Diligend - Due Diligence of External Investment Managers – Digitize or Jeopardize!

In the eyes of many people, the investment world is a representation of the ultimate modern business. Yet when it comes to adopting new technologies, investment management tends to be much more conservative.

A sector that is so dynamic and quick to act on changes in the market is extremely slow in enhancing its established operating methods through digitization. These missed opportunities are especially evident when looking at how asset owners and many investment consultants manage their interactions with external investment managers.

Traditional methods for performing external investment manager due diligence are outdated.

When analyzing and manipulating data and files manually, there is always a risk of possible mistakes, and consistent information tracking is almost impossible. Data security, consistency, and retrieval are inefficient, and the overall length of the due diligence process is arduous.

Rather than spending considerable time and resources on collecting and organizing information, shouldn’t due diligence teams focus their efforts on the discovery, verification, and analysis of managers?

With hundreds of asset managers all over the world, thousands of strategies, complex market conditions, demanding sets of regulations, increased scrutiny, and the need for constant information, fund selectors need efficient due diligence processes.

Reviewing the old systems and processes, looking for ways to optimize them should be done regularly. Digitization is definitely an aspect to be explored and adopted.

So why are so many asset owners and investment advisors still stuck with the old working principles, and why has this dynamic sector been hesitant to make a change?

• Many investors and investment advisors are not aware of or don’t have up-to-date knowledge about the suitable technology options available on the market.
• The attitude of “we’ve always done it this way” is often present among investors and advisors, even though their current processes are complicated, inefficient, and lengthy.
• Frequently, firms have spent considerable time and money on the development of these internal tools. Yet the usefulness of these tools is questionable at best, they have often reached their limits, the technology used to develop them is outdated, and significant resources are dedicated to their maintenance. Changing this is not an easy decision to take, but with a new wave of tailored solutions, the potential benefits cannot be ignored.
• It is also a common belief that the old systems would be difficult to upgrade. But technology has significantly evolved in this area, and there are many readily available solutions to deal with this task. (APIs, export/import files, mass-transfer of data, etc.).
• There are concerns regarding how fund managers may react to change. However, the fact is, fund managers are more and more supportive of more efficient communication and data transfer methods.
• Many investors and consultants fear data breach and theft, especially when it comes to sharing sensitive data. Using software and hosting services that have implemented the appropriate, advanced security measures is often more secure than exchanging data through emails or keeping data on internal servers.

Interestingly, according to a recent State Street Study, 48 percent of the respondents believe that emerging technology is a top growth enabler, which is a dramatic shift in mindset compared to the result of only 18 percent from 2017. At the same time, integrating new technology is seen as the most significant challenge among 49 percent of the survey respondents.

Why digitizing the external investment manager due diligence process is a “must-do”?

• Reducing the due diligence time frame is one of the main benefits – for investors to select the appropriate manager faster and for asset managers to respond promptly. By reducing assessment time, more opportunities can be looked at and the buy list can be increased.
• Digitizing due diligence processes enables the automatic assessment of information and facilitates detection of changes, scoring and final decision-making.
• Avoiding mistakes that can cost time and energy is another significant benefit of digitized due diligence.
• The ability to track information and communication flow is vital for spotting crucial issues at the exact time of interest, and not hours later.
• Cost saving as the process is faster, more accurate, and requires less workforce (either internal or outsourced), thus providing long-term monetary benefits.C

The due diligence process does not end with the selection of the manager. It continues with manager monitoring. Digitizing this process enables investors to get relevant and timely results of manager performance, operational risk data, and ESG considerations to spot deviations and potential risks in real-time.

Applying technology solutions to investment manager due diligence should be in the common interest of both sides “in the game” – investors and asset managers.

At a time when information is power, information security is a fundamental issue in external investment manager due diligence. Only a quality technology solution can protect sensitive data exchange.

Conclusion

In one of its researches related to the future of the asset management industry, PwC predicted that by 2020 technology and data management would become mission critical.

2020 is here and soon digitization, automation and technological solutions will become prerequisites for performing external investment manager due diligence.

If you would like to find out more about the tools that enable you to digitize your external investment manager due diligence process please contact us.