By Joanne McEnteggart, Global Head of Corporate and Loan Servicing, and Justin Partington, Group Head of Fund and Asset Managers
Before the global pandemic, a trend among asset managers toward outsourcing was already on the rise, driven by increasing investor and regulatory demands. Now, with increasing inflation, rising interest rates and management fee compression, more and more asset managers are evaluating their operating model and use of outsourcing. Finding (and retaining) talent is a nearly unprecedented challenge, and even large firms are struggling to keep pace with the rapid advances in technology.
Against the backdrop of a volatile and uncertain macro environment, asset managers can no longer depend on improving margins by increasing assets. Instead, they are increasingly looking to optimise operational efficiency through outsourcing.
We have seen a growing trend of asset managers who are comfortable outsourcing their middle and back-office tasks including corporate administration, AML/KYC collection, accounting, regulatory compliance and CFO/COO support. According to the Cerulli Report (2022), 65% of managers cite improving internal productivity and leveraging external capabilities as key drivers for outsourcing, followed by incorporating efficiencies (58%).
Where asset managers have traditionally performed administrative tasks in-house, the need for specialised knowledge, processes and technology means that independent administrators may sometimes be better placed to provide these services. By outsourcing, managers can reorient their focus toward their core competencies of investment analysis, portfolio management and generating returns for their investors. They can also capitalise on the third party’s expertise and economies of scale.
In this article, we’ll explore the direct benefits of outsourcing in asset management and the motivating factors behind this rising trend.
1. Streamline processes
Firms of every size are looking closely at their internal processes in search of ways to reduce spend. Functions that aren’t core competencies of the firm are often accomplished more efficiently and cost-effectively by external partners, while freeing up time internally to focus on core business activities. Because managers can maximise cost efficiencies if outsourced tasks are specific to fund activity, reviewing the work of a third-party administrator or corporate service provider helps to offset necessary operating costs. Indeed, the majority of fund documents enable cost transfer to the fund for most of these commonly outsourced activities, and investors accept bearing such costs where it provides additional expertise, independent controls, quality of reporting and more access to data.
2. Access specialised expertise
Third-party providers serve multiple clients and focus solely on administrative tasks, which means they enjoy the dual benefits of deep experience and economies of scale. Long-established relationships and niche expertise allows outsourced firms to share sector best practices and deliver better outcomes than many asset managers are likely to achieve on their own.
3. Leverage the latest technology
Related to the above, specialised third parties often adopt the best FinTech for the purpose. Some of these emerging technologies can also enable the digitisation of manual processes including AML/KYC and data management to perform tasks more efficiently.
These technology solutions are often cost-prohibitive for asset managers at small to mid-sized firms, and the process of internal adoption can be slow. Outsourcing empowers managers to take advantage of the most recent technology without continually reinvesting in updates and implementations.
4. Improve access to data
Continuing the technology theme, fund services businesses that have invested in robust accounting systems, client portals and data platforms enable asset managers to enhance their own access to their data. Further, these tools enable much improved access to documents, dashboards and data for investors – who are increasingly pushing for such access. The industry is trending towards investor self-serve data over the medium-term and such tools will be a pre-requisite for tomorrow’s investors.
5. Enhance focus and productivity
It may sound counterintuitive, but outsourcing administration to a third party increases an asset manager’s level of control over staff output. Where the focus of internal employees is often multi-faceted, outsourced staff are dedicated to a single purpose. Establishing a relationship with a provider enables firms to implement strict service level agreements (SLAs) for critical tasks, ensuring they’ll receive service when they need it.
6. Bolster governance
Outsourced providers can offer robust, industry-standard governance structures, providing a clear framework to support internal efforts. Hiring a third party helps managers sidestep conflicts of interest and promotes best-practice execution in an ever-changing regulatory landscape. Firms that outsource are also well placed to navigate the evolving regulation, including the growing regulatory reporting requirements.
7. Exit the war for talent
The current ‘War for Talent’ has led to unprecedented difficulty in recruiting and retaining skilled employees. Back-office vacancies that prove difficult to hire are a perfect opportunity to fill open roles with third-party staff, freeingmanagers from constant recruitment efforts. Outsourcing also allows rapid scaling up or down based on the current needs of the firm.