By Daniel Trentacosta, exeuctive director, business development, MUFG Investor Services.
Over the last decade, the investment management industry has faced significant changes. Firms have been experiencing pressures from new regulations globally as well as mounting demand from investors for transparency and lower fees. It has become increasingly expensive for firms to run their businesses, and the old adage of growth leading to equal investment in middle- and back-office operations makes it nearly impossible to grow profit margins.
Amidst this dynamic, a growing number of investment firms have been turning to business process outsourcing (BPO) – and many more should. We are at an inflection point in the industry where firms need to adapt their businesses to the changing landscape, and BPO is fast becoming the new norm for firms to continue to thrive.
Investor’s guide to BPO:
Business process outsourcing is the enlistment of a third-party partner to manage operations and processes, including (but not limited to): data management, middle- and back-office functions, portfolio administration, customised reporting, and other ancillary support services such as regulatory reporting. The technology employed to manage this can be a combination of both provider and asset manager.
The current movement:
While investment managers rarely involved outside entities in their businesses historically, it has become increasingly popular post-crisis with the rise of operational burdens from fee pressure, the scalability of internal staffing models, and mounting technology requirements.
Each of these factors has posed an added burden for investment firms as they try to meet demands while maintaining investment portfolios. These demands have also led to regulations that restrict even further. Mifid II is the most recent example, but regulations dated back to Dodd Frank have each added daily responsibilities and high costs for firms as they need to maintain strong CCOs, in-house compliance teams and up-to-date infrastructure and technology to meet regulatory reporting requirements.
With today’s crowded investment market, inflows into passive strategies, and pressure to keep fees low, portfolio managers need to focus on investing and providing value for clients, not on developing back offices and maintaining complex data systems. This has driven many firms to engage BPO providers who can partner with them and offer the infrastructure and technological advancements needed to meet demands and growth, without the corresponding financial and personnel investment.
Furthermore, some investment firms have seen steady growth, even over shorter periods of time. It’s become nearly impossible for firms to evolve their platforms quickly enough to meet growing AUM and investor pools. This has driven many large asset managers to explore and employ BPO partners who can provide quick, adaptable, high-end solutions. At the same time, startup hedge funds witness this dynamic and engage BPO partners early on, preferring to keep their in-house resources lean and focus on investment.
So, what’s the hold up?
Alongside the relatively quick rise of BPO in investment management, it is natural that some concerns have arisen – mainly about longevity, logistics and financial requirements, and liability.
Letting go of the reigns – For many firms, it can be daunting to think about giving up control over operations. Older firms in particular can struggle with this, as they are used to managing their full business processes and may naturally feel apprehensive about trusting a third party to take over.
Longevity – A BPO provider can become an extension of the firm, so companies rely on those providers to stay around. Anxiety over a BPO provider’s stability and the chance of that provider closing and leaving the firm in the lurch can cause hesitation to establish a partnership in the first place.
Logistics and financial requirements – For firms who do not understand the role and functionality of BPO providers, it can seem logistically and financially taxing to onboard and transition a third-party to take on operations and data management and processing.
Liability –When involving a third party, this adds a layer of liability around their work, on top of the firm’s internal proceedings. For some, it can thus seem prudent to keep operations in-house, although at a larger expense.
With the direction in which the asset management industry is moving, firms will need to think carefully and strategically about how to manage operational requirements without it compromising or detracting from the focus on portfolios and investments. Business process outsourcing can be the easiest solution when firms find the right partner to take on the development, management and evolution of operations, enabling them to focus solely on investing successfully.
We expect to see more firms take on BPO providers over the next few years as the role of a provider continues to expand into that of a partner.