Achieving Operational Excellence During Times of Uncertainty

Canoe Thought Starters is a blog series that explores timely topics for single-family offices, multi-family offices, registered investment advisors, and private banks. Designed as thought exercises to drive conversations within your firm, these discussions are inspired by our recent conversations with clients, prospects, and influencers in the industry. This month, we are focused on how wealth managers can leverage operational excellence programs to promote success during times of uncertainty.

Priorities that Gain Importance During Uncertain Times

Whether or not you were working in the industry during the subprime mortgage crisis, it’s impossible to not be familiar with the event and the subsequent global recession. The warning signs, the observed best practices, and, ultimately, the wave of innovation that followed offer tangible learnings that can be studied and applied to better navigate future moments of uncertainty. Amongst recent rumblings of a global recession, market volatility has been top of mind for most investors. Rather than enter reactionary panic mode, we can instead study the recent past to identify and apply strategic changes to best prepare for the future.

To better understand the context behind decisions made, such as portfolio rebalancing or process reimagination, it is first important to make note of what priorities arise during times of uncertainty. With so many factors seeming completely out of your control – inflation, rising interest rates, and their downstream impacts – it is no surprise that wealth managers often don’t know where to start. “Looking back, the amount of deer in the headlights moments that we witnessed – people freezing as a result of not knowing what to do when markets were functioning in extreme ways – created an opportunity for suboptimal decision-making,” said Seth Brotman, President of Canoe. Prior to his tenure at Canoe, Brotman focused on alternative investments research and analysis working for multi-billion dollar allocators and family offices.

Before making any changes, wealth managers generally begin by looking inward. “You don’t want to go into a period of volatility with less information,” says Brotman. In the interest of keeping costs predictable, questions arise such as, how can we optimize costs? What resources are truly needed to manage this process? How strong is our tech stack? Similarly, process reimagination often begins, with managers looking to identify activities that can be streamlined and to modify weaknesses in the current workflow. In short, the broader goal becomes focused on increasing operational efficiency with existing resources. 

At the same time, wealth management operations are inextricably linked to the portfolio itself and relevant decisions made by the front-office. According to a Cerulli Associates Survey, the typical 60/40 portfolio model fails to deliver under the current market conditions. The appeal of equity exposures is greatly affected by increasing inflation, and the stability of low-yielding bonds is similarly impacted by rising rates. With traditional investments impacted on both ends, the rise of alternative investments is a natural progression – offering the ability to reduce public market exposure and increase downside risk protection with income as a key objective. A recession would likely push wealth managers to allocate more to private and alternative investments as they look to lower their public market exposure. What may have been working well for a very long time is likely no longer the best option, and it’s how you make the shift that will make the most impact. How can you optimize your current, constrained resources most effectively to better manage complexity – regardless of the current economic climate? In our experience, this involves a keen focus on operational efficiency. 

Preparing for Uncertainty: Incorporating Alternative Investments into Your Portfolio

Cerulli Associates, in the aforementioned survey analysis, describe the current market as “a Goldilocks moment for alternative investment distribution.” They report that allocations to alternative asset classes are notably higher in 2022, on average 14.5% of the portfolio, and express the intention of those polled to increase alternatives allocations even further in the next two years, up to 17.5%. On top of that, a number of attractive new products are now accessible to these investors. 

As the front office rebalances its portfolios, its diversification efforts are likely to introduce new, unfamiliar asset classes to the processing workflow. Our recent conversions with prospective clients confirm the same. In one of these discussions with a COO from a $1.6 billion multi-family office, adjustments made to their target portfolios resulted in a higher allocation to privates and a subsequent increase in interest in Canoe’s solution to help manage the exacerbated operational complexity. 

While alternative investments are a great choice during times of uncertainty, they lack standardization when it comes to the operational processing and reporting necessary, quickly becoming an obstacle to scaling your business. As such, though your firm can greatly benefit from diversification into alternative asset classes, without proper education about and preparation for the related operational complexity factors, these investments may be seen as more trouble than they are worth. Down the line, the new strategy may be held up for weeks or even months as the back-office teams work to manually reprocess everything. 

As we learned at our virtual event with The Exchange Network (TEN), standardized reporting on financial performance metrics makes it easy to automate these processes when investing in traditional asset classes. However, the same cannot be said for alternative investments, with no agreed-upon performance reporting standards in place. Thus, automation is much more difficult and technology solutions tend to be much further behind in this space. 

Alternatives-specific functions, like managing capital calls and distributions, are much easier to manage when automated. However, with alternatives providers delivering documents in different formats at varying cadences, the concept of automated data management grows even more complicated. Wealth managers looking to change allocations must then acknowledge that alternative asset classes carry additional complexity levers with them. More complicated investments require more steps and nuance to manage. Moreover, the recurring reporting and performance documents that need to be managed on a monthly basis differ on a per asset class basis, requiring even more involvement from your team. Given the amount of unstructured information and the fragmented landscape of technology solutions, introducing alternative investments can become an obstacle to scaling the business if not managed properly. 

Leveraging Technology to Achieve Operational Excellence

Fortunately, many of those who rode the wave of the subprime mortgage and credit crisis have pivoted – taking what they learned from working through the challenges of prior periods of crisis and volatility to design technology solutions to manage potential operational scenarios more effectively. “It sounds obvious, but more tech-forward operations, across the firm, lead to better-organized data which leads to faster and more successful decision-making. If we had the resources available today during the credit crisis our portfolios would have performed much better,” notes Brotman about his experience during the 2008 crisis. “We would have allocated away from strategies based on better, more available, and timely data.” Put simply, giving more people access to more complete information can drive a major impact on operational decisions.

With a solution like Canoe’s, the decision to invest more in alternative asset classes no longer carries obstacles to scale. This is further evidenced by our engagement with clients; Theresa Arroyo, Senior Manager of Financial Operations at Wetherby Asset Management said, “Canoe has helped us manage this [consistent growth in the number of alternative positions] without needing to add additional human resources, keeping costs predictable and allowing us to scale.”

As discussed in our adopting an operational excellence program blog, you may not be able to control market volatility, but you can control your data management strategy. Data management impacts nearly every aspect of your business, so effective strategy and execution can have an enormous influence on your organization’s capacity, decision-making capability, and confidence. 

Data Management 

Having a systematized way to get your data collected, normalized, aggregated, and then into the necessary spreadsheets or reports can be a way to free your team from the burden of carrying out a challenging, time-consuming process each month. “Everything Canoe does today, we had to do manually. There were lots of moving pieces to get even a basic understanding of the portfolio and then determine what that means given everything else going on,” said Brotman. “What trends do we see every month? What wouldn’t have been a surprise if we had been able to perform more analysis?” With an automated system like Canoe’s, your team can get data faster and more accurately without burning so many calories. And, with that time freed up in their day, your team can allocate more time to exploring the answers to these questions. 

Data Accessibility

With headlines changing by the day, the timeliness of data becomes an even more important factor in your decision-making capability. If your team is processing everything by hand, it’s likely you are making decisions based on outdated or inaccurate data. The speed at which you operate also has a massive influence on your ability to allocate, deploy capital, and achieve optimal results for your clients. By implementing an operational excellence program, the quality of your information and the speed at which you can deliver it drives stronger investment decisions and improved insights for your clients. “When people are only exposed to information about their strategy, they’re going to pick the best of what’s available in their area, even if that would be grim compared to other strategies, because that’s what they know. Rolling out a more standard, data-driven process across the organization greatly expands the decision-making opportunity,” said Brotman. 

Client Communication & Relationship Management

In times of volatility, your touchpoints with clients are also likely to be more regular. Brotman asks, “How can you turn around responses to clients faster? The speed and quality of data you’re using to articulate a confident message become so much more important in reassuring clients.” Beyond offering reassurance to your clients, an operational excellence program can also highlight activities within your client relationship management workflows ripe for optimization. While client reporting is a key workflow, the amount of data and work needed to manage it often limits how much value can be derived. On the other hand, when data delivery is automated by software like Canoe, the system handles it on your behalf, leaving you time to focus on creating more value for your clients and improving their experience with your firm. 

Operational Improvements

With rising volatility, your ability to not let operational inefficiencies take over becomes crucial to your team’s success. On top of that, the unstructured nature of alternatives introduces additional complexities that make each step more complicated and therefore, more time-consuming and error-prone. Instead, by enforcing standardization and consistency across the entire document and data management workflow, you remove operational considerations as an investment decision factor. For clients like GCM Grosvenor, “Canoe technology enabled us to take a fresh look at our downstream processes and identify opportunities for automation and efficiencies.”

“If it’s a well-organized machine and people are confident in the information they have, they’re spending less time looking for it and understanding it,” explains Brotman. “Having comfort and confidence in the process and the information you have leads to better decisions. Take the extra time and allocate it towards the new questions or manager research and portfolio management.” 

Achieving Operational Excellence with Canoe

In the decade since the subprime mortgage crisis, there has been a boom of financial technologies popping up to provide answers to any number of challenges. Yet, the central focus behind many of these solutions continues to be driven by what was, or what would have been, most helpful to managers trying to manage increasing volumes, process new asset classes, and keep costs predictable during the Great Recession. 

Canoe’s purpose-built platform is designed in a technologically sophisticated manner, leveraging a shared intelligence amongst our client base that enables wealth managers and asset allocators to support their business ever more effectively. We take the next step with machine learning and combine our industry expertise to build complementary processes around the technology, meaning that our operational excellence model is nearly impossible to replicate. 

As the discussion of a recession continues on for a longer period of time, interest in alternative and private investments will continue to rise, making Canoe a key partner in navigating the uncertain market. Canoe enables allocators and investors to more effectively support increasing data volumes and business demands, a necessity given the current instability of the market. Clients like Align Impact have more than doubled their volume of investments and are “experiencing up to a 75% reduction in time spent on managing an even larger volume of alternative investments with the same resources compared to manual workflows leveraged prior to implementing Canoe.”

Our scalable ecosystem and extensive partner network help alternative investors work faster, save money, and reduce operational risk. We have supported more than 200 alternative investors and allocators in establishing operational excellence programs.