Digital transformation - What does it take to win?

DIGITAL TRANSFORMATION: WHAT DOES
IT TAKE TO WIN?
FEBRUARY 2018

2DIGITAL TRANSFORMATION
LAST YEAR’S STORY
• Last year was seen as a year of great political
change and respondents expect the impact of such
change to be felt for years to come
• Cybercrime was a topic of concern with major high
profiles breaches, including Equifax and the SEC
breaches.
• Firms started to see the importance and impact of
emerging technologies like machine learning, Robo
advisers, and blockchain.
• In 2018, firms are shifting focus and preparing for the
new wave of demands from regulatory and clients
within the context of emerging technologies
progressing from just conceptual testing to live
implementation
24%
18%
13%
12%
12%
8%
7%
Asset Management Industry Disruptors in the next Five years
Political/Policy change
Cybercrime
Machine learning/Artificial Intelligence
New intermediation models e,g, Robo advisers
Continued growth of ETFs
Blockchain technology
Movement into alternatives
Source: Linedata Survey of Industry Participants

INTRODUCING “TRANSFORMATION”
• Low margins and high operating costs are pushing
large buy-side firms to re-evaluate operating models,
especially in a highly digitized world.
• Firms need to have more flexibility when it comes to
operating models and technology stacks. Many firms
are already in different stages of this “transformation”
process.
• This digital transformation can be applied across a firms
operations, from every day business processes to
regulatory change management.
• Underlying this change will be “big data” and analytics
– notion of being able to combine structured and
unstructured data across different business lines to make
better and quicker strategic decisions, or to provide
products and services to clients which can distinguish
firms from the crowd.

MOVING PAST COST CUTTING
• Managers have been squeezed and have engaged in efficiency oriented projects and focused on cutting costs, but
what have they been doing with the savings?
• Many institutions are in the process of replacing manual processes and legacy systems with system consolidation
a key theme of 2018.
• Central to digital transformation is data management and risk management at an enterprise level.
• Transformation of the client experience and journey. On-boarding, reporting and providing tools and greater access
to investment data.
• Creation of solution teams and products to address specific client needs.
• In order to succeed in the near future, firms are likely to adopt robotic process automation, machine learning and
artificial intelligence tools.

THIS YEAR’S STORY: FOCUS ON THE CLIENT
• This year, product breadth, inclusive of a unique
investment strategies is no longer top. Instead, it is the
reputation of the firm as a trusted partner which is
most cited as the main distinguishing feature of
respondent firms.
• Client service, remains a significant factor, which can
help build upon the reputation of the firm. This can be
improved by a transforming client experience
through digital portals and greater understanding of
client behavior.
• Overall, relationship-based factors continued to be
seen as areas of differentiation(trusted partners, client
service and reputation)
26%
21%
17%
13%
11%
4%
4% 2% 2%
Firms’ Distinguishing Aspects
Reputation/Trusted partner
Client service
Product offering/Unique investement strategy
Innovation
Investment performance
Risk management
Cost structure
Independance
Transparency

OPPORTUNITIES ABOUND
• Private Equity investment is expected to increase,
accompanied by traditional asset class like fixed
income.
• Last year, saw the rise of cryptocurrencies which
have now caught the interest of financial institutions,
with some groups expected to explore investment
opportunities
• ETFs are expected to increase along with similar non-
market cap smart beta strategies which allow firms to
access active-like risk return profiles with passive
vehicle fees
4.55%
6.82%
11.36%
15.91%
18.18%
18.18%
18.18%
20.45%
20.45%
20.45%
20.45%
22.73%
25%
0.00% 5.00% 10.00% 15.00% 20.00% 25.00%
Other (please specify)
Global macro
Credit/Distressed credit
Absolute return strategies
Equity
Long/short strategies
Derivatives or derivatives overlays
ETFs
Real assets
Smart beta
Crypto currency
Fixed income
Private equity
Products and Investment Strategies Expected to Grow

ETFS AND SMART BETA GROW
• The global ETF market is to reach nearly US$
2.1 trillion, which includes traditional and
smart beta ETFs.
• In the United States – the share of smart
beta has grown to about 24% of the ETF total
market.
• 2017 also saw significant inflows to ETFs,
continuing the pressure on active managers.
However, there is some concern around how
these strategies will handle an extended
market downturn compared with active
counterparts.
$0.310 $0.351 $0.361
$0.464
$0.622
$0.718
$0.933
$1.291
$1.472
$1.637
$2.171
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Total Smart Beta ETF’s AUM as a % of Total US ETF’s AUM
2007 to 2017
Total US ETF AUM (in US $ billions) Smart Beta ETF AUM as % of Total
17,9%
20,5%
15,8% 15,2%
17,7% 17,8%
20,3%
24,3% 24,0%23,8%
Source: Aite Group
24,6%
25,6%

THE ESG FACTOR
• Globally, ESG related investments have reached over
$22 billion and are expected to continue their rapid
rise over the coming years.
• Europe has lead the charge, but global momentum
has picked up across the other regions.
• To keep up with institutional and retail demands and
expectations, investment firms are increasing
product breath by adding specific head count and
functions related to ESG integration to support the
proliferation of research and products.
$10.755
$12.040
$7.301
$9.809
$0.20
$1.042
2014 2016
Growth of ESG Related Assets by Region
(In US$ billions)
Europe North America Asia-Pacific
$18,256
$22,891
Source: Aite Group

PREDICTED MARKET EVENTS …
• Changing US policy is seen as a significant in
determining global market movements.
• Rising interest rates and the end of QE will test asset
valuations.
• With uncertainty still surrounding Brexit, the eventual
agreements and trade deal will no doubt impact
markets over the next 12-18 months.
• Lastly, demographic changes in Asia are already
creating a demand for more sophisticated local
investment fund services with increasing demand to
access overseas securities.
27%
24%
19%
16%
6%
4%
3% 1%
Important Events to Impact Investment Strategy (12-18 months)
Changing US policy
Rising rates
Brexit
Demographics and rising middle class in Asia
Global trade wars
Middle East conflict
Additional EU exits

RISE OF THE HOSTED MODEL
• There is now a general perception among the buy-side
community that migrating to a hosted model will lead to
reduced TCO and thus a potential cost efficiency. This is
a significant transformation to existing technology
stacks.
• The gradual rise in popularity of hosted SaaS model over
in-house installations has been primarily due to technology
advancements in vendor firms’ hosting capabilities,
which have alleviated technology fears around stability and
performance concerns.
• Financial institutions currently with in-house
implementations, cite many hurdles that prevent them
from moving over to hosted, including internal inertia,
work required for migration, data privacy and regulatory
requirements, and lack of vendor hosted models available.
51%
22%
27%
Respondent’s Implementation Models (N=51)
In-house
Combination of host and in-house
Hosted models: SaaS/Managed Service
Source: Aite Group

DEPLOYMENT CONUNDRUM
In-house Hosted
Financial institution private cloud Public cloud Vendor’s private cloud
Vendor
Financial institution
On-premises
Source: Aite Group

THE BUY-SIDE WARMING TO CLOUD
• Many firms are looking to the cloud to transform
their physical footprint, with the need for greater
storage and processing power driving the move.
• Hedge funds, more so than asset managers, have
been particularly active in their assessment of cloud
technology, with hedge funds taking the lead in
implementing public cloud-based solutions.
• Many will wait for first movers to either sink or
swim before they venture to implement cloud
technology themselves
• Firms will likely chose to implement non-core
systems first to test the water before moving core
operating platforms to cloud based deployments.
41%
20%
27%
Adoption and Attitudes Towards Cloud N=41
Yes, currently using cloud
No, would not consider cloud adoption
No, but would consider cloud adoption
Source: Aite Group

TRENDS IN OUTSOURCING
Source: Aite Group
Outsource core functions
In-house team and technology
Back
Office
Middle
Office
Front
Office
Or

THE MAJOR CHALLENGES
• 2018 will be remembered for the significant
regulatory changes and this reflects in the ranking of
current challenges.
• Secondly, businesses are challenged to find
operational efficiencies which is expected to become
harder over the next 3 years. Reduced head counts
need to be supplemented by greater automation
across a affirm.
• Looking to the future, managing risk as well as data
will be seen as greater challenges, once some of the
regulatory dust has settled.

MANAGING RISK
• Risk management continues to be an area of focus for
firms with it being an expected challenge over the
next few years.
• A majority of firms (65%) have already invested in
risk management systems over the past 24 months but
many still have not which leaves them open to
operational and business continuation risk.
Transformation maybe be needed.
• Over half of respondents have used at least some
vendor technology, but 29% have looked to rely on
internally built platforms.
• Buy-side firms have a growing demand for real-time
risk systems and firms have implemented an IBOR to
help support this function.
47%
29%
18%
6%
Internal Risk Technology Setup (N=17)
65%
35%
Q.Has your firm invested in risk management
technology within the last 24 months?
Yes
No
Deploy a vendor
software solution
in-house
Built own platform
in-house
Hybrid of build and
buy
Hosted/managed service
Source: Aite Group

IT PRIORITIES
• Areas of spending in IT systems
match the industry’s main concerns
with front office applications
budgeted for major spend. This is
likely to include TCA tools for
improved best execution compliance.
• To improve efficiency, asset managers
are either looking to move off in-built
systems and/or consolidate existing
systems.
• Cybersecurity is an area of future
investment and concern for asset
managers with dangers to reputational
risk.
• Data related spending will also be
significant, in particular analysis,
visualization, and governance. This
include new BI tools for internal and
external client use.
10.00%
10.00%
10.00%
15.00%
20.00%
20.00%
22.50%
22.50%
25.00%
27.50%
27.50%
27.50%
33%
35.00%
42.50%
42.50%
Outsourcing of in-house managed functions
Consolidation of systems
Business Process Management/Robotic Process
Automation…
Reg Tech /Regulatory technology
Implementing cloud solutions
Client facing web technology
Middle office systems (Investment Ops, IBOR, Nav Oversight)
Fund administration
Reporting
Risk management
Data management/Data governance
Data analysis and visualization
Compliance
Cybersecurity
Improving legacy systems
Trading and other front office applications
Area Allocated for Highest Portion of IT Spending

EFFICIENT CONSOLIDATION
• The driver to an efficient technology stack has lead
some firms to consolidate relationships across their
core systems.
• Nearly 70% of firms have 2 or less vendors for
portfolio systems.
3%
23%
43%
23%
3%
8%
None 1 2 3 4 More than
5
Respondents’ Number of Vendor Relationships
for Portfolio Managment Systems (N=40)
Source: Aite Group

YEAR OF THE NEW REGULATORY REGIMES
• Regulatory scrutiny and new initiatives
have been the biggest driver of
compliance changes over the past few
years and 2018 is likely to be no different.
• Buy-sides are less prepared for the
challenges compared with sell-side
counterparts, with ESMA likely to be
lenient for only a short period of time.
• European regulations are felt across the
globe with the full extraterritorial impact
yet to be fully realized.
4%
4%
4%
6%
8%
8%
12%
12%
15%
21%
23%
23%
38%
52%
Benchmark regulation (BMR)
MAD/MAR
Securities Financing Transactions Regulation (SFTR)
Packaged Retail Investment and Insurance Products
Dol Fiduciary Rule
Investment Company Reporting Modernization Act
Client money-focused regulation (including CASS)
Other (please specify):
Dodd-Frank
Derivates-focused regulation (EMIR, CFTC requirments)
AIFMD/UCITS
FATCA/CRS (Common Reporting Standard)
General Data Protection Regulation (GDPR)
MiFID II
Area Allocated for Highest Portion of IT Spending

COMPLIANCE SPEND
• For compliance, one of the biggest areas for spending
is in surveillance technology. This is more prevalent
in the sell-side but has also gained traction within
larger asset management firms. This is an area with
real world applications of AI based technologies.
• GRC – is a topical issue with a greater transparency
and attention on governance structures as well as
multiple risk measures required at an enterprise and
executive level.
• Further spend on compliance staff is expected to
meet the ongoing demands and thwart the risk of
monetary fines by regulators.
3%
17%
29%
42%
49%
59%
Other
Regulatory probes
Maintaining knowledge of industry
regulations
Additional support staff
Governance, risk, and compliance (GRC)
technology
Surveillance technology
Q. In which of the following areas do you expect to
invest your compliance budget in the next 12
months? (check all that apply) (N=123)
Source: Aite Group

MIFID II PROGRESS
• MiFID II implementation date has passed by many
firms have yet to reach compliance.
• MiFID II demands greater data governance models
due to trade and transaction reporting, as well as
product governance requirements.
MiFID II
and
MiFIR
Trade Reporting
Best execution
Transaction
reporting
Non-EU access
Record keeping
Governance
Investment
products
Research
unbundling
Source: Aite Group

DON’T FORGET ABOUT GPDR
• GDPR will come into effect on 25 May 2018, with direct impact on each EU member state with uniform
implementation.
• The implications are also extraterritorial in nature, as the rules not only apply to organizations within the EU but, also
to non-EU entities with control of data where such activities relate to the offer of goods and/or services to the EU, or
simply if the firm is involved in processing data that takes place in the EU.
• Two defining groups within GDPR are controllers and processors of data.
• Both are expected to implement mechanisms which ensures data can only be processed in compliance with GDPR
data protection rules.
• Includes communication with the subject of the information on how information is used and processed while explicit
consent must be given for data to be used. Data Protection officer is required to monitor the governance of data.
• Failure to adhere can result in Monetary fines for non-compliance to GDPR and could range up to €20 million or 4% of
total worldwide annual turnover in the previous year

DATA CHALLENGES
13%
14%
21%
29%
33%
38%
43%
48%
56%
60%
45%
57%
48%
54%
31%
29%
33%
20%
27%
41%
21%
24%
13%
31%
29%
19%
24%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Elastic computing capacity
Governance
Data storage
Data vendor selection and management
Visualizing meaningful results
Data quality
Data consistency across the organization
Meeting the need for speed
Data security
Challenges to Data Management
Highest Challenge Medium Challenge Lowest Challenge
• When it comes to data management, the
greatest challenge is seen as data security.
• The speed of data delivery across a
business is seen as a major challenge,
especially for firms engaged in digital
transformation projects. Batch processes
and end of day refreshes are making way for
near real-time updates.
• Also critical is the consistency of data
across an institution. This entails greater
adoption of data warehousing or data lake
solutions.

INDUSTRY DISRUPTION
• Market participants feel a major disruptor to the wealth
and asset management is the rise and proliferation of
the low cost Robo adviser.
• ETFs continue to disrupt the market, a trend not
expected to reverse within the next year
• Use of blockchain technology within the industry is
likely to gain some traction within the new year, with
additional consortiums forming and the technology
moving away from concept testing to real world
applications.
• Last of the major disrupters is machine
learning/artificial learning. The most common use is
to apply such techniques to alternative data, allowing
for a more holistic investment framework. Further use
cases include trade surveillance and regulatory
change management.
21%
19%
16%
12%
10%
6%
6%
6%
2% 2%
Industry disruptors New intermediation
models e,g, Robo
advisers
Continued growth of
ETFs
Blockchain technology
Machine
learning/Artificial
intelligence
Shifting client
demographics
Political/Policy
Robotic Process
Automation (RPA)
Movement into
alternatives
Cybercrime

ALTERNATIVE DATA HITS HEADLINES
Traditional asset managers Hedge funds Pension funds Others
Prediction for future
market movements
Identify arbitrage
opportunities
Investment idea
generation Firm specific research
Alpha generation
Analysis
Alternative data sources
Fundamental analysis Statistical analysis Big data analytics
Artificial intelligence
techniques
Private company
data
Weather reports Social media loT Captured
data
Transaction
history
Geo-location
data
Souce: Aite Group

ALTERNATIVE DATA HITS HEADLINES
Number of alternative
data providers
212
Number of alternative
data analysts
340
Number of firms
employing data analysts
160 0
50
100
150
200
250
300
350
400
2010 2011 2012 2013 2014 2015 2016 2017
Growth in Alternative Data Headcount
Number of alternative data analysts
Number of investment funds employing alternative data analysts
Alternativedata.org/FT

DEMAND FOR MOBILE

MARKET PREDICTIONS
• There is a lack of consensus when it comes to the
assessment of markets in the upcoming months.
• A large portion agree that volatility is likely to
increase but with some disagreement over the
general market movement, with some predicting a
continuing bull market while others a market
correction event.
• Many are concerned about asset bubbles, in
particular the housing market and cryptocurrencies.
Source: Linedata Survey Industry Participants

THANK YOU
Aite Group is a global research and advisory firm
delivering comprehensive, actionable advice on business,
technology, and regulatory issues and their impact on the
financial services industry. With expertise in banking,
payments, insurance, wealth management, and the
capital markets, we guide financial institutions, technology
providers, and consulting firms worldwide. We partner
with our clients, revealing their blind spots and delivering
insights to make their businesses smarter and stronger.
Visit us on the Web and connect with us on Twitter and
LinkedIn.

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