Opinion: How risk became riskier in the investment sector

The investment sector was virtually shipwrecked after the Global Financial Crisis of 2008. Somewhat surprisingly, it is now flourishing, with a number of caveats to that burgeoning health, some of which can be solved with technology.

In July and August 2007, a number of European and US financial institutions suspended activity in investment vehicles linked to US mortgage debt and their derivatives. On 15 September 2008 the US government allowed the investment bank Lehmann Brothers to go bankrupt. The idea that all money was safe in banks disappeared overnight. Within a month, the threat of a domino effect through the global financial system forced western governments to inject vast sums of capital into their banks to prevent them failing. The banks were rescued in the nick of time, but it was too late to prevent the global economy from going into freefall. So began the Global Financial Crisis, now known to us all as the GFC 2008.

The investment sector has since been salvaged and refloated but is scrambling to regain public trust in its ability to keep its passengers dry. How has the sector evolved post 2008? Here are a few headliners from my knowledge, research and discussions with clients:

  • Widely expected to stagnate for a while, instead the investment sector is flourishing worldwide. PwC and KPMG predict that Assets under Management will reach US$100 trillion in 2020, almost doubling from what they were in 2013.
  • “Risk” has become the number one issue keeping the investment industry awake at night. It’s a refrain I hear over and over in my conversations with investment managers.
  • Regulatory change is transforming the industry. Compliance checks abound. Transparency around fees charged by advisors and institutions is now mandatory in most markets.
  • The sector is grappling with the impact of technology on their business. In the midst of recession, technology has disrupted the way we do almost everything.

Let’s put some context firstly on the massive growth in the investment sector. Governments the world over, are shifting the responsibility for retirement to the individual, fuelling an increase in what’s called DC schemes (Defined Contribution) à la KiwiSaver. A massive middle class is rising in countries like India. To put some scale on this rise, PwC predicts that between 2010 and 2020, “… more than one billion more middle-class consumers will emerge globally, representing the largest single decade increase in customers in history.” While those consumers, individually, will not represent significant wealth, together they will.

In the midst of this, businesses are struggling to cope with the expectations of their customers.
The rapid pace of change in consumer technology over the last decade means that you have more consumers expecting better information on their investments, delivered to them faster and whenever they want.

Many investment managers are still using spreadsheets to analyse data before it’s been validated. That spells errors just waiting to occur which equals high risk and sleepless nights. Here’s an example. I recently heard of a fund that had inadvertently saved a spreadsheet that was being used for “What if” scenario planning. It took months to uncover the error that had put their sums out to the tune of US$100 million.

Regulatory change is another headache for investment managers. Post GFC 2008, regulatory bodies demand to see how money is being invested, where it is invested and what fees are being charged. Moreover, investors themselves are performing due diligence on investment management systems to make sure their money is handled efficiently and safely. Whether we’re talking wholesale market or high net worth individuals, transparency is paramount. Reporting and due diligence takes up time, far more than it used to. If IT systems are not up to scratch, it means taking analysts away from what they are supposed to be doing - adding value to investment portfolios – to perform additional administrative tasks.

Back in 2008 just as the GFC 2008 was kicking off, ClearPoint designed and built our first investment data management platform. It was for the New Zealand Superannuation Fund. Once we had completed a series of these platforms, we invested in detailed market and customer research through the Haas School of Business at the University of California – Berkeley. The results kept giving us the same overall messages. The IT Director of a US state pension put it to me recently that “… data access and data management is our number one problem.” I’ve now launched a separate company to ClearPoint to address the opportunities: AlphaCert. We took the concept to Callaghan Innovation. They gave us an R&D Growth Grant in 2012. We’re now taking our data management platform to market. I’ll keep you posted.