Centralised vs Distributed Operating Model for Investment Managers

Two target operating models in asset management

The operating model in investment management has historically varied from best-of-breed investment management systems to front-to-back. The latter has been the trend for the past decade. However, a version of the best-of-breed model has emerged, which we call a distributed operating model. A new generation of investment Management technology has enabled this shift (which we won’t dig into here, but you can follow the link to read more).

Centralised operating model

The centralised operating model is synonymous with front-to-back office systems I.e. it means having one solution that covers as much as possible of the system capabilities needed, such as:

• Front Office: portfolio management, rebalancing, and execution
• Middle Office: IBOR, reconciliation, risk management, performance attribution, and settlement
• Back Office: Accounting and administration
• Investment Data management

A vital aspect of a centralised model is that it must also cover all funds and mandates, from passive products to active and traditional assets to alternatives and digital assets.

Over the past decade, there has been a case made that asset management firms achieved a faster time to market and lower costs of their investment systems with one central investment management platform. Essentially, the pitch of the front to platform providers has been:

"focus on your core activities of investment performance and distribution while we handle the rest"

Distributed investment management target operating model

Traditional challenges have prevented asset managers from adopting cloud solutions. Thanks to cloud-native solutions, a new type of the previous best-of-breed model has emerged. Modern systems have become more efficient to operate without requiring long technical implementation periods, expensive upgrade projects and no hardware costs. In other words, it’s unclear whether running 2-5 modern systems or 1 front-to-back system with legacy technology is more cost-effective.

However, none of these modern systems has, to our knowledge and at the time of writing, had the time to build support for all asset classes and front-to-back capabilities. The narrower scope is counterbalanced by the emergence of APIs, which are more stable and cost-effective ways to connect systems and enable workflows to span multiple systems.

An interview with FISV about investment managemet operating models

Limina’s co-founder Kristoffer Fürst sat down with Erik Mostenicky from Fidelity International Strategic Ventures (FISV) to get their view of the market. Erik says that asset managers of the future will need to differentiate themselves more. They need to cater for increasingly diverse investor demands and preferences. That differentiation can only happen if it’s underpinned by a distributed operating model, i.e. a decentralised technology stack.

Interview with Erik Mostenicky of Fidelity International Strategic Ventures about decentralised vs. centralised operating model in asset management

Topics discussed with Erik

• To capture future market growth, asset managers with diverse client profiles need to address complex tech stack challenges. They need to overcome the shortcomings of legacy solutions to enable better client delivery that investors will expect in the not-so-distant future.
• A thematic approach to the asset management industry will be seen in future. That will likely be combined with highly personalised offerings to each investor, even for retail and smaller institutional investors.
• Erik believes asset managers should opt for decentralised tech stacks that consist of best-of-breed solutions with data models that interact with each other. Such an operating model will ultimately achieve a seamless data transfer and eliminate the data reconciliation challenges of the previous era of best-of-breed solutions.
• As the industry evolves, differentiation will be more than price for asset managers.
• The market is moving towards a services-led approach. Listen to the interview above to explore what Erik means by services-led and how asset managers can turn it into reality.

Erik points out in the interview that companies like Finbourne are part of the new distributed operating model. Due to their belief in this model as the future, FISV has invested in Finbourne.

Limina’s view on investment management operating models

At Limina, we believe in supporting investment managers as their business strategy evolves. We believe in a solution that fits current operating models and can help transition to a target operating model, regardless of which model that is. Such operating models include outsourcing, such as outsourced trading or middle and back office.

Limina’s Investment Management System (IMS) can fit most operating models. Here are six example operational models and how Limina could work in each of them: