The 2020 Investment Adviser Adaptation

by: Align on Feb, 12, 2021 | 0 Comments
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In this HFM Global report, John Araneo and Vinod Paul of Align discuss how an investment adviser's IT environment has become the new proving grounds to demonstrate its operational, governance, risk management and compliance controls.

  1. VP JAFor modern investment advisers, the typical challenges that must be overcome, as the price of admission to managing investor capital (for instance, raising capital, meeting regulatory compliance standards and demonstrating sound operational controls) have all experienced a change of venue, from the corporate office to the virtual network.

Think of it this way: back in the industrial economy factories, plants and physical locations were the focus, and conversely today, where we are well into the information economy and even further, the world suddenly works and functions in an entirely decentralised workforce—there are no factories, plants or physical locations to examine and assess.

Workloads are digital and workflows are virtual, automated and electronic. And so, of course, it’s the investment adviser’s IT environment where all of the metrics of success—operational, compliance and risk management controls—now reside. Recognizing this reality, we posit that for investment advisers, whether start-up, emerging or mature, the determination of architecting, designing and managing its IT environment is indeed a pivotal, if not existential, decision and one that will have meaningful and direct ramifications at every stage of the firm’s lifecycle.

The new reality

How times have changed. As the investment management industry—and indeed, the rest of the world— scrambles to adjust to the abrupt shift from a centralised workforce to a fully decentralised or distributed workforce, the various challenges an investment adviser faces in demonstrating that it has adopted sound operational practices, an effective compliance programme and appropriate risk management controls have been similarly upended. In the pre-pandemic world, the focus of these operational due diligence (ODD) reviews, regulatory inquires and examinations and risk management assessments (each of which constitutes its own unique exercise, viscerally different from the others), all contemplated a shared common denominator, to wit, essentially the controls being evaluated all cantered around a ‘hive’ or ‘mothership’. Indeed, the centralised workforce was thematic for each of these evaluations. But now... not so much.

And so for an investment adviser to now be able to demonstrate that these operational, compliance and risk management controls are alive and well within its organisation, without the options of receiving boots on the ground, or hosting in-office interviews or even allowing third-party examiners and assessors to ‘camp out’ in Board Room 2, the new reality suddenly becomes obvious: these controls live and breathe within the investment adviser’s underlying IT environment.

All of this, as discussed further below, portends one inescapable conclusion: the decisions regarding an investment adviser’s IT environment is arguably the most important foundational determination an investment adviser can make as it will impact the investment adviser at every stage in its lifecycle.

Other pre-existing trends have long relied on an appropriate IT environment

Certainly, the post-pandemic reality of a fully distributed workforce serves well to highlight the importance of an investment adviser’s underlying IT environment; as the firm’s business makes the mass exodus from the boardroom table to its employees’ kitchen table(s), it’s the firm’s network that connects the employees, hosts the workloads and facilities collaborative workflows. In this setting, it’s easier to recognise the importance of the investment adviser’s IT environment. However, the truth is that even before the pandemic, the significance and meaningful impact that an investment adviser’s IT environment has on its operational, compliance and risk management posture was evident. Over the years, numerous trends have pushed investment advisers to rely more and more on their IT environment in meeting these various standards, whether they knew it or not. Examples abound.

Embrace of the public cloud

The public cloud has long surpassed the tipping point and is universally accepted as the most powerful, effective and secure construct from which IT environments can be designed, developed and implemented. The public cloud is indeed a game-changer for many businesses and investment advisers have been quick to discover how the public cloud can be employed to deliver unprecedented levels of computing, operational efficiency, transparency and collaboration at predictable and efficient price points.

Regulatory compliance

The regulatory landscape is demanding and constantly changing, with one constant: records, records, records. In the age of virtual communication (emails, text messages, zoom meetings), electronic transactions, e-signatures and electronic workloads and data flows, the underlying IT environment will dictate how to maintain compliance.

Automation

As Alpha is the endgame for every investment adviser, the quest to automate business processes is never-ending. Business automation is also a key differentiator for investment advisers looking to differentiate themself from the some estimated 15,000 other investment advisers they are competing against. Use of big data in an investment adviser’s investment programme and utilisation of artificial intelligence (AI) are booming trends that are still nascent. The push for increased automation, use of big data and AI, all, of course, draw investment adviser’s deeper into the digital ether, concomitantly increasing the importance of the underlying IT environment.

Operational due diligence

Post-Madoff, the level of scrutiny and exhaustive review of an investment adviser’s operational controls as well as the heightened expectations of operational efficiencies has reached an all-time highwater mark. Portfolio risk management, transparency and access to real-time quality data are all necessary to illustrate these controls and all require a well-functioning, effective IT environment that can draw from numerous data pools and integrate disparate work flows simultaneously.

Cybersecurity preparedness

Maintaining a secure environment is a must-have in virtually every context, whether from a compliance, reputational, ODD or legal perspective. And while cybersecurity is fundamentally a multi-factorial challenge that requires numerous layers of security that are both technological and non-technological—a modern, sophisticated IT environment will deliver a rich litany of technological security controls that are both baked in and ongoing.

Determining the optimal IT environment will impact an investment adviser’s business throughout its lifecycle

Investment advisers in the modern world are largely coming to terms with the significant impact that its underlying IT environment will have on every aspect of its business. The IT environment provides the construct from which an investment adviser’s operational, compliance and risk management controls will all be fashioned. As the public cloud continues to deliver unprecedented optionality, efficiency and predictability, existential decisions will hinge on how investment advisers conceive, design, manage and invest in their respective IT environments.

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Tags: Managed Services, Compliance, Financial Services