5 Risks of Investment Management Automation

Automation is inherently good, right? And manual processes are bad.

That’s the philosophy that has driven much of the buy side’s effort and investment in the operations world for decades.

But is it true?

Well, up to a point. But automation is not without its costs or dangers.

Reasons Money Managers Should Automate

We in the industry have devoted countless years and billions of dollars to developing, implementing and using the latest breed of hardware and software tools, in an effort to eliminate manual involvement from all along the investment management value chain. To reach the nirvana of straight-through processing.

And there are good reasons. Automation clearly brings benefits, including:

  • Lower costs.
  • Fewer errors.
  • Reduced investment and operational risk.
  • Faster and better regulatory compliance.
  • Improved client service.
  • Enhanced scalability and business agility.

At a time when asset managers are being warned to cut costs, automation is clearly essential to firms’ future prospects.

5 Pitfalls of Investment Management Automation

Automation can also bring problems:

Law of Diminishing Returns

Automation comes at a price – whether it’s implementing new systems or extending current functionality to new areas. The expectation is the ROI will make it worthwhile. Yet that’s not always the case.

We see it time and again. Sometimes automating a process may require 500 hours of effort (plus ongoing system costs) for an activity that takes a human 10 hours to complete each quarter.

It’s easy to get carried away. So be careful not to automate for the sake of automating. Instead, rigorous cost-benefit analyses are needed to weigh up the advantages.

Technology Implementation Failures

If an automation initiative is not properly scoped, and/or the implementation mishandled, the result can be a project that goes over-budget, fails to achieve the desired efficiency gains and creates more complexity.

Supporting Custom Business Demands and Opportunities

Automation requires a certain degree of standardization. That can make it difficult to deliver the level of service flexibility some internal teams or external clients want, to meet their custom or unique requests.

So there is often a trade-off between maximizing efficiency through automation, and managing the exceptions that come with a highly-tailored, high-value service offering.

Changing Employee Functions and Skills

Technology is reshaping the work of middle- and back-office staff within buy-side firms. Automation will continue to remove some functions. But those roles that remain require higher skillsets and training, not least people who:

  • Understand the systems and broader technology use cases.
  • Know how to manage and resolve the (typically more complex) process exemptions that result.
  • Can ensure all the automated and non-automated processes integrate together.

People with the right combination of advanced business and technical skills are in short supply. Finding them is a challenge, and you will have to pay accordingly.

Key Person Risk

As mentioned in the previous point, with more functions being automated, the skills needed to oversee those tasks and manage the non-automated ones are becoming more rarefied. And this creates a related issue: a growing risk that the knowledge and understanding of your processes will become concentrated in one or a handful of people. So what happens when they are ill, or leave the firm?

Finding the Automation Sweet Spot

Automation brings undoubted benefits. And as the technology becomes increasingly sophisticated and more readily available the use cases will only expand. But there is a balance.

Minimizing your middle- and back-office costs and optimizing your operating efficiencies depends on finding that balance – or outsourcing to a third party to take on that challenge for you.

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