Five Benefits of institutional platform innovation
Over the last 20 years, retail investors have experienced a revolution in online service offerings which have delivered greater choice, lower costs and simpler administration to private individuals. The pace of change in the institutional market has seemingly been much slower by comparison leaving a fragmented process that can often be inefficient and costly to investors.
However, the institutional market is evolving and investors and their advisers no longer have to settle for a lower level of service in the asset management market.
Here are five ways that AMX believes innovative institutional platforms are now helping asset managers meet their clients’ demands and are forging a new and better way of working:
1. Greater choice of funds and management styles, to facilitate efficient asset allocation through open architecture
Many institutional investors follow a multi-asset approach but can be challenged by the need to connect with multiple systems and contact points that can involve complex, sometimes manual, processes. This complexity can also restrict the asset manager’s ability to serve a larger, more diverse client base and can make it harder for new managers to enter the market.
Multi-asset platforms, can offer investors the ability to diversify risk more easily across global (active and passive) equity and credit funds as well as hedge funds. They can also make it easier for asset managers to launch new strategies that meet specific investor needs, such as offering stewardship overlays on funds to support environmental, social and governance (ESG) policies. he most flexible platforms for institutional investors are those that offer multiple asset classes and are open architecture, where the investor has an avenue to express their needs for new or additional strategies to a collaborative audience of investment managers.
2. Increased transparency and control of costs, including lower fees
Institutional investors are increasingly demanding more granular cost breakdowns from asset managers. They want to know exactly where they are incurring costs and what they get for the fees they pay. For example, if an asset manager offers passive management at near zero fees, will it stop providing added-value services (that cost time and money) or will it find ways to make a profit elsewhere in the process?
Institutional platforms can provide the transparency that investors need to compare the value of the many different services on offer. Open-architecture platforms can integrate with the wider funds ecosystem, effectively consolidating the market in one place. This can help reduce costs, for instance, by standardising processes around KYC and AML paperwork, and legal reviews, during manager onboarding.
Platforms can also allow robust management of counterparty and delegate costs through leveraging scale. Importantly, pension schemes can find savings, through, for example, managing withholding tax efficiently, using tax transparent global equity fund vehicles such as Irish-domiciled Common Contractual Funds (CCFs). A platform is able to set up and operate the funds leaving the asset managers to focus on the investment strategy.
3. A customer experience as good as that provided to retail investors
As private individuals, we are used to accessing our personal investment data through efficient digital dashboards and getting ‘next day delivery’ of goods and services. In contrast the institutional market often receives investment data in many forms and this may also be hard to access at speed or scale.
A platform can smooth the process by offering easy access to multiple asset managers through a single secure online client portal and with streamlined presentation of investment data. This can make reporting and monitoring more efficient for all parties, ultimately improving the institutional client experience. Processes such as onboarding of new managers and de-risking of assets can be faster and more efficient. Data elements from different strategies can be normalised and stratified for more useful analysis, decision making and governance.
4. A route to improved governance and ESG reporting
Underpinning innovation is a need to provide substance to support regulatory and governance requirements. An institutional platform can standardise, centralise and streamline the relationship between institutional investors and asset managers. This not only helps to improve transparency but can also reduce compliance costs, to the benefit of the institutional investor and end savers. In addition, it can make it much easier for asset managers to meet the service requirements demanded by institutional investors and regulators.
Many discussions at industry events during 2019 have identified environmental, social and governance (ESG) strategies as a prime driver for investors and managers. However, picking truly ESG compliant investments can be challenging because the industry lacks standardisation. Platforms generally have the ability to support ESG demands and keep up with regulatory changes, particularly by reducing the administrative burden through smarter execution. While market standard reporting on ESG is still emerging, platforms typically have more resources and a wider vantage point to give best in class reporting while the market standard solidifies.
Platforms in their various guises can alleviate the burden of governance through smarter, coordinated execution, while also yielding cost savings and transparency to the betterment of the end institutional investor or end saver
5. Opening new channels of distribution
Ireland has a reputation as a fund-friendly domicile, with a pragmatic regulatory environment that enables managers to passport their funds across the EU. However, to benefit from these opportunities, managers must operate through a Management Company (ManCo) or Self Managed Investment Company (SMIC) domiciled in Ireland. That recently became more onerous after the Central Bank of Ireland strengthened governance, compliance and supervisory requirements.
Management Companies must now maintain most of their Designated Persons in residence in Ireland, with specific responsibility for areas such as Investment Management and Fund Risk Management, Compliance and Finance and Capital. It must also have operational and administrative capabilities and independent directors. This, of course, comes at a cost: not least identifying and recruiting the right expertise on the ground.
A platform with real substance can support its clients’ regulatory and governance requirements by operating as a ManCo with its own in-house Designated Persons and the ability to manage funds under the Alternative Investment Fund Managers Directive (AIFMD) and Undertakings for Collective Investments in Transferable Securities (UCITS).
A parting thought
Institutional asset management is continuing to grow at pace. AMX believes that the future of the Irish domiciled products from tax transparent vehicles like the Common Contractual Fund (CCF), to the nimble structure of the Irish Collective Asset-management Vehicle (ICAV) and the pending conclusion of the Irish Limited Partnership (ILP), offer global asset managers a full, robustly regulated suite of vehicles from which to service investor monies.
With greater transparency, tighter governance and better risk control at the top of the agenda for many investors and managers, the need for institutional platforms which are aligned to these industry requirements, and offer future-proofed flexibility, is growing.
Eoin Motherway, Country Head, AMX