Necessity is the mother of invention, and our volatile times make it especially necessary to improve operational efficiency, compliance processes, insights through analytics, and boost business development through improved customer propositions and service. Volatility catalyses investments in tech solutions and galvanises the opportunity for fintechs to help. With the more agile nature of the Buyside enabling easier adoption of innovative solutions and the evolution of innovation within the sector, now may be the time for rapid growth in partnerships between the Buyside and start-ups.
The tech journey
The Sellside has led on tech innovation, with its bigger balance sheets and larger budgets to fund internal teams and build in-house tools. The initial strategy was ‘build not buy’ due to the vendor pool being limited as they needed to be established and have a proven record of revenue. Only larger companies like Sunguard, Smartstream, IBM, HS Markit, and Fidessa were in the market.
In-house tools were often built on old technology which over time required patches to make them safe in the short term but posed potential issues in the longer term. After years of building, the ghosts of now-defunct applications are strewn throughout financial services organisations.
Over time, due diligence and procurement rationale was adapted to allow smaller companies to compete for business. Banks began creating their own innovation hubs to help them discover new tech applications, and strategic venture arms were formed to enable them to benefit from reduced risk, input on product development and interoperability, and have skin in the game to realise potentially huge upsides from their investments.
The Buyside situation
The Buyside has had a different profile and approach, with its tighter margins and greater competition constraining investment in new technologies. With the notable exceptions of giants like Fidelity, Aviva, and SEI, and those that are divisions of larger banks such as HSBC AM and JPM AM, Buyside firms do not have strategic investment arms. Similarly, there are a few outliers that have built their own tech and even sold it to their competitors, as with Blackrock and Aladdin.
The annual TradeTech conference is also a testament to the growth in interest in innovative tech from the Buyside. On the collaborative front, the Investment Association’s own IAEngine innovation hub, launched in 2018, shows recognition of the need to identify, nurture and adopt tech solutions, and the benefits of this strategy, for the Buyside.
As Gillian Painter, Head of Membership and Engine, The Investment Association, describes, “Engine was created to fuel the adoption of technology within investment management for the benefit and changing needs of our clients. We work with more than 150 FinTech firms and help them to raise awareness of their innovative solutions and work collaboratively with the industry. Cultural and societal changes require our sector, now more than ever, to think differently and innovatively. By working with solution providers, we can create efficiencies, reduce costs, and capitalise on opportunities.”
So, the current backdrop is an industry under pressure. Managers are contending with the cost of business, increased regulatory and compliance demands, the active vs passive debate, and the desire for enhanced yields. Customers also add to the squeeze as all margins are being hit. As the sector grapples with the fallout from the pandemic and the war in Ukraine, it is arguably the larger players on the Buyside and the smaller niche, bespoke boutique firms will be able to weather the storm of volatility more easily with their greater resources or more targeted offerings.
For a large number of firms in the middle, developing digital platform strategies that provide seamless, reduced-friction, real-time product offerings, and smooth operational and compliance processes through automation and simplification will be all the more important. For those who haven’t diversified into new markets and geographically or invested seriously in tech and data resources, it can have a huge bearing in terms of performance. With today’s endemic stress, if the industry does not self-disrupt it will be disrupted.
The landscape of the future
Technology will have a profound impact on all aspects of the Buyside, from trading and execution to operations and distribution. The shifting sands of the present have already led to diversification from liquid to illiquid assets such as RE and PE, with more change to come with the democratisation of private assets and their accompanying complexities around value and requirements for transactional information and modelling.
Adopting new technologies also brings new aspects of governance, risk management, security, and partner management that arise from the modernisation of operations, but innovative solutions worth their salt will address these in their offerings.
Buyside, and Sellside, players are at different stages of their journeys. Some have been active, some nibbling at the edges, and some coming late to invest properly. But there is an increasing recognition on all sides that it’s how you spend it, not just how much. Firms can’t do all things themselves. There is a line between proprietary tech that delivers a ‘secret sauce’, that competitive edge, and operational tech that can be bought to streamline processes and lower costs. This is where start-ups really come into their own and can add great value to Buyside operations.
With Buyside’s tighter margins and smaller budgets, efficient deployment of investments in innovation has always been more essential, and partnerships with start-up innovators are less costly, risky, and lengthy than building. While Buyside outfits don’t have bank balance sheets, they are nimbler with less bureaucracy and levels of approval making it easier to adopt new tech.
With the Sellside trend of repositioning their strategic venture arms in their asset management divisions, they are evolving into investing in and owning the technology that others are building in order to make them operate better and become more competitive. Whether the Buyside begins to identify early-stage start-ups that are strategically important to their operations to gain first-mover advantage plus significant potential upside remains to be seen.
What is clear, though, is that innovation and digitisation are vital in an increasingly competitive environment to ensure maximum efficiency, and competitive advantage through lower fees and reduced reputational risk, and to enable firms to target clients more accurately by leveraging data sources. The time is ripe for the Buyside and FinTechs.
About the author: Steve Pomfret is CEO of Cygnetise. Cygnetise applies blockchain technology to revolutionise the process of Authorised Signatory Management (ASM). The Cygnetise solution solves the pain of ASM by enabling operations and finance departments to digitally manage and share authorised signatories in real time, reducing risk, cutting costs, and making the process more efficient, transparent, and secure.