Better technology and the focus on data are among the factors that have asset managers rethinking the business case for outsourcing.
From Covid to the Great Resignation, a sea change in the way we work means that there has never been a better time to reconsider your technology and operational strategies. For asset managers, this may mean revisiting previous decisions around outsourcing fund administration to third-party administrators.
A decade ago, the case for outsourcing functions around fund administration seemed crystal clear.
Historically the back office was seen primarily as a cost center—almost something to be endured with little obvious return on investment (ROI). For many asset managers, outsourcing was not only a cost-effective solution—for those that couldn’t afford a team of back-office employees to do work like NAV calculation, fund accounting, tax reporting and transfer agency—but a means to streamline operations and remove non-core activities from their focus.
But what was the right calculus ten years ago may not be the case today. Advances in technology such as the cloud, as well the back-office’s ability to generate huge swathes of high-quality data mean that for some asset managers, it may be better to insource this fund administration piece. Not only does this mean they can have that two-way flow between client data and the back office but also access auditable data that can bring both insights and revenue. They can also increase oversight and provide a differentiated customer experience for an evolving client base that now cares more about transparency and control.
The past two years have only accelerated some of these trends. From the onset of the Covid-19 pandemic to the Great Resignation in 2021, changes in the financial services ecosystem and the way people work mean that asset managers are reconsidering their technology and operational strategies. Firms can locate operational teams outside of financial centers, thereby paying less than premium prices for premier talent. The asset management industry has also been marked by frenetic consolidation over the past few years that seems unlikely to let up. As firms aim to stay competitive, two-thirds of AUM still lies with smaller firms.
In that context, here are some points to consider:
Technology: Technology is replacing labor, which means the costs associated with a given body of work have been reduced significantly—and the reasoning to outsource is less obvious. Additionally, automation can make the process more foolproof. The Covid-19 pandemic solidified the distributed workforce, and thanks to advances in technology, process checks and automation, better oversight, and risk management, not only is physical proximity not needed, but there is greater peace of mind knowing an accurate NAV will be produced on time, automatically. This is what is known as the “hands-free NAV.” There are many ways of monitoring a NAVs production status and accuracy throughout the day – something that could not be done in the past. Rules-based exceptions processing allows asset managers to scale without needing to add overhead in the race to grow AUM amid shrinking margins and complex funds.
Oversight: Fund managers have always retained the legal responsibility for their funds, but mistakes and even system outages can happen when it comes to striking a net asset value. Such was the case in 2015 when a large fund administrator could not generate NAVs for multiple days, prompting big changes in the industry. While contingent NAV is not yet required by regulators, it appears to be going that way as major players invest in these systems. With the US SEC and other regulators encouraging shadow and contingent NAV—and with the risk of outages always present—is it easier to take the full task in house and invest in a system for parallel NAV?
Client support: Supporting your clients is easier when you have all the data at hand and under your full control, which is especially true as that client base evolves. Asset managers need to understand the priorities of a much more diverse investor pool. Millennials and Gen Z are a growing force in investing—31% of them began investing before age 21—and will “drive capital to new frontiers, on new platforms, with new priorities,” according to a recent report in Fortune. The more granular the data asset managers have about end investors and the decisions they are making, the better they can diversify their portfolios and develop attractive new products. If their data sits with a third-party administrator, they may be missing out.
Customer experience: This is increasingly important as a competitive differentiator. Insourcing gives you control over how you service your clients and what experience you provide. Additionally, clients—especially Millennials—are demanding more access to and control over their data. From branded portals, opportunities for self-administration and overall increased transparency, it is easy to control and manage what is presented to end clients and investors if you control the offering. When you outsource, you lose that control.
Harnessing data: If the old, nearly cliched adage about “data is the new oil” remains true, it is only because like oil, data must be harnessed and converted to bring any real value. While data is key in every industry at the moment, fund administration is no different. Certainly, on the transfer agency side with GDPR, you can leverage data. Having it in-house—as opposed to with a third-party administrator—makes facilitates access for actionable and revenue insights.
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All of these reasons aside, there are still very legitimate reasons to continue to outsource – not least of which is the specialist knowledge required to administer complex or nontraditional fund or financial products. For smaller asset managers or firms that want to focus solely on portfolio composition without the distraction of a back office, outsourcing remains a wise choice. Additionally, clients may get increased peace of mind from a fund with an independent, third-party administrator.
But for asset managers that are considering insourcing, technology and other factors have converged in to make it less costly and more value positive to do the work in-house. Firms can derive the benefits of consolidating activities inhouse without needing the same level of operational expertise that back-office roles once required. Ultimately, it is about making an educated decision based on today’s facts and today’s priorities rather than the ones that drove such decision making 10 years ago.
About the author, Michael Galvin
Michael Galvin is Global Product Manager for Linedata’s fund accounting platforms. With 25 years in the industry, he has led the development of core applications, surround technology, and process management solutions for fund administration and investment management firms. Michael began his career as a fund accountant at JPMorgan Chase.
Linedata’s Fund Accounting, Transfer Agency, and NAV Oversight solutions are used by leading Asset Managers and Fund Administrators in the US and Europe.