In the rapidly evolving world of Managed Portfolio Services (MPS), creating model portfolios for third-party investment advice firms and sending them to investment platforms involves a complex interplay of financial expertise, technology, and regulatory compliance. Given the critical role these model portfolios play in shaping investment strategies and client outcomes, the resilience of the systems environment that supports their creation and distribution cannot be overstated. Drawing on principles from the Financial Conduct Authority (FCA) in the UK, this article outlines the important aspects of a resilient systems environment for MPS model portfolio creators.
1. Integrated Governance and Risk Management
Effective governance structures and comprehensive risk management frameworks are the cornerstones of resilience. For MPS model portfolio creators, this means establishing clear oversight mechanisms for the entire lifecycle of a model portfolio, from development and testing to distribution and monitoring. Identifying and managing risks, particularly those related to data integrity, calculations, cyber security, and third-party dependencies, is essential. With many firms today operating MPS model portfolio management on spreadsheets, the identification and management of risks should be a clear starting point.
2. Clear Definition of Critical Services
Identifying the services critical to the successful delivery of model portfolios, such as data analysis, portfolio construction, and communication channels with investment platforms, is vital. Understanding the components and dependencies of these services enables firms to prioritize resources and focus their resilience efforts where they are most needed. For firms using spreadsheets with dependencies on key staff may challenge the nature of whether this is sufficient to support being a critical system.
3. Impact Tolerance Setting
Determining the maximum tolerable level of disruption for each critical service is a crucial step. For MPS model portfolio creators, this could involve assessing the impact of delayed portfolio updates or incorrect asset allocations due to system failures, incorrect calculations, workflow errors, etc, and setting clear thresholds for these disruptions. With the ever-shortening cycles of reviewing the investment markets, resilience increasingly will mean having minimal disruption and fallback options up in minutes and hours not days and weeks.
4. Comprehensive Scenario Testing
Regular testing against a wide range of adverse scenarios, including cyber-attacks, data breaches, and third-party failures, helps firms understand their vulnerabilities and prepare for potential disruptions. These tests should inform ongoing improvements to resilience strategies.
5. Robust Communication Strategies
Effective communication plans are essential, especially when disruptions occur. Stakeholders, including investment platforms, advisors, and end clients, need timely and accurate information. Establishing predefined communication protocols and channels ensures clarity and efficiency in crisis situations.
6. Incident Management and Business Continuity Planning
Having detailed plans for incident management and business continuity is non-negotiable. These plans should include procedures for rapid response, data recovery, and service restoration, ensuring that critical services can be maintained or quickly resumed following a disruption. With the wonder of technologies to support distributed working this can be a real asset if everyone is working on a collaborative system, however where weak links include the routing of spreadsheets, often relying on key individuals as part of the workflow, sometimes these incidents and planning for their recovery can be a challenge.
7. Third-Party Vendor Management
Given the reliance on third-party vendors for data, technology, and platform services, MPS model portfolio creators must ensure that these partners also adhere to high standards of resilience. This includes conducting thorough due diligence, regular performance and security assessments, and having contingency plans in place. With Financial Simplicity’s cloud infrastructure all housed in Microsoft Azure’s infrastructure, there are high levels of resilience built in.
8. Data Integrity and Backup Systems
Ensuring the integrity and availability of data is fundamental. This requires robust data management practices, mainly in the form of ensuring data integrity within a single system as opposed to distributed spreadsheets and ensuring consistency of data methods across the end-to-end processes. With successful MPS operations requiring data integrity end-to-end with several different platform endpoints, this is sometimes like managing a multitude of different data sets and ensuring process consistency across them. Flexibility of spreadsheet methods can be very powerful in dealing with this flexibility yet are somewhat challenged in being an enterprise system to maintain integrity.
9. Regulatory Compliance and Reporting
Staying compliant with regulatory requirements and being prepared to report operational incidents to regulators like the FCA is crucial. This includes understanding the regulatory landscape, maintaining transparent records, and having mechanisms for rapid incident reporting. With increasing focus by regulators on model portfolio-based operations, we expect this only to increase and necessitate an enterprise approach to both the data sets and processes to be reported on.
For MPS model portfolio creators, building a resilient systems environment is a multifaceted challenge that requires attention to governance, operations, technology, and compliance. By prioritizing these aspects, firms can ensure the reliable delivery of model portfolios, safeguard client investments, and maintain trust in an increasingly complex and interconnected financial ecosystem.
