Ross Carmichael has always lived by the old adage: “Don’t reinvent the wheel.” In his six years at Liontrust Asset Management, including two years as CTO, he and the firm’s senior management favored buying solutions off the shelf over building them from scratch—that is, until April 2022 when Liontrust acquired Majedie Asset Management.

During the acquisition, Carmichael looked across Majedie and Liontrust’s tech stack and spotted gaps. The combined firms needed two new bespoke solutions—a client services portal and a tool for tracking its ESG performance—to set it apart from its buy-side rivals. To build them, Carmichael wanted to work with trusted tech partners and ensure that Liontrust would retain the IP of the technologies and their embedded workflows.

“Putting data in our own system, being able to display it to the client in a way that we control, and being able to continue to evolve and improve it is important to us. That’s why we have built tools with selected providers, and we’ll continue to develop the tech and own the IP on it,” Carmichael tells WatersTechnology.

When buying a product from a vendor off the shelf, clients understand that the tech IP is owned by the vendor and can be resold to their competitors. Liontrust licenses the widely-used SS&C Eze order management system (OMS) and uses SS&C’s RealTick execution management system (EMS). However, when developing a custom-built solution with a third-party development partner, Carmichael says it becomes harder to understand how that IP is managed and the lines of controlling the IP can become blurred.

“If we have an idea of how to do something, and we go to a development partner and ask them to build a system for it, we own that IP, and they cannot go and sell it to someone else. But fundamentally, if someone else goes to them in a year’s time and asks for a system that does something similar and explains how they want it to work, that vendor can go and build a system for them that looks very similar,” Carmichael says.

To help with this shift in thinking, Liontrust is working with Perspicuity, a third-party tech partner, to help it build out Majedie’s client services portal, a system that allows users to access their portfolio information in real time, such as their holdings, and their audited and unaudited valuations, and provides visibility on how the asset manager is voting on their behalf.

Separately, Liontrust is working with Wrender, a second tech partner, to develop its ESG performance tool. The asset manager has worked with Wrender for a decade, including the build of an early iteration of an ESG product. The new ESG performance tool, which is expected to be completed by the end of the year, will combine bits of functionality, IP, and in-house workflows from both Liontrust and Majedie, and bring that into one solution. The acquisition also integrates Majedie’s Global Fundamental team with Liontrust’s central responsible investment team.

“[ESG] is something investors are focused on and it’s a way for us to differentiate ourselves from competitors. This is why the IP is important to us,” Carmichael says. “It’s not about operational efficiency; it’s about being the best asset manager in the ESG space.”

In both co-development projects, Liontrust has agreed with each of the tech partners to fully own the IP to the products.

‘Residual work knowledge’

Co-developing bespoke solutions with a third-party tech partner is not new. But as asset managers push to customize their front office and stay competitive, they are more heavily scrutinizing which service providers to work with based on how they handle their IP arrangements.

Matt Barrett has seen this firsthand. Barrett, CEO of Adaptive Financial, a consultancy and trading tools provider that helps capital markets firms develop custom-built systems, says a big decider in how its clients choose a tech development partner today heavily relies on the way it deals with IP.

He says there have been several examples in which Adaptive has won contracts because of its approach to IP, such as the implementation of Systematica Investments’ real-time compliance system and the rollout of ErisX’s matching engine. In a third example, a market-structure firm that could not be named for client confidentiality reasons, partnered with Adaptive because it wanted to patent the custom-built corporate bond trading platform it had built with the vendor.

“Our approach to delivery enabled that specific client to patent the workflow we implemented with them so they could claim exclusivity on how the platform exposes liquidity to the counterparties that are trading on it,” Barrett adds.

Barrett says that when Adaptive works with clients to build bespoke systems, they will then own the IP to the implemented tech, but the vendor does retain what he calls “residual work knowledge.” This is the knowledge and expertise that is gained by working on these projects that they then use to help them build similar systems faster and cheaper, in the future.

“Clients come to us for the experience and knowledge we have gained in building front-office trading systems and we’re very clear that we retain the expertise from [building] the systems. But we do not reuse any of the codified IP, the source code, to implement other client’s system,” he says.

Stephen Murphy, co-founder and CEO of low-code platform provider Genesis Global, has similarly worked with many asset managers and financial firms with varying contract types and conditions on who owns the product IP. He says clients even approach the vendor with market opportunities or ideas for solutions that could be “productized”—in other words, repackaged and resold to other customers in the market. He says clients are incentivized to do this if they are seeking to negotiate favorable contract terms and cheaper pricing.

“Some clients have come to us with the proposal of a real business partnership where they bring other clients together and can benefit from the opportunity. So that’s also a very interesting model. And if the product takes off … and [other] clients take [and implement] it, we can then bring in preferential pricing for them,” Murphy says.

Put simply, asset managers want to retain the IP of the trading workflows that are built into their front-office tech, which they believe gives them an edge over their competitors. Murphy says examples of custom functionality include bespoke ways in which data analytics or events are displayed and how they are actioned.

“[It’s the way] they look across the structure of the funds and their portfolios; it’s the client flow; it’s the external events [they see], and how that is used to make decisions about how and where they should trade,” he says.

Know your limits

There are many variables when it comes to how IP rights are agreed upon. For instance, the client might choose to own the rights to the product in perpetuity, the vendor might provide its services to the client at a cheaper price to own the rights to the tech or the vendor might agree not to resell the product or any of its IP for a prescribed timeframe. Additionally, the client could build on top of a vendor platform and the IP ownership lines are then split, where any of the added customizations would belong to the client.

As part of co-development projects, tech partners can be bound by non-disclosure agreements to prevent IP leakage. But there are other restrictions that can be applied to give clients peace of mind.

“In the past, we have limited specific teams from working on similar projects for similar clients and in similar areas,” says Adaptive’s Barrett. Typically, these restrictions last for a defined timeframe—say two or three years—to avoid becoming overbearing or limiting to the development firm’s resources.

Barret compares these restrictions to Chinese walls between different divisions in large institutional banks, such as the brokerage arm, the retail bank, and the investment bank. These virtual barriers are intended to prevent any unauthorized or illegal exchange of information between different parts of the business.

“An investment bank couldn’t really function if it didn’t have such Chinese walls and wouldn’t be able to provide a universal service to its clients. Similarly, for us, we couldn’t function if we were only ever able to work on one interest rate trading platform,” Barret says.

Carmichael says one of the biggest challenges in co-building solutions with an outsourced partner is negotiating the trade-offs between the IP and the price of the development service. This is especially true in cases where smaller buy-side firms might have tighter budgets and less leverage to negotiate the ownership of the IP outright.

“If you’re looking to build something with a partner that they can resell and reuse elsewhere, they are going to price it more competitively than if they are only building it for you, so that is a trade-off. One of the things we have had to consider in the past is giving a limited period of exclusivity,” Carmichael says.

Liontrust’s approach is to closely manage the relationship it has with its tech partners. Carmichael says the asset manager commits to working with its providers on a long-term basis and that he hopes this can help to mitigate any issues or misunderstandings when it comes to managing the product’s IP, dealing with any potential ambiguities or conflicts of interests, and updating the tech in the future.

“It’s about a long-term relationship with that partner you’re building with. If you can do that, then they will understand your business better and therefore can build something that is right for you when you need it. There also is less likelihood of challenges [like IP contract breaches or ambiguity], than if you have a one-off relationship or one-off contract each time,” Carmichael says.

In any co-development project, relationship management is key. It’s important to highlight that every financial firm’s needs are different: Some will want to own the IP of their co-developed solutions while others will be happy to offset the cost of the implementation by forgoing the IP. Either way, it’s crucial to know where you stand, scrutinize what you are willing to share with your partners, and fully understand how their IP arrangements work.

In other words, do your due diligence before handing over the keys to the castle.