Sector · Opinion

Parts of the fund industry need urgent restructuring

Every now and then, my development team informs me that they need to take a pause from future developments to refactor code. Refactoring is a process where they restructure existing computer code without altering its external behavior.

Over time, small incremental changes to the software’s code base degrade maintainability, readability, and performance. The purpose of refactoring is to enhance code performance without affecting existing functionality, as a clean code base facilitates the addition of new features.

Similarly, the fund industry could benefit from urgent refactoring, commonly known as restructuring, as decades of incremental changes have rendered it increasingly slow to react, difficult to understand, and hard to change, impeding innovation.

Here are three areas of the fund industry that should be restructured:

1. Regulations

While many of us might wish to eliminate existing regulations, unfortunately, they are a necessary evil, in place for a good reason: humans are inherently dishonest. Over time, regulations have been added to enhance investor protection and prevent scams.

However, this has resulted in a labyrinth of rules and regulations so convoluted that an army of lawyers and consultants is required simply to navigate compliance. Regulations are rife with exceptions and scattered across a plethora of documents.

A software developer would not tolerate such a situation and would strive to create a single, clear, and concise document before making any additions.

2. Framework

In the nascent stages of the fund industry, delegation was nonexistent. An investment fund manager would serve as the portfolio manager, transfer agent, accountant, and depositary, fostering greater levels of product innovation and flexibility.

However, as the industry matured, rules, regulations, and the quest for efficiency gains led to an increasing number of intermediaries involved in fund creation and distribution. This has gradually eroded the industry’s ability to launch innovative new investment products.

A software developer would never maintain systems that do not communicate efficiently and would instead seek to integrate everything into a unified code base.

3. Operations

Compared to today’s tightly regulated industry, the pioneers who launched the first mutual funds nearly a century ago operated with few rules and would be considered mavericks. They were innovative entrepreneurs interested in transforming savings into investments for profit.

However, entrepreneurship and innovation have been stifled by existing rules and regulations. Instead of investment fund managers being populated by business-minded individuals, they are predominantly staffed by bureaucrats and technocrats in risk and compliance roles.

A software developer would never maintain slow and inefficient code, as it affects software performance and their ability to implement new features. Agility would be prioritized.

Ultimately, unless an industry undergoes constant refactoring, it will struggle to innovate. For instance, if we had persisted in using floppy disks, we would never have developed artificial intelligence. Unfortunately, the fund industry is still metaphorically stuck using floppy disks.

It’s time for urgent restructuring.

Gregory Kennedy is a columnist for Investment Officer Luxembourg. His columns appear every other week. He also works as a business development manager at