Cloud computing, the latest technology buzzword, refers to the Internet-based sharing of computer and network resources-the servers, the applications and the data. The user doesn't own or operate the technology, which is rented from a third-party provider. All the user needs to do is make sure the technology offering is secure, reliable and cost effective. Think of the cloud as an electrical grid. You plug your toaster into the wall and don't pay too much attention to the source of the electricity and, as long as you don't stick in a fork to pry out a bagel, the electricity is there when you need it. You don't have to produce the electricity, pay for the generators or provide a failsafe system in case something goes awry. Someone else handles all that for you.
It may sound like standard technology outsourcing, but it is much more comprehensive than that. The concept of cloud computing is really not that new, having been talked about in technology circles for better than two decades. The interpretation of the cloud is as amorphous as the term itself. The Internet, that vast array of networks, servers and applications that blend together on your desktop, is the ultimate generic cloud. When you view a Web page, the fact that it may be a composite of isolated applications from multiple servers over perhaps thousands of miles of network, is irrelevant. The key is that it works.
So how will the maturation of cloud computing benefit your business? Well, the cloud concept offers economies of scale that translate into lower costs. It's really just a new phase in a technology cycle that has seen processing and data migrate from a centralized source (mainframes) to local sources (personal computers) to quasi-local sources (local area networks) to a blend of all three. We're now at a point where the physical location and number of computers are no longer constraints, as long as the computers stay in sync and work as a unified whole, sharing processing logic, appearance and data as necessary. The onus of operating the technology infrastructure lies upstream with people who enjoy doing it.
The Wealth Management Cloud
Think of cloud computing as another step toward standardizing the financial application universe. Today's wealth management technology, albeit a giant step beyond what existed just a few years ago, still has its shortcomings. Many technology solutions in the financial services industry are less than ideal because they have been retrofitted across service niches. Take the example of hedge fund technology solutions that have been modified for use by family offices. The basic features may work in both niches, but some of the nuances and nomenclature may be incompatible. Or the system may have gaps in its functionality-an application that handles alternative investments, for example, may not handle traditional investments well, or vice versa.
Today, the responsibility of managing a wealth management group, a family office or a multifamily office obliges you to make some difficult choices about your technology. You can generally pick your wealth management applications from the following menu:
b. A totally integrated in-house system, which hopefully has all the functionality you need, the way you need it, though you will probably still need to rely on option a.
c. A best-of-breed configuration from multiple vendors, stitched together in a way that hopefully does not require too much duplication and redundancy, though you will definitely still need to rely on option a.
d. An outsourced system, which is the same as option B, except someone else has the headache.
e. An outsourced system with an operations component.
f. Any combo of the above, with plenty of option a.
Now, overlay the computing cloud over the wealth management business. Wouldn't it be great if you could pick best-of-breed functionality from a variety of service providers-just the features that you need to run your business and have them work together seamlessly-and not have the responsibility of maintaining your own technology? I know what you're thinking: This is just outsourcing, so what? Well, it is a form of outsourcing but not the way we currently think of it.
Many outsourcing providers do a reasonable job of delivering functionality-with the caveat that you pick the functions that they offer. Some of the features may be spot-on; others may be deficient or missing. There are always trade-offs.
Cloud computing offers the promise of bringing more order to the outsourcing universe. What if picking technological functionality were like picking dishes off a restaurant menu? Perhaps you'd want to start with a simple general ledger as an appetizer and, for the main course, a portfolio accounting and management system with performance measurement. You could add a side of multi-currency and private equity cash flow analysis, plus a fairly robust partnership accounting system. To cap it off, you perhaps might want bill-paying and document management applications. If someone joins you midway through the meal, just order again from the same menu. Somewhere in the kitchen, it all comes together as if it were custom made just for you.
The key distinction from today's environment is that, even though the functionality may come from different service providers, it appears to the user as a seamless suite of applications because it is essentially operating off of one seamless platform-the computing cloud.
Take a look at a Yahoo! finance page; it is generally well designed and reflects a cornucopia of data. Yet, under the hood, the pieces all come together from a variety of sources, neatly nesting onto your screen as if they were one. If cloud computing lives up to its billing, the wealth management cloud will perform similarly. Applications from a variety of providers will cohesively work together. It would be the best of all worlds: an integrated, outsourced, open architecture, best-of-breed configuration whose underlying mechanics are invisible to the user.
The benefits should go far beyond functionality. In this new world, you will pay as you go. It will be a utility service model that will be offered on a subscription or usage basis. You will avoid large capital expenditures-and your total technology cost may be far less than it is now. The utility model offers you the flexibility to shift direction and scale on a dime without worrying about infrastructure and staffing changes. You will have exactly what you need: functionality, flexibility and scalability.
The Long-Range Forecast
The technical underpinnings of the cloud are available to many businesses today. For the Wealth Management Cloud to become a reality, however, two hurdles need to be cleared: functionality and security. The business functionality needs to be delivered in bite-sized chunks so they can be picked off a menu-similar to the way people now pick applications to run on their iPhone. Delivering these applications in a secure way may be the toughest hurdle. That's because the dream aspect of cloud computing-the sharing of a vast technological network-could turn into a security nightmare if proper precautions aren't put into place. State and federal regulators put the onus on data owners to ensure that their technology providers can secure information under their care. Service providers will need to show that private data, once it becomes part of the cloud, will be as safe as it would be if it were locked away in a private vault.
It may be that the first wealth management service provider who decides to migrate to a truly open architecture will set a de facto standard. Others will join and a critical mass will quickly develop. The Internet was in existence for more than 20 years before anyone knew about it. It wasn't until common protocols were developed enabling disparate computer systems to communicate that the Internet started to turn into the massive communications and commercial network that it is today. Just as the growth of the Internet ushered in the end of closed proprietary systems such as America Online and CompuServe, the rise of cloud computing may lead to more uniformity in the financial service applications industry.
Needs drives solutions. With the creativity of today's technology providers, we may be just a few steps away from seeing the computing cloud turn into a more specific Wealth Management Cloud. Now, if only someone will devise a safe way to get my bagel out of the toaster.
Ritch Gaiti (firstname.lastname@example.org) is a partner at Windward Advisory Group, a family office technology consultant in Princeton, N.J.