Buy-side institutions are facing extensive challenges that are accelerating the need for digitalization and the adoption of next-gen technology. Many of these solutions are in direct response to competitive pressures: asset class convergence, fee compression, and changing investor preferences while others are designed to propel the industry forward as a whole, carving out opportunities for efficiency along the way.

According to Broadridge’s 2023 Digital Transformation and Next-Gen Tech Study, which examined how buy-side C-suite executives and direct reports are embracing digital transformation, more than half (57%) of leaders say that digital transformation is their most important strategic initiative. This highlights how firms face the choice of accelerating their investments to meet the demands and challenges of the shifting landscape or risk losing out. 

The Industry Responds Through Next-Generation Technology

Despite challenges, the industry is finding ways forward, with next-gen tech adoption at the core of their strategies.

Buy-side firms recognize that relying on out-of-date systems puts them at a competitive disadvantage relative to their peers who are innovating more quickly. The study finds there has been a notable increase in budget allocation to digital transformation across the buy-side as a result. Broadridge’s research notes that buy-side firms are currently allocating 27% of their overall IT budgets to digital transformation — a significant jump from 2022 when this figure stood at just 11%.

Where Firms are Investing

The ongoing democratization of investing and increased retail AUM inflows have led buy-side firms to focus on identifying, gathering, and growing the retail assets that they have. Technology plays a major role in this, helping to improve client education, communication and experience as well as the ability to leverage detailed distribution data to better segment and target retail flows.

Broadridge’s study finds that firms intend to increase their investment in data analysis and visualization tools by 24% during the next two years. A quarter already say they are in the advanced stages of replacing legacy systems with modern, cloud-based IT platforms. This modernization will help accelerate digital transformation and data centralization, augment performance and improve client reporting.

Data analytics tools can help buy-side firms monitor their investments and operational activities across multiple asset classes. As more firms launch hybrid investment strategies including public and private assets, this technology will play an invaluable role in helping them oversee complex portfolios and manage risk. They are also using data to drive strategic decisions about launching new products, optimizing distribution channels and streamlining the sales process.

Innovation is not Without Complexity

Despite ongoing technological innovations from the buy-side, challenges still remain on the road to digitization. Forty-two percent of buy-side respondents said inflexible legacy systems and inadequate IT infrastructure were major impediments when implementing technology changes. A further 36% blamed digital talent shortages as one of the main obstacles, while 33% said staff resistance to change was a problem.

The Decade Ahead

Respondents expect the buy-side to adopt disruptive technologies over the long-term. They plan to increase spending on artificial intelligence (AI) and machine learning tools by 21%, blockchain/distributed ledgers by 18%, and robotic process automation (RPA) by 15% during the next two years.

AI is widely seen as one of the most exciting technologies, with 74% of buy-side firms saying it is significantly changing how they work. The growing interest in AI comes at an opportune moment with the emergence of powerful generative AI, such as ChatGPT. For example, new generative AI tools are already being used to answer bond-related questions and assist users in their identification of corporate bonds. This helps with the often-complex bond selection and portfolio construction processes, benefiting asset managers, hedge funds, and dealers. The technology will also have a seismic impact on the future of investment research and client communications.

The findings indicate that senior executives are fully aware that to retain investor confidence, they will need to improve their technology. Simultaneously, as overhead costs continue to trend upward, firms will look to technology and automation to rein in their costs. The increasing pace of change, driven by more powerful next-gen technology means taking a wait-and-see approach is no longer an option.

This article first appeared in Traders Magazine October 2, 2023.