What a great SIFMA Ops 2023 conference. It was terrific to see the impact SIFMA has had on our industry over the last 50 years. As I said in my keynote at the conference, what most excites me is looking ahead to the next 50 years. No one can predict the future, but we can all be pretty sure of one thing: there are more changes coming.
New trending insights on technology spending and ROI
Let's start by looking at where we stand right now. FNZ has worked in partnership with Boston Consulting Group (BCG) to release new insights on the global financial industry landscape, so I can share some fresh intelligence.
One of the striking things in this new data is the ongoing increase in technology spending.
Over past five years, the analysis shows a 25 percent increase in in-house engineering. Immediately, I think about the investment wealth management firms have made in building software and technology internally. Spending has also increased by almost 20 percent on hosting technology. This is likely for mainframe applications that many in our industry still use.
Has this spend had the intended impact? Does this investment, in effect, do its intended job? This looks like a lot of money is spent building in-house capabilities to develop, maintain, and innovate on technology.
What outcome would you expect from increased costs such as these?
I would expect it to give the firms – the industry overall – a good return on investment (ROI). Otherwise, why spend the money in these areas? I would expect to see ROI in either reduced business costs, or improved revenue streams from customer acquisition, customer expansion, or new lines of business. Otherwise, it seems like just tech for tech’s sake.
Evidently, it’s not actually helping. It’s not providing the ROI that I would expect.
Despite the growing investment in technology, operational costs are still increasing – rising an average of 15 percent to run overall operations around the globe.
Nor has this spend seemed to generate new income growth. In fact, net income per AUM has actually gone down during the same five years of that spend.
Thinking about the ROI, the data isn't telling a promising story.
Does this sound or look familiar? I know some of you are laughing, thinking, “Yep, this is pretty much what’s happening in our business.” I’m sure it resonates for many of you out there. It certainly sounds familiar to me – this is the story we hear all the time when we talk to potential customers about their challenges. I was, however, a little surprised that this played out across such a broad global group of wealth and asset managers.
Technology Investment Can Deliver ROI
Or…maybe this isn’t the case at all in your business. I know, and I want you to know, this doesn’t have to be the case…
On average, firms on FNZ's platform are achieving cost reductions across their businesses – note the lower cost-to-service end investors in the chart. Additionally, most are simultaneously growing assets.
Unlike the broader data set in the study, these insights are based on FNZ platform data only. Think of this as specific to a fully outsourced technology operations model. This is likely why we’ve seen the inverse of what the broader, global data set just revealed.
ROI can be achieved. Investing in the right technology and deploying the right business model can help generate growth and lower costs at the same time.
The obvious question is: Why is this happening? Why such big differences in the data?
I have some hypotheses.
We hear from many large financial institutions that a majority of the in-house development costs focus on just running the business and keeping up with regulatory demands. Basically, they need to increase spending just to stay compliant. It’s a constant burden.
A second theory, as I’ve already alluded to, is the difference in outcomes based on the overall approach to strategic transformation. The industry has been exploring three primary business models for digital transformation: build-it-yourself, stitch together best-of-breed, and outsource to an end-to-end partner. It's clear from this report that results from technology spend will vary based on what strategy you choose.
Is it time to look at your technology spending and ask: Which digital transformation model is going to generate growth and help me scale my business?
Look for my next post on insights about the advice gap and artificial intelligence soon.
Tom Chard
Group Head of North America
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