The full research also spoke to COOs about themes including data silos, regulatory pressures and reporting standards. You can download the full report here.

Contributors to the research include Aberdeen Standard Life, AJ Bell, BlackRock, Brookfield Asset Management, BTIM Australia, Equitile investments, Fiera Real Estate Investment Management, First Sentier Investments, Full Goal Asset Management Invesco, Liberum Wealth Management, M&G Investments, Moonfare Private Equity, Ninety-One Investments, Prime Value Asset Management, Pzena Investment Management, Strategic Investment Group.

Outsourcing: gaining momentum

Outsourcing, particularly of functions related to data, technology, and regulatory reporting, is becoming more popular among fund operators.

Two key factors driving this trend are the increasing complexity of international regulations and recognition by many COOs of the value of external expertise in developing solutions to ease reporting challenges or simply to provide on-the-ground knowledge across markets and sectors.

Despite this trend, the 20 asset management firms interviewed for this survey cited several factors that made them reluctant to use outsourcing arrangements, including, among them:

• Desire to keep data inhouse
• Importance of retaining responsibility for outsourced operations
• Acknowledgement that only a few vendors are well equipped to serve all the needs of one firm

Increased pressures on firms

Almost all of the operations professionals surveyed acknowledged they were encountering work-related pressure, particularly with regard to ad hoc reporting, ESG, and shifting global regulations. In addition, uncertainty associated with Brexit continues to be a major thorn in the side of asset managers with European interests.

One COO said: “If Brexit causes any more uncertainty or divergence away from current regulations, this may push us more towards outsourcing and certainly to more outside consultancy.

"Whilst we have a compliance and risk team, they are not absolute experts, they are not lawyers, they do not know it all. If the FCA (Financial Conduct Authority) sends us a paper, it is the responsibility of our team to interpret it."

“So, the more this happens and the more we drift from the EU norm – the more we will have to seriously consider outsourcing.”

“Now, customers want transparency, monthly reporting, they want underlying holdings and investments”

Because of this extra work, the asset management industry is more open to bringing in external partners than ever before, especially to build or update accounting and reporting systems. Several of the interviewed firms said that investor demand was making third-party involvement a necessity.

Another operations professional said: “The investing space was very opaque, very closed-door and customers were only interested in returns. Now, customers want transparency, monthly reporting, they want underlying holdings and investments... This has always been strong for listed funds, but illiquid assets and private markets are also seeing this control seep in.”

ESG is also making investors far more conscious of where their money is going, which, in turn, is requiring more reporting. Consequently, firms that have access to the technology to meet customer demand are getting more inward investment.

Outsourcing is the future

The increase in regulatory requirements is prompting an increasing number of enterprises to consider outsourcing part or all their reporting responsibilities.

Among the investment firms interviewed, there were broadly two schools of thought on the value of third parties in dealing with this complexity.

The first one is that outsourcing can result in significant cost savings for asset managers, and the second is focused on added expertise and sector-specific knowledge offered by vendors.

One Head of Operations commented: “Our competitive advantage is in investment management, and we don’t want to be secondary to that. So, we outsource tech providers and third parties on regulatory issues. Fintech solutions are not our thing, so we partner with specialist firms.”

Another one added: “It is about building a solution based on regulation and keeping advice up to date. Technology is key here; we have a whole department dedicated to product management of this. This is the future I think; you’ve heard of outsourcing everything, like trading and such, so the more cloud-based platforms available, the more firms will utilise this.”

“Our competitive advantage is in investment management, and we don’t want to be secondary to that. So, we outsource tech providers and third parties on regulatory issues.”

In addition to the general trend toward outsourcing components of regulatory reporting, the firms cited other areas in which external specialist expertise was critical, including, among them, AI, ML and Blockchain.

One respondent summed up a potential key benefit of outsourcing: “As an asset management organization, it is paramount to explore the latest data and technology solutions to gain a full understanding which one is best placed to enhance the front to back cross-asset division to achieve operational excellence and acquire a competitive edge."

“If that is best found through outsourcing, then that is what any logical COO would do.”

Another one stressed a key point: “Management needs to challenge the operating model. Technology has changed so much; it has condensed 30 years of behavioural change into one year. Outsourcing my middle office system is better...”

“I feel that the same should be done with regulatory departments – although it must always be remembered that services can be outsourced but not responsibility.”

The importance of retaining responsibility

The importance of good governance and ensuring sufficient oversight of outsourced operations was a critical consideration for several of the asset managers. Indeed, some of them noted that introducing checks and balances was a core focus for the year ahead.

One COO said: “Our main focus is on improving in-house governance, but our funds are best spent outsourcing operations related to technology and data management systems."

“Ownership of data is huge and must be monitored, but we are not a tech company, and we are not tech specialists – so we use lots of vendors and third-party advisers to look into this and provide the best platforms for us.”

“We have benefited from carrying out scale and resourcing from outsourcing, but the detriment is the additional risk associated”

Another one added: “Due diligence needs to be kept inhouse. There are high-risk vendors and low-risk vendors."

“Business continuity check-ins have become much more prevalent since March 2020, forcing us to outsource more and find platforms and systems that can help with this."

“We have benefited from carrying out scale and resourcing from outsourcing, but the detriment is the additional risk associated.”

Investing in artificial intelligence and machine learning

While it was agreed that governance is critical, one of the operational heads pointed out that the use of technology, AI, and algorithms can help to provide transparency and reasoning behind investment decisions.

Used correctly, these algorithms will help streamline the entire investment process, from regulations to risk decisions, while metadata can be scaled to provide larger alternatives and options.

“AI and ML are only as good as the historical data you have”

Importantly one respondent pointed out the following about AI and ML: “These are extraordinarily complex issues; AI is new and is a long way away from mass adoption, but it is there, and it is worth investing in it."

“However, AI and ML are only as good as the historical data you have – so it cannot predict everything, and it cannot foresee things that have not happened yet."

“Therefore, when outsourcing anything, whether regulatory reporting or more market-based data, there is a need to balance this with inhouse human advisers and asset investment managers are still needed.”

Gaps in the market

One consistent theme in the research was that COOs were not able to find vendors that could meet all their regulatory needs. While this might seem to be a hindrance, several firms said they preferred to use many vendors to make sure that they were receiving local and market expertise.

One Head of Operations said: “I have not seen a supplier yet that can provide all those regulatory data and can be the relationship manager with the regulator, simply because funds cover so many different areas."

“There is a trend around suppliers partnering with firms on reporting aspects like ESG, but for one firm overall, there are too many pieces... and a number of suppliers will provide the different aspects.”

Another added: “As it stands, we have not been able to find a service provider that can provide all of the regulatory reporting requirements we need. Data needs to be accurate, we need to understand it, and we need to understand the implications of it."

“We have not been able to find a service provider that can provide all of the regulatory reporting requirements we need”

“Fundamentally, regulation can often be open to interpretation on some aspects, and different service providers and investment houses may have different risk appetites."

“Regulation is one of the most important touchpoints we have with the outside world. We need confidence to hand that over to a third party as we are not delegating responsibility. Historically, only you know your clients and you know your regulators – it is the outsourced relationship that is new, and this is where the focus should be.”

For some firms, this means that every time a new element of regulatory reporting is needed, a new vendor must be found. That can further increase the governance burden as strong oversight is required for every outsourcing partner.

“There is no single party that can do an entire global regulatory reporting system”

It can also cause difficulties when it comes to larger organization-wide projects.

One COO concluded: “We want to automate our entire regulatory reporting system, and therefore any investment platforms will have an easier time extracting data for reporting and collating – whether we keep that in-house or outsource some."

“There is no single party that can do an entire global regulatory reporting system. Instead, there are firms for regions and for one-by-one regulation."

“We operate in Australia, Singapore, Hong Kong, and the UK and sell into Europe and Asia, no one can cover all of that. New requirements are made by multiple regulators each year.”

The full research also spoke to COOs about themes including data silos, regulatory pressures and reporting standards. You can download the full report here.

 

 

 

 

 

 

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