As inputs for investment decision-making expand, processes to implement the decisions become more complex, and regulation gets more exacting, institutional technology systems need to keep up.

The investment-management business is moving toward open, modular frameworks that enable the most efficient workflows, but the shift has been gradual and the landscape remains cluttered with legacy processes. Older systems are typically clunky and siloed, with limited interoperability — in short, ill-suited to meet the needs of today’s investment decision makers  

“Buy-side firms see opportunities around alternative data and content, and new technologies like machine learning and AI, and what it all brings to the investment process,” said Kristina Karnovsky, Head of Research Business at FactSet Research Systems. “The question then becomes how to apply it and integrate it, and how to bring the whole investment-management platform forward to the next generation.”

Alternative data was an input in investment decision-making at 79% of financial firms in the third quarter of 2018, and four of five non-users plan to use alt data within a year, according to a WBR Insights survey of 100 portfolio managers and traders. With regard to artificial intelligence, 83% of buy-side firms are at least in the planning or research phase, and 61% expect to increase spending on the emerging technology over the next year, according to a separate Tabb Group survey.

Next-gen buy-side research systems can be considered a manifestation of the Fourth Industrial Revolution, also known as the second machine age, which is characterized by a fusion of physical and digital systems. “This is impacting every industry, not just financial services, and it is very exciting,” Karnovsky said.

“As technology providers, we need to think about how to help firms ingest new content types in frictionless and seamless ways,” Karnovsky told Markets Media. “Ultimately it means that there’s an opportunity for much greater connectivity and efficiency for our buy-side clients.”

‘Major Shift’

“There is a major shift happening in the production, distribution and consumption of research,” said David Easthope, who leads the Capital Markets practice at consultancy Celent.  

The tech evolution has centered around the research management system, which Easthope calls the nerve center of buy-side investment decision making. “The RMS is what supports analytics, news, broker research, company meetings, internal research notes, email, chat, contacts, earnings calls — all kinds of data flows.”   

Legacy systems spanned disparate parts that often didn’t work with each other, Easthope noted. “You might have email here, and your appointments and contacts in Outlook,” he said. “Something is on desktop, something else is on the shared drive. You have this on mobile and don’t have it on desktop, or vice versa.”

The challenge was replacing the shared-drive approach with a seamless, interoperable system to store, manage, tag, and aggregate data, that works across functions. Tech providers have done this, and they continue to raise the bar with improvements and upgrades.    

“Ultimately, why does all this matter?” Easthope asked. “Because it supports the investment workflow, the automation, the decisioning, and the supporting of recommendations from the analyst to the PM. And everyone can see it.”

One regulatory impetus for next-gen research systems is MiFID II, which requires that buy-side firms budget for, price, and justify research. The sweeping European ruleset took effect in January 2018 and effectively mandates firms bring systematization and transparency to an area that historically has had little of either.  

“Buy-side firm are under greater scrutiny to be transparent to asset owners on how they arrive at their recommendations,” Easthope added. “That transparency is not cheap — you need the right tools and the right technology.”

FactSet’s Karnovsky said that especially in light of constraints such as MiFID II and buy-side fee compression, firms’ research platforms must be up to speed.

“It’s critical that the insights derived from new content types make their way through the investment process in an efficient way,” she said. “All of the data has to be consistent, and systems need fast and high-quality integration. For example, a portfolio manager’s portal can have the notes from the research analyst’s work, right inside the portfolio dashboard where they can do trade simulation.”

“New content and new technologies are driving every industry, and financial services is no exception,” Karnovsky concluded. “How firms can tap into the opportunities that brings is going to determine success or failure.”