Wealth managers can use cloud computing systems in their quest to help clients check performance more quickly and efficiently, this article argues.

Cloud-based computing
is the practice of using a network of remote servers hosted on the internet to
store, manage, and process data, instead of using a local server. The cost and
flexibility of this approach continues to attract admirers – but also
controversy, given concerns about privacy and security. At Teknometry, an
investment-performance analysis firm, it examines how wealth managers can get
an edge through the use of cloud-based performance software. The views of this
article are those of the author and his firm and not necessarily endorsed by
the editors of this website, although we are pleased to share these insights
and welcome readers to respond. The article is by Mick Brant, managing director
of Teknometry. This firm is based in the UK but its insights have global relevance.

With increasing client concern over investment strategy and
rising levels of due diligence, wealth managers need to be continually
monitoring performance at client, portfolio and even holding level.

Yet the cost of traditional installed performance and
attribution applications for many small and medium-sized firms is prohibitively
expensive, running into hundreds of thousands of pounds for implementation
costs alone. With cloud-based systems, there is now a cost effective method for
providing this assurance to investors.

Demands

The problem for investors is that there is no accepted
standard for performance reporting among wealth managers and some firms have
been getting away with the bare minimum for a long time. The financial crisis
changed all of that forever and clients are now becoming far more demanding in
terms of their understanding of their portfolios’ performance and risk. Some
commentators suggest investors are demanding real-time mobile apps and while I
am sure that this is true for a small proportion, I am not convinced that this
need is commonplace.

What I am certain of, however, is that investors are asking
for more detail on how their portfolio is performing, where that performance
has come from and how the risk is being managed. This is particularly the case
in the ultra-high net worth market, where the managers have discretionary
portfolios, as opposed to the high-end IFA that only has a small number of
holdings in several unitised vehicles.

Smaller firms

Despite this growing need for detailed performance figures,
cost is still a major factor for wealth managers when it comes to IT spend. For
a firm managing five hundred portfolios, requiring full performance and
attribution functionality (particularly where that functionality requires multiple
attribution models), the chief operating officer could be looking at hundreds of
thousand pounds in licence fees alone. In addition, there can be significant
upfront implementation costs and ongoing operational running costs. 

On the other hand, cloud technology enables the wealth
manager access to this capability on a service, pay-as-you-go, per portfolio
basis, where the annual charge for a portfolio is as low as a few hundred
pounds. Many wealth managers currently pay that amount for a WebEx facility
without a second thought.

The cost of cloud-based performance solutions is service and
volume based, so adding more users may not increase the running cost – creating
an opportunity to provide wider internal, or even external, access to
performance analysis tools, dashboards and reports.

Monitoring

Forward-thinking wealth managers are also deriving other
business benefits from cloud-based performance systems. One such advantage is
the ability to enable the front office to see the impact that their
transactions have had on performance, using the same tools across the front to
back office by providing different views of the portfolios they manage.

The front office requirement is different to client
reporting: whereas client reporting is more concerned with periodic, investment
book of records (IBOR) style of analysis, the front office wants to know if a
particular investment strategy is working – almost in real-time, not just at
the end of the reporting period.

If the firm can supply the trading data in a timely fashion
then the front office can have access to performance and risk analysis based on
portfolios, strategies or indeed any other breakdown. Any concerns about
performance information being based on un-reconciled accounting and trading
data can be mitigated by using query tools that can distinguish between this
data and locked data.

The net result is that the portfolio manager can keep tabs
on how his strategy is delivering, without having to wait weeks for reporting
information or maintaining their own book in spreadsheets.

Operational risk

Smaller wealth managers that don’t have the budget to spend
significant sums on a performance system often have relatively small holdings
and limited numbers of portfolios. These firms may argue that they can handle
the performance measurement function themselves, through the manual manipulation
of a multitude of spreadsheets or internally developed applications. The
problem with this theory is that there is a significant cost of maintenance.
When even a relatively minor change is made, that change has to cascade through
multiple spreadsheets or applications –and this takes valuable time and
increases the likelihood of human error.

Another consideration for wealth managers is the operational
risk associated with having one or two individuals that know the spreadsheets
and applications. Staff leaving can result in the firm having a mission
critical application grinding to a halt. Now, when you compare those risks
against a high-end installed platform, it is easier to convince yourself that
those risks are worth bearing. When you compare it to a low cost, constantly
updated, secure piece of technology with multiple users that is being
constantly developed and maintained, it’s a risk that is harder to justify.

Setting the scene

Offering timely, detailed information to investors;
improving the monitoring of investment strategies; and the reduction of
operational risk provides cloud-based performance measurement systems with a
compelling business case, one that is attracting the attention of large
established wealth managers and small boutiques alike. The stage is set for
those firms looking for a new source of competitive advantage.

With increasing client concern over investment strategy and
rising levels of due diligence, wealth managers need to be continually
monitoring performance at client, portfolio and even holding level. Yet the
cost of traditional installed performance and attribution applications for many
small and medium sized firms is prohibitively expensive, running into hundreds
of thousands of pounds for implementation costs alone.

With cloud-based systems, there is now a cost effective
method for providing this assurance to investors, as well as deriving other
business benefits such as the ability to enable the front office to see the
impact that transactions have had on performance through their own views on the
portfolios they manage. It’s a compelling business case that is attracting the
attention of large established wealth managers and small boutiques alike.