Data costs are rising. So how can investment management firms control them – and could a managed data service from RIMES provide the answer?
The effective management of market data has become an increasingly urgent focus for investment management firms. Fast-moving investment opportunities mean firms need more quantity, quality, complexity and timeliness in their data. Yet, while pursuing these opportunities, investment management firms have come to realise they must also satisfy the regulatory demands and transparency issues surrounding the industry, as well as ensuring they comply with vendor contracts on the distribution and usage of data.
Based on this, it’s easy to see that these firms need robust systems and people in place to acquire and look after data. All of which requires considerable investment, leaving many firms wondering and worrying about the spiralling costs associated with market data.
So it’s timely that Cutter Associates, a leading investment management support and research agency, recently released a report into the true cost of market data and its operational impacts. The in-depth report was based on a survey of global and regional insurance, pension and traditional asset investment management firms in Europe and North America. Using precise methodology and detailed interviews, Cutter Associates has created a current snapshot of the true cost of market data that is highly relevant for the industry as a whole.
The basic starting point of the survey will come as no surprise to anyone in the industry: the costs of market data are rising and firms are finding it difficult to understand and manage these costs to get a complete picture of the total costs of market data.
The cost of licensing
So how do you breakdown these costs into easily measureable slices to find a firm’s true outgoings on market data? The best place to start is with a relative constant – data licensing fees. This cost should be fairly easy to track via a firm’s accounts department.
However, as the Cutter Associates survey has highlighted, monitoring the costs of licensing market data isn’t always as easy as digging out a data vendor invoice. This is because market data costs are often bundled with other solutions or services from market data providers or come via third party vendors making segregating the costs of market data licensing from other vendor costs less than straightforward.
The cost of managing market data
Managing costs becomes further complicated when trying to measure the internal costs of looking after the acquired data.
The reality is that in many investment management firms the data management function is spread across various internal departments, systems and processes, while data vendor add-on services may come from a variety of sources and service providers. So the true costs of market data – beyond licensing fees – can be said to be significant, without a firm being able to quantify them exactly.
When the Cutter Associates True Cost of Market Data report looked at this area, it took a broad view of what constituted market data management costs. From a personnel view point, the Cutter Associates survey included the costs associated with specific data management groups, as well as how these functions required, used or were part of IT, Operations, Portfolio Management, Risk Management, Performance Measurement/Attribution, Marketing and Client Reporting.
In terms of the cost of the systems involved, the survey took into account reference data management systems, extraction, transforming and loading (ETL) tools, data hubs and warehouses, tools for aggregating and distributing market data, tools for administering market data and tracking usage. The Cutter Associates report also factored in and apportioned other costs that data management requires (such as accounting, client reporting and administrative services) to get the clearest picture possible of the total cost of market data.
The cost breakdown in detail
Taking all these factors on board, the Cutter Associates report found that although firms have invested in technology and data management systems (or service providers performing certain market data management tasks), the costs of the personnel involved in data management was always higher than the total costs of systems and services.
The survey found that, on average, 75% of a firm’s non-license costs for market data can be attributed to people performing data management tasks either as their dedicated role or as a part of their roles. Yet, the precise details of these costs are not always accurately accounted for in budgets, so are often underestimated and therefore become the ’hidden costs’ of data management.
The Cutter Associates report further found that participating firms dedicated an average of 15 full-time employees to the task of managing data, and that this number didn’t include staff involved in systems/solutions or program implementation.
As for market data systems (such as ETL tools, reference data management services, data warehouse and hubs), the report revealed these represented 10% (or an average of $702,000 per annum) of a firm’s total non-license costs. The report noted that these costs do vary widely from firm to firm depending on the mechanics of their internal set-up, the quality of their data and the consequent effort required to cleanse, validate and enrich it.
Costs were also affected if a firm decided to use add-on system solutions from data vendors to help with acquiring, cleansing and delivering market data. These add-on systems are proving a popular management tool for firms and the Cutter Associates report found that investment management firms were spending on average $640,000 per year on such services.
Some investment management firms have gone further and have outsourced to external service providers in a bid to reduce their data management costs across the board. The Cutter Associates report found that the investment firms surveyed spent at an average $381,000 annually on services from custodians, middle and back office service providers and managed data service providers such as RIMES.
What conclusions should investment management firms draw?
Where does this all leave investment management firms trying to understand costs? Well, the Cutter Associates report has some clear findings. First, the report showed how hard firms find it to accurately measure their data management costs and how much can slip under the radar. Because of these ’hidden costs’, it’s very difficult for firms to get a handle on their total costs. Although license fees are a constant and generally quantifiable through analyzing and breaking down invoices, it’s the non-licensing costs that can really hurt a firm’s bottom line.
The solution to this is to thoroughly analyze the costs in the broadest terms so firms can understand and therefore manage them better. An effective data governance program is a good start point as this will help allocate responsibility and therefore costs internally. A centralized strategy helps as this will reduce redundancy and duplication in market data usage. Process is also a must for keeping data quality high as is being proactive with data cleansing, validation and enrichment. And finally, firms need top notch IT systems in place.
If all of this sounds too daunting (or too expensive), then there is plenty of external help available and perhaps the soundest answer to the problem of market data costs is making it someone else’s! A managed data service from a provider such as RIMES could well be the best plan. With a range of tailored solutions to help investment management firms look after their data, comply with regulatory demands, process it, store it and even take care of the data governance side of things, RIMES offers clients a complete service to ease the financial burden – as well as the administrative headache. And, according to the Cutter Associates True Costs of Market Data report, firms that take this route can save significantly on their data management costs. And, in this day and age, that’s always worth considering.
The True Cost of Data – Infographic: