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Time to Sink or Swim

Smarter data management is key for asset managers in the era of high-frequency regulation.

For the capital markets, the financial crisis is in the distant past, but for the asset management industry its aftermath is here to stay. Investors and regulators alike are demanding unprecedented levels of transparency – increased breadth and depth of information with greater frequency.

No example of this new norm is perhaps more paramount than the Securities & Exchange Commission's recently released proposal calling for new forms and rules designed to enhance the information reported by registered investment companies and investment advisers. No longer simply focusing on what information is being provided to potential and current investors, the rule maker to the nation's securities industry is aspiring to collect large chunks of data to stored and analyzed.

In fact, I think it is fair to say that the financial back office is entering an era of high-frequency regulation. And, just as was the case when trading became high frequency over the course of the last decade, remaining competitive in this new environment will require investments in back-office data and technology.

Charles Darwin once said "It is not the strongest of species that survive, nor the most intelligent, but the one most responsive to change." That same holds true for asset managers and the firms to which they outsource their back-office operations. The ability to manage data most efficiently is becoming the key differentiator. And the firms that are the most responsive to the changing operational dynamics of our business will survive.

Our industry can boldly rise to these new regulatory demands by creating a more transparent, investor-centric operating model, one that is built with the flexibility to anticipate both regulatory and investor needs and inquiries. Or we can sit on our heels, waiting for regulators to implement new demands for disclosure and access and invest enough to meet the minimum threshold for each new rule. I believe it will be cheaper, faster, and more profitable in the long run for our industry to not be resistant to regulatory change. In fact, I think asset managers are in the best position to create the new transparency operating model that the regulators want to see.

The good news is, the most innovative leaders are beginning to imagine what a data-driven future might look like and anticipating what regulators will ask for months or years from now, well before it becomes a requirement. That is a significant change in tone. In conversations I've had recently, clients are starting to ask themselves, "Do I have a business model in place that is flexible enough to anticipate and respond to future requests with ease, efficiency and at a low cost?" Answering yes to that question boils down to having the right systems and the right thinking about data in place.

The firms that are answering, "yes", that have put the right pieces in place first, have the opportunity to redefine the asset management industry as we know it. Since asset managers are the kings of their own data, they are best positioned to understand what data regulators might ask for, and more importantly, what investors might want.

Think of the way Apple has repeatedly been able to revolutionize their industry by making products that put power and control into the hands of their customers. Take the iPhone, for example. Apple wasn't the first to develop a smartphone, but they were the first to make one that everyone wanted to use. They developed an intuitive, easy to use product that put control into their customer's hands. And just look at where we are today. Eight years ago, did any of us imagine that mobile smart technology would be so interwoven into our personal lives? No, but Apple did, and they delivered it to us.

A similar tactic must be employed by our industry. Managers must commit to the idea that providing investors with the information they need to make investing more intuitive and easier is not too hard, too expensive or too time-consuming. In fact, it will be far easier, cheaper and faster for our industry to create this new reality than if we wait for regulators to mandate it.

From a business standpoint, being highly transparent will also offer benefits. Much like how social media has changed the definition of personal privacy, the digital, data-driven era in finance is changing the definition of business privacy for asset managers – and it is up to them to liberate their data. In an age where individuals have grown accustomed to so much personalization and are used to complete control and flexibility over information, investors won't continue to settle for veiled asset management services.

Signs of where a data and technology driven model will take the industry are already beginning to emerge. Just look at the rise of the robo advisor, which promises to give investors flexibility and control to essential information about their investments. The model is designed to put control into the investors' hands. And guess what – robo advisors are able to do this at a lower cost point.

Hyper-transparency and investor control, both are inescapable features of our industry's future. There is a real opportunity for us to think creatively and imagine a future where transparency is not forced but rather is an inherent aspect of operations. The people and firms that imagine that place today are going to win tomorrow. They will win because their operations are functioning at such a high level that investors will want to follow them.

When that time comes, will you still be operating with today's manually driven mentality or will you have imagined and built a business that puts control and transparency into the hands of your investors?

It's time to sink or swim.


1https://www.sec.gov/rules/proposed/2015/33-9776.pdf

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