The fund industry is a poster child for digital transformation. The industry is characterised by easy-to-follow processes and a high degree of automation. With just a few clicks, investors and auditors can interact with fund managers seamlessly.
Sounds exciting. The reality though is quite different.
Digital Transformation
Processes are slow, inefficient and bureaucratic. Onerous regulation is often cited as the reason for the status quo. Yet, other heavily regulated industries, such as aviation seem to excel in digital transformation. Ryanair’s app is fantastic.
Before any digital transformation can begin, you must have a firm grasp of all the data related to the services that you are providing. A golden source. This is a real challenge in an industry characterised by extensive outsourcing and many intermediaries. Yet, these challenges can be overcome.
You cannot excel with Excel.
Excel vs APIs
Excel is the main tool being used to manage data in the industry, a fantastic tool, but extremely poor at aggregating and delivering data. The best way of building a golden source for data aggregation and dissemination purposes is through APIs connected to your delegates, service providers and investors.
You can imagine an API as an efficient way for databases to communicate with each other.
Challenges
Digital transformation is not a new concept, so why has it not been done?
Profitability
The fund industry is extremely profitable. High fees along with enormous economies of scale mean that most fund managers enjoy an extremely low cost to income ratio. This scenario leaves little to no incentive to innovate. If it is not broken, why fix it? Why transform digitally?
Modus Operandi
Onerous regulations and high profit margins have led to extensive outsourcing and delegation across the whole industry. The industry is characterized by thousands of players, hundreds of jurisdictions and millions of investors. This complexity makes digital transformation projects challenging.
Literacy
The level of digital literacy is low amongst fund professionals, this has negative effects, such as high levels of anxiety when working on digital transformation projects but also a tendency to ‘’play it safe’’ by inadequately selecting big name software providers. A recipe for disaster.
Ultimately though:
“Change happens when the pain of staying the same is too great to bear.” Anonymous.
The fund industry has not yet reached this point!
The challenges of performing a digital transformation are not technological. They are all related to an industry’s capacity and appetite for change. The most likely catalyst for this change will be a drop in profitability in the industry. Until then, Excel and inefficiency will remain king.
Gregory Kennedy is a columnist for Investment Officer Luxembourg. His columns appear on Wednesdays. He works as business development manager at Finsoft Luxembourg.
Related articles on Investment Officer Luxembourg:
- Disruptive innovation: the iPhone as game changer for investors
- Decalia’s Vettasseri: Paradigm shift requires innovation
- GP Bullhound sees 2023 as ‘great vintage’ for tech