By Helen Fowler
Technology has always played a pivotal role in finance. The movement of ideas, knowledge and money is integral to building capital, as Nathan Rothschild knew when set up a Europe-wide network of messengers and carrier pigeon stations, gathering information that could affect his investments.
Legend has it that when the Battle of Waterloo was being fought in June 1815, rival speculators watched Rothschild’s stocks in an attempt to guess who would win. Shortly after the battle ended, and long before anyone else knew who was victor, Rothschild began selling stocks. Everyone assumed this meant Napoleon had won and Europe was lost. Panic selling followed. When prices crashed, Rothschild bought everything in sight and made a profit.
Today finance no longer relies on carrier pigeons. But effective communication remains as vital to successful investment as ever before. The only difference is the medium for messages. What distinguishes the best businesses and money managers is their ability to turn data and information into results, just as it always was.
Technology means there is a greater abundance of material available to ordinary investors than ever before. However, making sense of that information still falls to the individual. Websites provide a range, depth and frequency of portfolio analysis than was previously inaccessible. Thanks to improved technology, investors can see more clearly what is happening in their portfolios, encouraging them to engage more with their savings. Just as importantly, they also stand a better chance of understanding why it is happening.
“Portfolio analytics doesn’t need to be expensive and complicated any longer,” said Justin Wheatley, Group CEO for investment analytics firm StatPro. “By harnessing the power, speed and efficiency of the cloud, clients can access and share all the analysis they need at a price they can afford. With visual dashboards, users can manage sophisticated risk, attribution and overall fund performance to improve communication, win new clients and retain existing ones.”
Even a few years back, a client buying a stocks and shares ISA or SIPP might have expected to rely on an annual paper statement to see how their investment was performing. Today those same clients routinely access password-protected areas on a provider's website for a breakdown of profit and loss across their portfolios, bringing them as close to their investments as a professional might be.
Allocations can be analysed in relative as well as absolute terms. Clients can see how much a given sector or individual position has contributed to the overall portfolio return. Applying risk scenarios allows users to assess how their portfolio might perform under different circumstances. If information is power, as Nathan Rothschild famously found it to be, then technology is empowering more of us as investors by giving us the insight we need.
But while in some instances technology is cementing the connection between finance firms and customers, in others it is loosening them. Just as the net has created a nation of citizen journalists and amateur doctors, so we have a new class of sole traders, who use larger companies only to place trades. It has never been easier to spread bet or trade contracts for difference. Technology has empowered us in finance as much as any other area.
Without improved technology, it would be hard to imagine the host of financial start-ups seen over the last decade. Start-ups have powered much of the $2.4bn hedge fund industry's growth. It is the latest software developments that have allowed the so-called "hedgies" to deliver sophisticated investment solutions to their clients. Operational efficiency, risk management and reporting in hedge funds rely on functionality available via the latest technology. Scalable software accommodating business growth has become increasingly sought after.
Scalability is an issue for many financial services firms, who are finding that the current data explosion, combined with a lack of flexibility in IT environments and contention for computing resources, are at risk of constraining their businesses. Cloud computing operates like a public utility, such as electricity or gas provider, combined with the function of autonomic computing (the self-managing characteristics of computing resources). Like a public utility, it has the necessary elasticity for scaling up or down. It is accessed through pooled computing resources using a multi-tenant model and can be metered and billed only for usage.
Cloud computing looks set to transform finance firms. It can offer the flexibility needed by firms for adding storage and processing capacity. Many adopters of cloud computing begin with the low-risk migration of horizontal shared services such as productivity tools before progressing to back-office support applications such including claims management and credit scoring. The advantage of cloud computing is that it can be scaled up as necessary to meet future requirements, reducing the amount of hosting services needed and costs involved.
Often encountered alongside cloud computing is Infrastructure as a Service (IaaS), a provision model in which an organization outsources the equipment used to support operations, including storage, hardware, servers and networking components. The service provider owns the equipment and is responsible for housing, running and maintaining it. The client typically pays on a per-use basis. It is clear that technology such as IaaS and cloud computing are revolutionising the way in which we store, access and view data.
Even so, despite recent advances in technological sophistication, the same principles that applied to Nathan Rothschild remain relevant today as they did in 1815. Good investing is never just a question of obtaining information, but formulating the correct response. That maxim applies as much to cloud computing as it did in the days of carrier pigeons.