If done right, performance measurement helps firms greatly improve their investment decisions and better explain their results to clients—two essentials for attracting and keeping investors. Yet everywhere a firm looks when it comes to this issue there are expenses, says Philip Lawton, an expert on the matter. “It’s costly but not without internal benefits,” Lawton quickly reminds me.
I recently spoke to Lawton, a partner with Stone House Consulting, about this “important feedback loop to business managers and the clients,” and how it offers a “tremendous diagnostic power.”
One of the biggest performance measurement challenges is the huge volume of data that needs to be managed, vetted and validated as well as kept secure. Firms also face a greater number of portfolios, diverse security types, and the growing need for daily performance reporting, Lawton says.
“For example, the Global Investment Performance Standards (GIPS) now require revaluation of portfolios when a large external cash flow takes place,” he says. “That effectively means that firms must have the capability to do daily evaluations.” (The GIPS guidelines were created by the CFA Institute.)
Complicating matters is the fact that many firms have isolated systems caused by either an acquisition or the evolution of distinct businesses.
Firms with business and IT stovepipes (Lawton says the term is “a little less damning” than silos) are likely to have “many portfolio accounting and performance measurement systems” that are not integrated. “I think there’s a great deal of infrastructure work that’s remaining to be done,” he says. “It’s these very large investment management firms that tend to have multiple systems and have some challenges in getting an overall picture of their investment performance.”
To rectify the situation, Lawton suggests that firms first get “a good solid understanding” of their performance measurement state in terms of organization, policies and procedures, and systems. “And then try to define policies that can be applied on a firm-wide basis to move an organization toward best practices in performance measurement and performance reporting.” He strongly urges firms to use GIPS guidelines.
Bringing in a consultant might also be a good idea at this stage, he adds. Consultants offer an expertise in systems integration and performance measurement that the firm may not have internally.
“I think consultants can also bring credibility to the conversation and help firms get past parochial politics and work together,” Lawton says. Consultants can also help firms develop optimal data flows—the lifeblood of performance measurement systems—and devise a set of best practices.
Looking internally, firms could also explore the interesting connections between performance measurement and risk management.
“It seems to me that the performance measurement and risk departments are growing closer organizationally, in part, because they have overlapping skill sets,” Lawton says. “Performance data can assist risk managers in evaluating the market risk of the firm’s investment products. Then that can flow into an enterprise risk management solution.”
Firms might want to consider hiring staff with risk management and performance measurement skills. “It also can be quite exciting for risk analysts as well as performance analysts to have this opportunity to grow intellectually and professionally,” Lawton says.
All of these issues and more—such as whether or not to outsource and the regulations to come from Dodd-Frank—are anchored by “legitimate budgetary concerns” stemming from profit margins under pressure, Lawton says. “It’s very difficult for firms to make sound, strategic choices on the deployment of budgetary funds.”
To help firms sort out their choices, Lawton and others will be speaking at the 4th Annual Performance Measurement conference this Wednesday, March 23, in downtown Manhattan at Bayard’s, One Hanover Square. The one-day event is organized by the Financial Technologies Forum.
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