Claire O’Brien, RBC Investor & Treasury Services
: Against the backdrop of increased regulatory compliance, fee compression and growing competition, asset managers face demands from their investors to provide enhanced offerings at a lower price point. For asset managers, outsourcing will result in increased efficiency and capacity, ultimately leading greater focus on strategy and growth.
Across many products, data visualisation tools and dashboards are being developed to provide greater insights and oversight, which can lead to more strategic decision making for an asset manager.
From an FX currency hedging perspective, asset managers will realise benefits of outsourcing in the form of reduced operating costs, minimised operating and trading risks, and ability to free up key resources to refocus on core investment activities, while maintaining controls via our leading digital oversight, analytics and execution transparency.
From a middle office perspective, evolving technology has led to traditional middle office functions being automated, resulting in an abundance of data that can deliver significant insight.
The opportunity cost associated with relying on outdated practices and legacy technology by asset managers can be projected by losses from using outdated systems leading to security and calculation errors, time expenditure to manually input data and siloed data not being reconciled and utilised to provide value.
An outsourced middle office solution helps asset managers to improve operational and financial efficiencies, providing valuable rich datasets to inform the front office and the assurance that they have the relevant oversight to meet compliance obligations.
For transfer agencies, while manual processes remain a part of the investor experience, automation is a huge focus. The account opening process for example is one of the activities still heavily reliant on manual processing. But manual processes can result in delays which does not translate to a positive investment experience for the investor. Ensuring the most efficient on-boarding process and the most optimal investor journey will be paramount, and this will come with providing a more digital experience for investors.
From a securities finance perspective, agent lenders are automating services to improve efficiency, accommodate new regulation and provide tailored programs to clients to meet asset managers’ increasingly diverse and demanding securities lending needs. In addition, new regulatory requirements for enhanced transparency, along with improved access to data and technology capabilities, have increased lender expectations around data availability and heightened the importance of extracting actionable insights from this data.
Brian Higgins and Karen Jennings, Dillon Eustace
: At both European level and domestic level there has been a general ratcheting up of the substance and delegation requirements applicable to management companies. To a large extent, this has been triggered by concerns over Brexit. Notable developments during 2020 included ESMA’s 18 August 2020 letter to the European Commission on its review of AIFMD and the subsequent letter issued by the Central Bank in October 2020 indicating the Central Bank’s expectation for effective governance, management and organisation of Irish UCITS management companies/AIFMs and self-managed funds.
The expanded substance requirements, together with the resultant costs, mean that many smaller management companies and self-managed funds are restructuring. This includes the use of white-label service providers whereby small to medium sized asset managers utilise the services of large third party UCITS management companies/AIFMs to provide a platform to set up fund(s) at the initiative of the asset manager, with the portfolio management functions being outsourced back to the relevant investment manager.
In tandem with the shift towards the use of fund platforms provided by third party managers, there is an increasing need to ensure that effective governance and risk management arrangements are in place in respect of outsourcing arrangements implemented by such third party managers. The Central Bank has undertaken a significant programme of work in relation to outsourcing and the management by regulated firms of risks presented by outsourcing arrangements. This has resulted in the publication by the Central Bank of a discussion paper ‘Outsourcing – Findings and Issues for Discussion’ in November 2018, which was followed in March 2021 by the publication of Consultation Paper 138 entitled “Cross-Industry Guidance on Outsourcing”. Ultimately, boards and senior management of UCITS management companies/AIFMs retain responsibility for the functions and services that are outsourced and are responsible for the management of risks associated with outsourcing. In the context of third party manager platforms, the importance of selecting the right commercial partner for the venture is of the utmost importance.
Ross McCann, Alter Domus
: The use of third-party ManCos is set to increase significantly as a consequence of growing regulatory demand on managers, particularly around substance and reporting requirements. For many smaller managers, the cost of setting up and running their own shop, for example, in an EU location for the purposes of passported fundraising, was already prohibitive in the face of growing regulatory burden. Now, only the largest managers have the scale to continue running their own ManCo.
This has presented a big opportunity for the service industry to provide the necessary support to managers through outsourcing. We have seen major growth in existing Super ManCos, particularly in Ireland and Luxembourg, and many new ones coming into the market, typically from service providers offering existing services such as fund administration and depositary. Managers not only benefit from significant cost savings under this model but can also utilize the systems, technology, expertise, and experience of these providers, allowing them to focus on their core business – fundraising, transaction opportunities and asset management. In many cases, use of reputable and regulated outsourced service providers will both lend credibility to the manager and provide comfort to investors around areas such as operational and regulatory risk.
Tadhg Young, State Street
: The outsourcing landscape of the future will look very different from today’s as asset managers start to take a more strategic view of the practice.
The historic approach has been somewhat piecemeal, with investment institutions identifying an area of their business that they feel they can benefit from handing over to a third party for a variety of reasons (cost savings, improved performance, the desire to focus on core business, etc.).
When selecting a provider, firms have typically assessed partners on their ability to manage specific operations being outsourced.
This is backed by research: according to the most recent State Street Growth Study, the substantial majority of investment industry outsourcing is done with “many different technology providers”.
For back office operations 43 percent of asset managers said this was the case, compared to 33 percent who said they use “just one or two strategic partners” who can take on multiple operations (the remainder said “mainly in house”).
In the middle office, 47 percent used multiple providers, while 27 percent took the strategic approach, and the ratio for front office functions was 55 percent: 33 percent in favour of many providers.
However, this appears to be changing. More than half of asset managers (59 percent) are actively preparing to outsource more, while two thirds (67 percent) are conducting assessments of their in-house versus outsourced business.
And furthermore, 54 percent are planning on “consolidating or reducing the number of outsourcing partners we use to focus on deeper and more strategic relationships”, while “robustness” and “size or scale” both scored highly as top factors for choosing an outsourcing partner.
In terms of areas to be outsourced, investment risk monitoring (57 percent), investment analytics (56 percent) and regulatory reporting (52 percent) were the top choices for asset managers, suggesting a growing focus on the front and middle offices.