We’ve all heard the mantra for years. Select the best portfolio accounting system, the best trade order management solution, the best performance and attribution product, ditto that for reconciliation and reporting, and put them all together to come up with a best-of-breed (spoken with reverential intonation) portfolio management system. We’ll, the jury’s in, and it just isn’t so! In fact, for many firms, selecting a well-integrated, better-than-most portfolio system, with all or most pieces of the puzzle already in place, will trump the lofty goals of the best-of-breed approach every time. The reason is simple and clear: Integrating complex, disparate systems is extremely difficult, costly, and fraught with risk.

I heard the first warning a half-dozen years ago. Back then, at a wealth management conference, it was predicted that the great hope of best-of-breed would, in future years, lose its luster. Now, it’s all too apparent that the prediction of busted dreams has become reality. Sure, some very large investment management firms with deep R&D pockets and the patience of Job have been able to successfully bring together a dozen or more independent systems. And, yes, they can, when all of the moving parts are meshing properly, pride themselves on having the absolute greatest investment accounting system, and the most robust performance attribution capability, an enterprise data warehouse, and so forth and so on. Some of them actually require all of that sophistication but the cost is extreme and, fact is, most firms just don’t need it and really can’t afford it. They can’t afford it, not only in terms of easily identifiable direct costs such as system license fees, but also in terms of the softer, but still very significant, costs of internal resources, external vendor or consultant evaluation and implementation support, integration software costs, time-to-market delays, and day-to-day business disruption. Many firms have found that these issues can be circumvented by implementing a solution that covers all or most of their major systems needs with an all-in-one system. Although the individual component subsystems may not have all the bells and whistles of their best-of-breed counterparts, they often do get the job done admirably well - and then there’s that little advantage of the whole thing actually working! More about that in a bit, but first, let’s take a close look at the myth of best-of-breed and why it continues to be perpetuated even today.

Perpetuation of the Myth

It’s easy to understand why the concept of best-of-breed still has its cachet. On the surface, it makes perfect sense. Why wouldn’t you want the best possible combination of available systems? In fact, an entire industry has sprung from this rosy concept and continues to generate huge revenues – mostly for the vendors – by addressing the difficult goal of integrating systems that were developed by different companies, using different technologies, on different platforms, at different times, even from different countries. The EAI (Enterprise Application Integration) software market, once thriving - now, not so much - came about as a result of trying to link these disparate systems. EAI promised not only the best of all worlds but, in the process, attainment of STP (straight-through-processing) and even support of the related but now comatose T+1 settlement initiative of a few years ago. Too, the financial software mega-conglomerates who have thrived by acquiring the products of smaller software companies - both the buy and sell sides - have a need to keep the halcyon dream alive. But even they, in attempting to integrate their newly acquired best-of-breed systems, have struggled mightily and in some cases even abandoned their integration efforts. Lastly, there are the big system integration consulting firms. Do I really have to elaborate on what their incentives are and why best-of-breed is a very good thing for their revenue attainment? In short, there is a deeply-rooted software industry incentive behind best-of-breed and while that goal may be justifiable for some large, sophisticated buy-side firms, for many it is simply not necessary and can be outright harmful to their health.

Stop The Madness

I’ve seen it from the inside. An RFP is received and, with best intentions, a medium-sized asset management firm has described their intentions to evaluate systems for portfolio accounting, trade order management, compliance, electronic trade settlement, custodian reconciliation, performance and attribution reporting, client reporting, and so forth. The RFP, often prepared with the help of knowledgeable consultants, covers all of the bases – detailed functionality, technical architecture, scalability, implementation expertise, customer support, and approximate costs. Responses are sent back, evaluations are made, a short list is created and a handful of vendors come in and conduct presentations and demonstrations. Then, at the moment of truth, the ultimate goal of a timely implementation of a solid, workable solution is somehow lost in the glare of the “greatest” performance attribution product, or the highly-compliant (pre-trade, of course) trade order management system, or sometimes - with unnoticed irony - the latest risk management system. You get the idea. With visions of a carte blanche, long term project, the consultant has little reason to discourage going with a menu approach – take the best of this and the best of that – and, while we’re at it, why not bring all that disparate data together in an enterprise data warehouse? And so it goes – and goes, and goes. Additional significant costs are incurred for the implementation and integration effort. The targeted live date is pushed out, usually several times. Internal staff is splitting time between project tasks and their real jobs. Managing money is still the firm’s purpose for being – but you might not know it by looking at where people are spending their time. Eventually, all of the moving parts are interfaced (though seldom truly integrated) but the whole is less than the sum of its parts. Now, the challenge is to keep these moving parts all moving together. Inconsistencies and redundancies in data exist and, although the data warehouse can normalize the data, the original goal of a real-time portfolio system has been lost and much of the data access is now dependent upon the day and time of the last update. Users are going from one desktop to another in order to move from, say, the set-up of a new asset to a reconciliation process. Integration, indeed! What have we created and how can we stop this madness?

Better-Than-Most Systems

In the world of portfolio systems, it’s the sum of the parts, rather than the individual parts themselves, that really matters. A well-integrated suite of what could be called “better-than-most” portfolio management modules, together comprising a true system, can have tremendous advantages over the so-called best-of-breed approach. The inherent integration of system modules and data is at the heart of the matter. Such integration brings with it the ability for users to work with real-time data, avoiding operational redundancies, discrepancies, and multiple user interfaces and desktops, and experience accelerated learning curves, decreased support costs, and significantly decreased IT costs. Combine all of this with a very significantly reduced overall implementation timeframe (and costs) and one must wonder why we’re still talking about best-of-breed at all anymore. Sure, if your firm truly requires a great degree of sophistication in many areas of buy-side portfolio systems, and has the resources, time, money and patience to justify it, best-of-breed can make sense. But for the rest of us, give me a good, working, well-integrated system every time!

About QED Financial Systems

Based in Marlton New Jersey, QED Financial Systems is a unique provider of a totally integrated portfolio accounting system solution to the public and private sectors. A small, privately owned company, QED carefully selects the relationships they choose to partner with and then provides an extraordinary degree of initial and ongoing service. As a result of this, QED has a 100% referenceable client base that is the envy of its industry. QED's clients account for approximately $1 Trillion in assets managed with its largest single client managing approximately $180 Billion.

About the Author

Matt Mille is a Senior Account Executive with QED. Over the past twenty-five years he has held senior account management and marketing positions with other financial services companies such as SunGard, SEI Investments, SS&C Technologies, Financial Models Company, Netik LLC, and Premier Solutions.