What makes the investment operations function critical

The investment operations function at asset management firms performs essential functions including trade support, performance measurement, risk management, data management, treasury optimization, and compliance. It is essential to a firm’s ability to ensure regulatory compliance and to manage data accuracy, as well as to draw efficiencies from everyday tasks such as treasury management.

What’s more, efficient investment operations facilitate smooth communication throughout the firm, helping to maintain operational integrity and support investment decisions.

“While there isn’t clear agreement on an ideal model, given the varying needs of different managers, there is broad consensus about the potential to meaningfully improve the bottom line by finding the right investment operations solution for [a firm’s] investment needs,” said Niall Mowlds, Global Head of Investment Operations Services at J.P. Morgan.ⁱⁱ

He points to five common challenges driving the need for change: multiple aging systems that typically are poorly integrated, heavily customized and difficult to maintain or upgrade; webs of largely manual and fragile operational and data management processes that were built reactively to support new strategies or to compensate for system or integration shortcomings; increasingly complex and diverse asset-class offerings that require a global support model, expert technology and operational flexibility; greater regulation that necessitates ongoing adjustments to investment operations; and greater demands on staff to work harder with the same resources.

Investment operations inefficiencies, per J.P. Morgan, make it harder for investment teams to manage strategies, liquidity, and risk. An inefficient investment operations function is also expensive, making the optimization of this area a worthwhile goal for asset management firms.

Leveraging managed services vs. DIY investment operations

Should firms build and manage the infrastructure and staff to handle the work of the investment operations in-house, or is it more efficient and cost-effective to turn to specialized managed-service providers? According to the results of the Alpha survey, the latter choice — leveraging managed services — has become increasingly popular.

It found that 44% of small asset management firms and 61% of large firms currently outsource this function. The shift took place in phases as technology and the capabilities of service providers matured. Firms came to realize the significant economies of scale borne from converting fixed costs to variable costs and not having to manage and employ an extensive tech staff.

At first, outsourcing this function focused on post-trade activities that were deemed safe to assign an outside provider, like trade matching and custody reconciliations. However, firms increasingly began to lean on managed services for work in pre-trade activities including investment book of record (IBOR) maintenance.

Recent demand for real-time position and cash views, as well as securities data validation, led to additional use of outside experts. The current frontier of managed services emphasizes end-to-end data harmonization via enterprise data models, which eliminates front-to-middle office reconciliations. That enables total portfolio views across public and private assets and leverages provider-managed data lakes with real-time accessibility.

The advantages of platform consolidation

Asset management firms considering a strategic look at their application architecture should contemplate consolidated software platform options, says asset management firm consultancy Citisoft.ⁱⁱⁱ

“Potential benefits can provide organizations with competitive advantages and contribute to cost savings, reduced risk, operational efficiencies, and increasing revenues through more trusted and timely data,” Citisoft writes. It conceded that obtaining organization-wide alignment on what’s needed may be a challenge, but it supports consolidated software platforms since firms “may be surprised at what a cost/benefit analysis reveals.”

Employing AI for process automation

According to recent research by McKinsey,^iv asset management firms spend more — sometimes significantly more — on maintaining operations and legacy systems than they do on future-focused transformation. McKinsey found that due to the complexity of those systems, asset managers allocate on average 60% to 80% of their technology budget to run-the-business initiatives, leaving only 20% to 40% for change-the-business operations. Worse, only about 5% to 10% of their total tech spending is directed toward firmwide digital transformation.

“For asset managers, the AI revolution is a timely opportunity to break out of entrenched cost structures by increasing efficiency across business functions,” McKinsey said.

A mid-sized asset manager with $500 billion in AUM could capture 25% to 40% of total cost base in efficiencies through AI opportunities enabled by end-to-end workflow reimagination, it noted.

Cloud vs. on-premise deployment

Since efficient investment operations run on secure and accessible data, asset managers must decide how to deploy and manage their data infrastructure. On-premise deployments can offer direct control and customization, but they tie firms to higher fixed costs and slower scalability. A 2024 PwC study found that 74% of top-performing companies of all types house most of their middle-office data in the cloud, significantly more than the 52% of the lesser-performing firms that do so.^v

Since most managed-solution providers are cloud-based, employing their support and embracing a cloud-native approach are complementary choices in the move to more efficient and cost-effective investment operations. Cloud deployment has therefore become a strategic lever for modernization, alongside managed services, platform consolidation, and the use of AI.

The coming challenges

With next-day settlement now a reality in the U.S., the future — T+0 — is not far off. Same-day settlement and perhaps even 24/7 trading will require robust counterparty risk management. The changes also will require the ability to record complex lifecycle events, calculate profit and loss granularly on both a historic and intraday basis, and ensure that all relevant systems back-to-front are updated continuously. Not only would these enhancements support treasury options in the back office, they would also buttress forecast models in the front office.

Asset management firms with a forward-looking approach to modernizing their operations, and especially those in investment operations, are preparing themselves for a more efficient and profitable future.