also focus on optimizing their trade management cycle to deliver above-the-market returns.
  • There are two suitable strategies for the operations optimization, which implies partnering with software developers. The first one is collaboration with an up-to-date software vendor which can support the optimal trade management cycle by implementation of ‘best of breed’ software. The second option is collaboration with a specialised outsourcing partner with experience across the sector.


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