The custody data revolution: playing catch-up in the information age

Custodians are missing the opportunity to become incredible sources of intelligence for asset managers and asset owners, writes Andrea Gentilini, head of SEI Novus, who points out lingering issues around timeliness, accuracy and data quality.

The proliferation of data in financial markets has revolutionised how asset managers invest and how asset allocators access information related to their portfolios. For asset owners, responsibility for being on top of transactions, returns and valuation data has historically been with custodians. Data management was never the primary reason why they were hired but has become a natural expectation over time. That said, despite changing demand, the industry is still massively behind on the adoption of technology and data management. 

In a world where data is so crucial, the role of the custodians consequently evolved to include data management, an added responsibility in maintaining and curating accurate and actionable data on behalf of their clients. Custodians are in a privileged position, acting as a consolidated information source for clients across asset classes with the potential to give them a unique view into the inner workings of their portfolios. As well as being guardians of assets, custodians have the potential to become incredible sources of intelligence.

This opportunity, however, is being missed. Poor quality or delayed data stemming from custodians is a well-documented issue among asset managers and asset owners, leading to a lack of transparency around held assets. In volatile markets, as we have seen recently, the timeliness and accuracy of this data is particularly crucial as allocators must closely monitor their exposures and manage risk. For allocators, there is also the added demand from the ultimate beneficiaries, whose pension pots they manage, to know how their money is being invested.  

Marshalling and improving the quality of such vast data sets is a significant undertaking for custodians. Very often, there are accuracy and timeliness issues at the Investment Book of Record (IBOR) level, which stem from errors in the management of transaction data as handled by custodians. These small errors are magnified when examined in the context of the decisions they facilitate. Incorrect or late data can devalue or nullify an entire analysis, invalidating any efforts to understand one’s portfolio and making it impossible for asset owners to properly steer their assets. 

It is therefore not surprising to hear that some asset owners simply refrain from embracing in-depth portfolio data for fear of incurring the higher liabilities associated with its mishandling. Unfortunately, not acting is no longer a viable option, as it won’t be tolerated by their beneficiaries. 

A data breakthrough

A primary cause of these data issues is rooted in custodians’ inability to resource their data teams to the level needed to service the demands of modern markets – admittedly a costly and often difficult operational shift. The status quo, however, is changing as third parties are increasingly able to plug directly into custodian data – an important step in rectifying deep-seated data management issues. 

Custodians are now able to collaborate with specialist data firms to reconcile and ensure accuracy of data sets. The end-result is a fully reconciled IBOR, allowing them to track exactly how a portfolio has changed over time. Third parties are now able to ingest raw data from multiple custodians and aggregate these sources into a single digital location where they can confirm, reject, amend, or enrich the data – allowing asset owners to analyse exposure, measure risk, predict performance, and properly steer portfolios.

Breakthroughs in data have transformed how custodians and asset owners can work together to improve transparency and enhance investment decisions. It is, however, the collective responsibility of all participants to push for higher data and transparency standards to benefit the financial services industry as a whole. Quality data has become an important part of a custodian’s value proposition, alongside offering security and sweating assets under custody. Those that realise the scale of the opportunity in data – and are able to work with data specialists to give their clients timely and accurate analysis of their portfolios – will be well positioned to capitalise on the custody data revolution.

While the data management burden is being lifted by specialist providers, custodians must look outwards and realise the value of data and the opportunity for clients. There is still some resistance in allowing third party providers to access their data for fear of diluting their value-add in the process. This however is likely to disappear quickly, since those who are embracing the future and allowing third party providers to consume their data via API are creating an expectation which their competitors will have to meet. Those that are able to effectively modernise and improve their data offerings will be well-placed to acquire sophisticated clients and uphold the high transparency standards expected by market participants.