Long-term investors already have a tough job, and their offices are usually understaffed and lacking in resources. As a result, they also must grapple with inferior technology. But it doesn’t have to be this way. Technology vendors can serve these offices and make their clients’ lives easier — if the vendors are willing to listen to them.
Over the past three years, I have surveyed 250 long-term investors to find out the essence of their investment processes, the technological functionalities they needed to make their working lives easier, and what they were doing about it — or not doing, as the case often turned out to be.
My questions often started broad and then went deep. As a technologist my angle has always been solutions, so it was disheartening to hear how many problems persisted through time. Decisions about asset allocation or risk management systems were ignored, delegated to a consultant, or done in-house using Microsoft Excel as a short-term crutch that eventually became a permanent prosthetic limb. These professionals were also frustrated that their offices had little to no ability to embrace innovation.
These frustrations are symptomatic of the environment and governance of long-term investors’ offices. These offices are often undermanned; on average, endowments and foundations have one full-time investment employee per $435 million of assets, according to the 2015 NACUBO-Commonfund Study of Endowments. (The stats for public plans are worse; they don’t have time to do anything but focus on investments). Being understaffed is the single biggest problem these investment offices have. They’re also hamstrung by inadequate technology budgets.
I created a series of surveys to get a glimpse of their technology landscape. For the first phase, I focused on document management technology. My findings were puzzling. On average, the respondents spent $19,000 per year for that technology, had a document repository containing 27,000 documents, incurred a cost of 72 cents per document per year, and had a level of satisfaction that was neutral (neither happy nor unhappy, with a fatter unhappy tail).
The survey also indicated that the respondents mostly relied on linear file structures (using local or cloud-based servers to store documents, which are then organized by folders and subfolders) and complained about the complexity of manual tagging systems for saving these documents. They also mentioned the difficulty of finding the stored knowledge.
Moreover, it appears that many of the latest technology concepts — like big data techniques, the new wave of GUI design, machine and deep learning, and natural language processing — have not reached investment offices. I am sure investment offices are aware of many of these but simply have not had time to look at their utility for their function. For one, it seems the old-tech vendors (defined as firms conceived pre-2010) have stopped investing in innovation for the long-term investor market, as is apparent from the lack of representation of these techniques within their tool set.
It would seem an opportune time for new-tech vendors (post-2010 startups) to make a run at the established companies to capture market share. That hasn’t happened either. They have had their own set of problems. Senior staffers for long-term investors say new-tech vendors pitching their wares try to sell out-of-the-box products without listening to the investors about what they need. They simply “don’t feel for our portfolio of technology headaches,” as one investment staffer put it. These vendors have to stop believing that their product is so good that the clients will simply show up.
If we assume that all needed investment office functionality is already identified and that hundreds of vendors already cover these needed functionalities, it seems reasonable to assume that the long-term investors could use a unifying platform. But all parties involved need to get on board.
This will require long-term investors to embrace innovation (e.g., accept startup or new-tech risk). Too often they fall back on the “no one gets fired for hiring IBM” excuse, whoever the IBM equivalent for that functionality may be. Thankfully, some innovative investors have started to lead the way.
Long-term investors can also do a better job at creating a culture of change. The biggest reason for failure in technology projects is failed implementation and the lack of adoption by internal users.
The changes new-tech companies need to make are simpler: Listen to the markets and continue to focus their talents on delivering elegant solutions based on the right specifications, but don’t get too greedy on price or be driven by valuation. The old-tech firms will have a harder time because they will need to go outside their comfort zones and innovate. But they can be more open to the tidal wave of burgeoning new-tech companies. This will require them to provide a formalized and transparent application program interface (API), openly available to all.
Will all these players act in concert and march together toward a world where all players’ interests are aligned and the clients’ technology needs are met? The odds seem against it. But in an era of underdogs scoring huge upsets — Brexit, the Chicago Cubs, Donald Trump — maybe someone will decide to make the changes that can lead investment offices into the modern era.
Ken Akoundi is the founder and senior editor of Investor DNA, a daily newsletter for long term investors, dedicated to readings at the interface of investments and technology.