Editor’s note: In this article on what might at first appear to be an unusual subject, Gary Butcher, director of Exact Consultancy, a UK-based technology firm, examines how wealth managers and other firms can make greater use of their historical data when it comes to managing risk and understanding business and other trends.

Financial data collected in the banking and financial industry is often relatively complete, reliable, and of a high quality, which facilitates systematic data analysis and data mining to improve a company’s competitiveness.

In the banking industry, data mining is used heavily in the areas of modelling and predicting credit fraud, in evaluating risk, in performing trend analyses and in analysing profitability. In the financial markets, data mining techniques have been used in forecasting stock prices, options trading, rating bonds, portfolio management, commodity-price prediction, and mergers and acquisitions analyses; it has also been used in forecasting financial disasters.

Nevertheless, the majority of wealth managers are not maximising their historic data. This data can deliver significant benefits to investment managers when searching for longer terms trends. Housed on a modern platform, archive data can be accessed quickly and cheaply to provide tangible value to the firm. Historic data can be integrated into API calls from modern systems and the auto-archiving of existing data from any system can save money, negating the need for this repetitive task to be performed manually.

When managed efficiently, historic data can become a repository from which investment managers can mine valuable performance data to satisfy client-reporting requests and validate their investment strategy. This data mining can also predict future trends and behaviours by reading through historic databases for hidden patterns, allowing fund managers to make proactive, knowledge-driven investment decisions and enabling the middle office to answer performance questions that were previously too time-consuming to resolve.

Reducing risk

Carefully managing historic data can reduce the risk of non-compliance and also help financial firms to contend with HM Revenue & Customs determinations and other regulatory authority challenges relating to the past – where transactions from up to 20 years ago can be scrutinised. Indeed, the threshold for HMRC investigations has effectively been lowered to the “mass affluent”; therefore the number of such challenges is going to increase.

The reality is that HMRC inspectors are now using cutting-edge technology to get every last detail they want. They are specifically targeting high net worth individuals, both the super-rich and the mass affluent, and have already set up the High Net Worth Unit, which deals with the top 5,000 super-rich people in the country - those worth in excess of £20 million.

The inspectors are using data-mining technology, among many other methods, to make sure they get through to the very last layer of information. The onus is on the taxpayer to prove that their income tax bill should be lower than that set by HMRC – not the other way around. A similar level of technology needs to be applied by the wealth manager to ensure that the dusty file containing the tax return data from 20 years ago that could rescue their client is both traceable and accessible.

And at a time when the Financial Services Authority has expressed its concern over the inherent risk of back-office outsourcing arrangements within the investment management industry, wealth managers would do well to consider whether their historic data is as protected and available as it could be.

The politics of data

Despite the obvious benefits, internal politics can work against projects surrounding archive data. A new chief data officer is unlikely to make his or her first landmark project one to ensure that the historic data within the organisation is being utilised to its full potential. If historic data is on the CDO’s “to-do” list, it has probably never reached the top. What they don’t realise is that to archive historic data is very cost-effective - it's not complicated and is not a substantial drain on the data management team’s resources (a team often stretched because of the latest swathe of regulatory reforms). Aside from extracting, mapping and testing the data, there is very little else to do from the wealth manager’s perspective.

Large-scale EDM projects can take years to fulfil and the project initiator often does not witness its completion. The value to be derived from big data projects is yet to be proven. A data archiving project can produce a deliverable in a very short timeframe – and a quick win for its sponsor.

Wealth managers need immediate access to their historic data if they are to maximise this hidden treasure.