Is It Time for Investment Managers to Reevaluate Their Global Operating Models?

Posted by Sean Cunniff, Investment Management research leader, on August 6, 2013

Earlier this year, Deloitte hosted a Dbriefs webcast which highlighted the need for investment managers to reevaluate the way they operate in light of the current market environment. The webcast highlighted key trends impacting investment managers and took a deep dive into the operating model by breaking it down into its core components of function and service delivery, processes, organizational structure, and technology. By closely reviewing their operating models, investment managers may be able to identify challenge areas and focus on which “levers” can be pulled to gain efficiencies in each of these areas. For example, a firm with service delivery issues might turn to outsourcing or centralization to eliminate the problem. Deloitte estimates that these efficiency gains can be in the order of five percent to 30 percent.

After listening to the webcast I thought of an experience I had several years ago when I moved into a new role at a major financial institution. One of my first tasks was to work with the client service team to bring a new client on board. The conversation was going smoothly, except for one sticking point: about 10 percent of the client’s accounts were of a type that my firm would not accept. This represented a fair amount of assets and revenue to both my firm and the client. The client and the client service team were, shall we say, not pleased, and asked me to look into the issue.

I started with a simple question: Why did we not allow these accounts? 

The first answer I got was that a regulation prohibited our firm from holding these types of accounts. That did not seem right to me, especially since several of our competitors handled the exact same type of accounts. I asked my compliance team to explain the restriction and was told that the regulation did not technically prohibit the firm from holding the account; rather, it required additional record keeping and reporting that our technology did not support. Therefore, it was a firm policy not to accept any accounts of this type. After going to the technology group to see what it would take to do the additional reporting, I learned that this would be a routine matter due to an already completed upgrade. It would cost the firm virtually nothing to do the reporting; all it took was setting a few indicators for each account. In the end, my firm was able to accept the accounts and all parties were happy.

My previous firm was in danger of tarnishing a new client relationship and walking away from a significant number of accounts simply because our current processes were out-of-sync with antiquated technology. When initially implemented, the account restriction was a valid and necessary policy. However, the need for the policy was obviated by the earlier upgrade and the two elements of the operating model were never synched up until the client complained. 

This example of a relatively minor change in procedure underscores how well-intentioned decisions of the moment can result in operational fragmentation over time. After listening to the Dbrief and thinking about the fundamental changes the financial industry has experienced in the last five years, I now wonder how many other outdated policies and procedures are still in place and how big an opportunity for improvement is out there. Five years ago the Dodd-Frank Act did not exist, smartphones were in their infancy, and “tweeting” was not a household word. The world and the industry are evolving quickly and we need to ensure that our operating models are being updated just as fast. 

When industry is booming and focus is on growth, small inefficiencies may remain unattended. During economic downturns, however, focus likely shifts to short-term cost-cutting with less focus on long-term efficiency. Is now the time for investment managers to take a step back and develop a strategy for optimal efficiency solutions? In my opinion yes, it may be time to peel away the layers of the operational onion to gain efficiency, improve quality, lower cost, and increase customer satisfaction.