Asset managers have been outsourcing back-office and middle-office functions to asset servicing firms and providers for many years, but the COVID crisis could accelerate that outsourcing, likely sending front-office functions to asset servicers for the first time for most investment firms.
Asset managers turn to dedicated asset servicing businesses or to the asset servicing divisions of large banks for fund administration, fund accounting, know-your-customer compliance, and management and delivery of data on fund performance and distributions. Custody services and accounting are back-office work handled by these servicers, while functions such as fund data and net asset value data that had been in firms’ middle offices have also moved to asset servicers over the past two decades.
The advent of asset servicers
The trend of middle-office outsourcing began with the 2000 dotcom bust and accelerated further following the 2008 global financial crisis. These historical events and their impact on asset services outsourcing form a precedent for another spike in outsourcing due to the current economic crisis. As The Trade mentions in their piece, outsourcing of front-office functions, like portfolio management or even the act of trading itself, could now start to go to the asset servicers. This allows lean asset management firms to focus on investment decisions and using technology to research and analyze securities and the markets.
However, there are some differences between what various types of firm would outsource, even on back-office tasks. Hedge funds tend to keep accounting in-house, at most turning to an asset servicer as a failsafe check. Private equity firms are more skeptical of outsourcing accounting and fund administration. Such firms tend to have fewer companies in their portfolios. A mutual fund with investments in hundreds of companies has a lot more to gain from the scale that an asset servicer can provide.
What this means now
Despite past trends after crises, outsourcing won’t necessarily be the default response. Those who use asset servicers’ offerings need to ask themselves how much value those services can add to their operations, as measured in investment return achieved from trading vs cost and the impact on governance – particularly if the outsourcing will get into front-office functions. While firms might be able to gain value from the ability to execute a strategy quicker and better by freeing up internal infrastructure through outsourcing, additional controls and governance will need to be in place, for example around the sharing, security and use of data by a third party.
To ensure that scale efficiencies are delivered with the right degree of expertise, asset servicers have to clearly define their client segments and configure the design of their services to give different types of traders and investors the right levels of professionalism and capability.
Getting value from asset servicers
Asset servicing firms’ offerings, once coupled with recent and continued technology advances, such as rapid growth in elastic cloud computing, are making it possible to offer more client-facing services in the public cloud. Digital design advances can also ensure an intuitive experience for users from the asset management and asset owner firms – making operational functions more efficient.
Asset servicers will no doubt be honing their sales pitches to buy side firms. While perusing the brochures, investment firms need to look beyond the benefits of using outsourced services, to ensure that they’ll still be able to get optimal benefit from their data, even if it’s it being generated or curated outside of the firm.