Down Market Puts the Squeeze on Buy-Side IT Spending

A depressed market, which has caused many investors to pull money out of investment-management firms for more secure financial venues, such as banks, is resulting in lower-than-expected IT spending on the buy side, according to a recent report by Celent Communications.

The report, written by analyst Octavio Marenzi states: "Celent forecasts that US$4.1 billion will be spent on information technology to support investment management during 2002. We believe that, with IT budgets under pressure until the industry recovers, spending growth in 2002 will be just 1.3%, or one-fourth the compound annual growth rate (CAGR) we anticipate for IT spending to 2007.

"We expect the industry will return to its long-run growth pattern by year's end. As industry fortunes improve from the recent lows, budget dollars will start to free up to help firms prepare for major initiatives such as T+1. We anticipate a "catch-up" period in IT spending after the recent lull, to enable firms meet industry deadlines and respond to market developments."

Also, more consolidation is in store for the investment-management industry, according to Marenzi. He contends that banks, broker, insurance companies, financial conglomerates and large-asset managers will look to snap up smaller buy-side shops that cannot maintain sufficient profitability in the current market.

Outsourcing, as well, will be on the rise, though Marenzi questions the true return on investment that such arrangements deliver, especially in light of greater oversight by the Federal Reserve, which may eventually require that firms maintain some presence at the outsourcer to ensure their fiduciary responsibility is maintained.

One would expect, explains Marenzi, that as the market recovers, assets will flow out of banks and back into investment-management firms, as has always been the case. However, banks are learning from the past ebb and flow of cash and endeavoring to prevent that scenario from occurring again. Thus, many banks are now employing Series 7 qualified representatives, who can offer bank clients a much greater array of investment products, thus encroaching further into the investment-manager's traditional domain.

All in all, Marenzi contends that as the market goes, so goes the future of buy-side IT spending. He predicts that a market recovery will coincide with the increased pressure to devote dollars to IT spending, which will build as the industry moves closer to the one-day-trade-settlement cycle, originally slated to take effect in June of 2004, now postponed to 2005. However, T+1 implementation is nowhere near the slam dunk it was considered to be a few years ago, as many in the industry question the payback.

Marenzi adds, "Of course, it is possible that the delay will extend indefinitely, given the growing resistance to T+1 from within the industry, as investment managers ponder the potential benefits against the likely costs of implementation."