Independent asset managers are wrestling with several key themes at present as they face up to this period of market turmoil and uncertainty. But risk, depressed asset values and cost constraints are proving particular areas of focus.

Independent asset managers are wrestling with several key themes at present as they face up to this period of market turmoil and uncertainty. But risk, depressed asset values and cost constraints are proving particular areas of focus.

Risk, in all its guises, continues to be of paramount concern for investors and asset managers alike.

For instance, the Merrill Lynch/Campden Research European Single Family Office Survey 2009, released in March, reported that almost half the family offices polled said asset protection has become their primary concern as they contend with the fallout from the financial crisis and the decline in their portfolio values. And it is a similar story for the broader high net worth and institutional investor segments.

But although the family offices questioned may have become more risk averse in their investment strategies, 74 per cent said the actual way they handle risk has not changed. Instead it appears that most have yet to significantly enhance their risk management systems, a large number of which continue to run off Excel spreadsheets. Upgrading risk management procedures was cited in the survey as one of the primary areas of focus for the coming 12 months however.

The risk management imperative

This is as it should be, since a sophisticated risk management infrastructure can produce manifold benefits for wealth managers of all descriptions.

For one it will help them to better control their various trading risks – market, credit, liquidity, issuer, counterparty and the like – and thus guard against the potential losses they can incur.

There are prospective upside benefits too, since an advanced risk management platform can counter some of the performance difficulties so many investors are facing at the moment by helping them improve investment returns. Achieving a sustainable balance of wealth preservation mixed with alpha-generating returns will be a key feature of successful asset managers in the period ahead. And to do that requires a combination of investment innovation, diversification, flexibility and prudence, rather than a pure return to old models.

This is where a sophisticated risk management system will be an invaluable aid, since it can provide managers with the tools and confidence to seek out better risk-adjusted returns across a wider spectrum of investment possibilities, whether that be by country, currency, asset class or trading strategy.

Other areas for improvement

Aside from the risk management imperative though, successful independent asset management firms will need to concentrate their attention on several other areas of prospective improvement.

Cost cutting in particular has taken on a new sense of urgency among organisations of all stripes. As the Swiss Bankers Association’s Wealth Management in Switzerland report noted, the financial crisis has made investors extremely cautious, leading them to seek relatively simple, low-risk financial products, as a result of which it the report said margins in wealth management are likely to fall in the immediate future.

Among other factors, the stunning losses sustained by global markets last year have slashed firms’ assets under management, and since management fees are the most common source of firms’ revenue streams, this fall in assets will have a painful impact on earnings. In response, many financial institutions around the world have resorted to widespread headcount culls in an effort to slash expenses. But for most independent asset management firms that is not an option: in Switzerland, for example, only 3 per cent of independent asset managers have more than 50 employees, while 62 per cent have less than 10 staff, according to a 2008 report by NOVEO Conseil.

Efficiencies over redundancies

Rather than slashing headcount, it is our contention that cost improvements can be better achieved by making existing employees more efficient. That means introducing automated processes wherever possible to remove the error-prone and wasteful use of manual resources in the manager’s more mundane activities, and freeing staff to concentrate on higher-value asset generating and client servicing tasks.

And reaping operational efficiencies through the implementation of robust yet flexible technology solutions can be realised in all areas of the transaction lifecycle: in portfolio modelling; portfolio rebalancing; inputting trade data; feeding the portfolio management and accounting platforms; collecting and reconciling transaction and position information with brokers and custodians; generating performance measurement figures and analysing them; generating and sending management and client reports; and being more responsive to and proactive in dealings with clients.

But creating a truly effective risk management environment or achieving the level of operational efficiency needed to meet the cost challenges of both today and tomorrow is not something that can be achieved in isolation. Yes, incremental improvements are possible by implementing a specific solution to fix a particular problem, whether that happens to be a new trade order management system, a more robust risk engine or a better reporting tool. But the results will always be limited.

Rather, the greatest gains come from having a reliable and functionally-rich platform that encompasses the full breadth and extent of the trading lifecycle, integrating the various front- to back-office functions in a virtuous loop of data integrity and operational efficiency. And it is through this framework that an asset manager’s latent synergies can be fully realised.