Concerns like agility, futureproofing, and accommodating new data models are top of mind, but implementation depends largely on company size and resources, said Stuart Gunderson, Executive Director, Chief Operating Officer, Seilern Asset Management.
In a recent Clear Path Analysis report, written in collaboration with Arcesium, several industry leaders in the operations sphere – including representatives from Northern Trust, Rothschild and Co Asset Management, and Federated Hermes – discussed the trends they were seeing in data management, especially when it came to operating models and what they needed to stay agile and competitive.
The topic is highly contentious with conflicting advice in a 2019 Accenture report, “The future of the asset management operating model: Creating an intelligent operating model as a competitive advantage”, which said that understanding and challenging the operating model was key. “Asset managers should perform an in-depth assessment of the operational and technological infrastructure to understand how flexible their current environment is and identify where there may be opportunities to achieve scale through strengthening their foundation and deploying emerging technologies,” it said. “This is the first and most critical step in redesigning the operating model.”
"The most important thing to consider is the necessity of oversight because ultimately it ties into regulators’, prospects’, and clients’ expectations.”
With this level of importance placed upon the operating model and its future, Gunderson was asked what the common operating models that asset managers were adopting now were and what this meant for the industry as a whole going forward.
“Generally, boutique firms that have in-house operating models perform some of the typical functions, or at least have internal oversight for those functions,” he said. “They then utilise service providers to do the heavy lifting. But the most important thing to consider is the necessity of oversight because ultimately it ties into regulators’, prospects’, and clients’ expectations.”
According to research from Cerulli Associates, 33% of asset managers outsource the full back-office function, while 20% outsource middle-office operations.
In Cerulli’s study, participants described “outsourcing as more common and more acceptable in recent years”, adding that, “increasingly, new firms are deciding to outsource middle- and back-office activities from inception”.
This trend, Gunderson said, emphasised the need to understand the risks to the business and have oversight for every service provider that a company might interact with.
“It’s not an issue to outsource – it’s fine to pass the work to somebody else to do the heavy lifting – but you need to understand exactly what the third party is doing and the risks that are in place,” he said. “You also need to have an adequate internal process for overseeing that relationship and reporting its risks or errors on an ongoing basis.”
He added that the second operating model is the opposite of the first, or a hybrid, which means operating teams must keep either some or data management teams internal. “Various large multinational investment managers are still taking the view that it’s beneficial to move to an outsource-type model where you turn to the likes of J.P. Morgan or CitiBank to do the back/middle office work that was historically done in-house.”
“We’re at a point where larger firms – as we’ve seen over the last ten-plus years – are continuing to move to an outsourced provider to do a lot of the commonplace heavy lifting and bulk work.”
Companies like these, Gunderson said, are moving towards a structure where it is economical to utilise an outsource provider, however, this is not always the case. Some firms still prefer to have everything or as much as they can in-house, and they believe it can be your unique selling point (USP).
“However, I would say that there’s a growing argument against that view, especially since these outsourcing processes are becoming standardised within the industry,” he said. “We’re at a point where larger firms – as we’ve seen over the last ten-plus years – are continuing to move to an outsourced provider to do a lot of the commonplace heavy lifting and bulk work.” He added that these companies might still keep the high-risk procedures internal, but that’s the general trajectory.
Executing the vision
With these strategies designed, the question then becomes how to implement this vision – especially when accommodating the need for things such as agility, futureproofing, and supporting new data models.
“How you execute your vision mainly depends on the complexity of the investment manager, the systems you already have in place, the cost constraints, the staffing constraints, and how long the business has been operating,” Gunderson said. “The culture of the firm is key.”
According to an FTI Consulting report from 2021 on investment management trends in real estate, cultural fit was one of the biggest priorities for those outsourcing, at the top of the list for companies that are already outsourcing as well as those that have not yet done so.
"Ultimately, the cost of management and containment and risk relative to the firm’s size and resources will be the deciding factor.”
“True outsourcing partners strive to understand their clients, from culture to communication preferences and everything in between,” said FTI’s report. “Ideally, they design customised solutions to fit their clients’ needs so they match the way those clients want to run their business rather than forcing them to accept solutions that don’t fit.”
When it comes to moving toward certain providers or platforms, it will continue to be an evolution, Gunderson added. “You will see systems in place that follow the exact models we’ve just talked about, where you either have individual systems that are experts within their respective fields or one provider that can do multiple things at the same time,” he said. “Ultimately, the cost of management and containment and risk relative to the firm’s size and resources will be the deciding factor.”
The key here, Gunderson added, is does it make sense for these functions to be carried out internally within the firm, "or should they be moved to an outsourced provider when they take on that risk and the potential errors and costs that could come with it?”
He added that he sees “this debate as continuing to evolve, especially with larger asset management firms.”
To see more of this interview, and read the report in full, please click here
Fund Operator - news round-up 26/5/23
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