Cost strategy in action:

harvesting the benefits of an integrated financial software solution

To support its ambitious international growth strategy while exerting an absolute degree of control over cost of operations, Edmond de Rothschild Asset Management needed a software system that lived up to its demanding requirements. This article examines how the French asset management company moved from a legacy platform to an integrated system, using a due diligence process to select a seamless solution to enhance transparency and control cost.

by Cédric Le Moan, Project Director at Edmond de Rothschild Asset Management, Paris, France and Laurence Adam, Head of Operations at Edmond de Rothschild Asset Management, Paris, France.

At a time when the investment management industry is contending with a host of pressing business issues, including rapid changes in regulatory requirements and investment techniques, as well as the imperative of keeping operational costs under strict control, the use of a flexible financial software solution that can be highly agile and adaptable is the guarantee of a client-oriented and cost-conscious business strategy.

In the current difficult business environment, asset management clients have become more discerning, demanding product innovation and a constant upgrading in the quality of the service their providers are capable of offering. This does not come without a cost, and asset management companies need to take this into account when planning their investment management systems.

Edmond de Rothschild Asset Management is one of those companies that have turned this challenge into a competitive advantage in prospecting new clients and markets. In the past 12 months, the company has opened two new offices outside France, one in Frankfurt and the other in Madrid. The Frankfurt office covers fund and asset management and commercial distribution, while the Madrid office focuses on distribution. Assets under management are approximately a current €13 billion, and here it is significant that it has expanded the assets in the institutional sphere, winning several high-volume mandates.

RATIONALE BEHIND SYSTEM CHOICE

Three years ago, Edmond de Rothschild Asset Management embarked on a path of finding a new software solution because it was proving a problem to track and accommodate new regulatory issues and procedures with the existing system. It was also proving difficult to maintain the growth in assets the company desired because the system fell short of expanding risk management requirements. The purpose was to be able to follow in real time all the risk issues with the same data used by the funds and the middle office.

The third issue was client support, which is a key business consideration when a company starts to develop its institutional business. Institutional clients demand sophisticated and highly customised reports quickly and efficiently.

In addition to the risk management and client support factors, the strategic impetus behind the drive was a combination of promoting international expansion and controlling operational costs. The expansion in international growth required substantial development in production tools, and a system was needed to be able to manage this more effectively. In view of this rapid expansion, it is important to industrialise the process, and to increase the level of automation. With an integrated approach, it is easier to manage the workflow and control the cost.

Edmond de Rothschild Asset Management’s priorities included the capacity to grow without system limitation; capacity to expand worldwide; ability to anticipate business changes; manage all asset classes without limitation; capacity to control IT costs; ability to mitigate operational risk; and finally to offer its clients full transparency.

The preferred choice was a fully integrated system focused exclusively on asset management; process and instrument coverage; local national coverage (of particular interest being Germany and Hong Kong); involvement and understanding of asset management business; structure and organisation (staff development, strong consulting staff); and finally a proven track record in attracting high-end clientele.

PHASED DUE DILIGENCE PROCESS

In the due diligence process Edmond de Rothschild Asset Management adopted to select its financial software solution, the first phase entailed creation of internal workshops to draw up a list of all its processes and functionalities and to decide what should be retained and what should be discarded. It then had the necessary roadmap with which to proceed with selection of the system it wanted to implement internally.

The next step was to send out requests for procurement, examining 14 systems available on the market. Here the criteria included reliability, capability and standing in the marketplace. The list was then narrowed down to four service providers, organising workshops with all the operational teams involved during a period of one month, which eventually resulted in a shortlist of two.

During the third phase, a scenario was compiled of mechanisms, tools and instruments the company wanted to have implemented, including random data and portfolios. Another month was spent working closely together with each of the two final contenders, examining what they had done with the system requirements and data. In the end, SimCorp Dimension was the preferred choice.

The first phase of mapping out every process internally took four months, and then allowing for an overlap of one month in the final selection process, the overall period stretched to eight months and was finalised in March 2009. Implementation of the project started in April 2009, with 10 funds in production by December 2009 and full migration of all funds to the new platform completed in July 2010.

DEPLOYMENT IN FOUR KEY AREAS

Edmond de Rothschild Asset Management’s adopted IT architecture is based on an integrated financial software solution, which features the following functional applications: order transmission, position-keeping, middle office, risk management, performance calculation and client reporting.

The investment software is deployed in the following four key areas:

Front Office

• Portfolio Workbench
• Order Blotter
• Short-Term Cash Management

Middle Office

• Payment Reconciliation
• General Reconciliation
• Corporate Action Manager
• Swift and Communication Server
• NAV and Portfolio Calculation

Risk Measurement

• Limit Monitor
• Value-at-risk (VaR) Calculation
• Performance Calculation

Reporting

• Report Book Manager

SEAMLESS SOFTWARE SOLUTION

The IT architecture in the form of a seamless software solution provides Edmond de Rothschild Asset Management with the capability to ensure uninterrupted reliability, efficiency and implementation of processes. The software platform enables the company to frame and structure its international expansion, develop investment management techniques like derivative products and overlay management, run a top-grade risk-control system and provide clients with the type of high-calibre services they demand.

The software solution is also sufficiently flexible to adjust to the various regulatory constraints of all client types, irrespective of their geographical origins. When a country- or client-specific item is added, for example, it may be re-used or adapted for another country or client type. This enriches best practice in the base and allows Edmond de Rothschild Asset Management to improve its investment and service standards and help all clients benefit from these changes.

SINGLE REFERENCE TOOL

The software architecture uses a single, reliable and controlled reference tool and a process and client reporting system that is shared by all the company’s business lines. This ensures a transparent environment that guarantees reliable data and precise analysis and client reports. This integrated solution enables Edmond de Rothschild Asset Management to ensure the same quality of investment, services and risk management throughout its various entities.

With an integrated processing tool it is better to have a single data management team for all the business departments, which all work on the same synchronised data. This helps to control operational costs, as well as to promote international expansion, creating new products and attracting new clients. The type of institutional clients Edmond de Rothschild Asset Management is now increasingly attracting are very demanding and it is crucial to have the right kind of tools in place to support their requests. Here the ability to link the right client with the right administrator also plays a vital role in terms of controlling costs of implementation.

The tool also supports Edmond de Rothschild Asset Management in its development strategy. For example, the tool can be used throughout the growing international network of offices so that whether it is Frankfurt, Hong Kong, Madrid or Paris, all are working on the same system. The same applies in the investment strategy – it facilitates the process of investing in new products and instruments, as well as responding effectively and efficiently to the requests of new clients.

SPEED OF ADAPTATION

The software system’s modular structure allows the company to very rapidly adapt to new client demands, specific investment issues in product innovation and particular client or regulatory requests. The speed of adaptation is a key competitive advantage, permitting the company to quickly roll out a development in a new zone or for a new client type. To meet any future marketing expansion, it may add other modules to the existing platform and reinforce them with specific features if and where needed.

However, a precise methodology has to be applied to the modular structure. For example, the methodology applied in the front-, middle- or back-office operations is not always one and the same. Edmond de Rothschild Asset Management works closely with its service provider to ensure that the same methodology is applied throughout the system. This in turn improves transparency and homogeneity. Each module has to be treated separately because a single point of entry for the data is required for the same treatment to be applied.

While speed of execution plays a very important role, Edmond de Rothschild Asset Management needs to be able to use the system to administer the increasing number of portfolios it is seeing. The growing volume of net asset value (NAV) positions has to be calculated in a very rapid and effective way, and also in a manner that is clear and transparent for the client. It is also very important to provide the fund manager with a global real-time view of all the fund components he manages in order for him to be able to take swift buy-and-sell decisions.

SUPPORT AT DIFFERENT LEVELS

The software system is based on a service level agreement (SLA) between the two contracting parties and is supported at different levels. Support at the first level is part of the Business Management and Projects department at Edmond de Rothschild Asset Management and comprises four internal staff and four external contractors in Paris, one contractor in Hong Kong and one in Frankfurt, and who are responsible for training, updating or enhancing the investment management software’s business features.

La Compagnie Financière Edmond de Rothschild’s Group IT department is in charge of infrastructure and OMS support and based in Paris. Providing second level support is the software provider based in Paris and Brussels and which is also responsible for escalation of any pressing issues to its head office in Copenhagen.

One of the reasons why the current provider was chosen was its expertise in the asset management sector – it is focused on the buy side and this suits Edmond de Rothschild Asset Management very well. A second consideration was the number of developers the provider has at its disposal in Copenhagen and Kiev. This fitted in well with the strategic decision to outsource this side of the business so that the company can concentrate its strengths on producing and delivering funds and to ensure that the operational and market risks are reduced to minimum levels.

INHERENT FLEXIBILITY

Generally, the software system has responded well to the functional requirements of Edmond de Rothschild Asset Management’s operations, ranging from the asset transmission and evaluation to the reporting. The system allows many processes to be automated and control over the overall workflow is increased. As a result, operational risk has been reduced and at the same time activity increased, while reconciliation and control have been improved. During the current year, six new funds were launched with full fund administration and custodian collateral without any impact in the middle-office and risk development areas.

Some specific processes had to be reconfigured in order to standardise as much as possible with a view to increasing the overall level of automation. Some aspects of the workflow had to be customised. But the net result has been a clear and measurable improvement in operational costs. And there has been no increase in the overall operational and IT headcount.

Cédric Le Moan is Project Director at Edmond de Rothschild Asset Management. An engineer by training, he graduated from ESME SUDRIA in 1998. From 1998 to 2000, he worked as e-commerce consultant at Andersen Consulting and then transferred to Fortuneo-ProCapital as Head of Engineering. From 2001 to 2007, he held various positions in the BNP Paribas group including Deputy Head for Information Systems Group at BNP Paribas Asset Management and heading information systems for the front office and risk management. From March 2007, he worked at BNP
Paribas Asset Management Sgr Milan. He joined Rothschild in 2008 as Director of the Department of Work and Master of Information Systems.

Laurence Adam joined Edmond de Roth­schild Asset Management in February 2008 as Chief Operating Officer. She has over 12 years of experience in the field of asset management, a large part in hedge funds. She began in 1998 at Barep Asset Management, a subsidiary of Société Générale, where she spent three years in the middle-office department. In 2001, she joined Systeia Capital Management, a subsidiary of Credit Agricole and managed the middle office there for seven years. At Systeia Capital Management, she participated in the creation and development of the middle office and performance measurement department.