Mid-size investment management firms could employ 16% fewer operational staff if they outsourced their investment operations, new research from investment management consultancy Investit shows.
The research found increasing business complexity (new asset types, complex investment strategies, global expansion and operational risk), global regulatory reform and client demand are adding significantly to operating costs and straining managers operating platforms beyond capacity all at a time when revenues are down, profits are squeezed, and firms are focused on efficiency and cost savings.
This is pushing investment managers, particularly those who have already outsourced their back office, to consider new services offered by asset servicers who are looking to extend their existing relationships with managers far beyond the traditional custody activities, said Investit.
Investment operations is the service area seeing the most innovation as asset servicers are responding to the challenging market environment and the need for change. Considering approximately 65% of a managers costs are staff costs and more than 50% of a managers headcount supports operations, it is unsurprising that managers are attracted by these services offered by custodians or specialist vendors in order to stem a future rise as complexity and regulation increases the burden, said Investit. As Investit has found in its research, the potential efficiency saving of a reduced operations function is an additional inducement.
Of the top 400 asset managers globally, only 23% (by AUM) outsource investment operations; however, this market area has experienced stable growth over the last 12 years, which continues today. Investit expects the rate of uptake to increase dramatically in the coming years as market pressures are driving managers to focus on their core business developing new products, growing assets and providing quality service to retain clients and outsource commoditized processing.
Investit predicts that the range of outsourcing services in the market will extend closer towards the front office, which we are already seeing as firms outsource trade execution and active currency management. “Each individual firm will draw their own value-add line which defines which services they are more likely to adopt in the next two years and which ones they see as key to retain. For most firms however, the question is moving from why outsource a given function, to why not outsource it.”
(JDC)