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INVESTMENT AND MIDDLE OFFICE OPERATIONS IS AN ASSET, NOT A LIABILITY
Asset managers often face the task of determining whether to insource, outsource, or utilize middle office services for their operations. This decision can significantly impact the organization’s overall success. The role of investment operations in asset management is important, as they are responsible for managing the organization’s middle and back-office functions.
Despite the benefits of middle office outsourcing, managers need to pay more attention to an alternative approach. An internal investment operation can drive performance by providing more organizational control, long-term cost savings, and quality data. This approach challenges common perceptions and highlights the advantages of having an in-house investment operations team.
IS SHORT-TERM SAVINGS WORTH THE COST?
An agile change collateral management process supporting an insourced operation is an effective way to create efficiencies quickly.
Outsourcing is a strategic partnership that reduces control over operational and technological aspects. Despite its advantages, such as short-term cost savings by downsizing personnel and leveraging technology/hosting providers, outsourcing comes with trade-offs.
Outsourcing providers integrate workflows, data, and technology into the asset manager’s operating model. Disengaging from the relationship is costly and disruptive.
Onboarding a new outsourcing provider requires time and resources. This process includes integrating with their systems and potentially changing custodian banks for U.S. mutual funds. As a result, asset managers relinquish control over their operations and must rely on the outsourcing provider’s expertise.
LONG-TERM CONTROL OVER EXPENSES IS A DIFFERENTIATOR
It is common for service providers to use a variable cost model by charging fees reflective of trading volume or assets under administration.
The asset management landscape is becoming increasingly competitive as the years go by. Margins are also tightening, and companies are trying to stand out. The best way to attract investors is to reduce their fees. While lowering operational expenses remains the goal of profitability, many firms find middle office outsourcing investment operations to be the most effective way to generate cost savings.
Meradia offers middle office outsourcing as well as other risk management services. Asset managers often outsource middle office services that leverage a variable cost model, where they charge fees depending on trading volume or assets under administration. By leveraging middle office outsourcing solutions, asset managers can realize significant cost savings while staying ahead of the competition when offering more attractive fee structures and overall value propositions to clients.
DECISION MAKERS NEED ENRICHED DATA FOR MIDDLE OFFICE SERVICES
There is more traceability and understanding of where data comes from when investment operations are insourced.
What is the best value to clients in decision-making? Data. Investment managers need high-quality data to make better investment decisions when looking into the best business strategies.
Delivering top-notch services starts with setting clear expectations and measuring key performance indicators (KPIs). Our operations teams use service level agreements (SLAs) to ensure we deliver the highest-quality work possible. However, not all SLAs are equally beneficial.
When middle office outsourcing operates, SLAs can often be generic and fit into the service provider’s existing delivery model. Insourcing operations has the advantage of being more agile and adaptive in setting SLAs that align better with portfolio manager requirements. By collaborating with internal teams to establish SLAs and KPIs, we can enhance our operational processes to ensure we deliver the best results.
Internal communication channels are key to providing timely and insightful commentary on data. These channels can provide a level of detail and understanding often unavailable from middle office outsourcing. In other words, insourcing investment operations can offer more traceability and understanding of where data management is coming from.
This is especially true when the front office and middle office have access to the same systems as operations. Portfolio managers can drill into lower-level detail and gain an understanding of the “why” behind their data and cash management. For example, a portfolio manager who reviews their cash ladder and identifies an irregular inflow projection could look at the IBOR portfolio management system to understand the transactions and reference data contributing to the inflow.
DATA QUALITY IMPACTS CLIENT EXPERIENCE
Asset managers with efficient insourced investment operations forgo a lower financial risk profile in exchange for better control over their product delivery, lowering their reputational risk.
Many companies offer a portal for reporting. They do not offer complete transparency behind the scenes regarding core competencies, business operations, and business strategy. Problems may arise with this strategy, such as incorrect reporting of the NAV and trade matching/settlement errors. Mishaps like these can majorly impact an asset manager’s relationship with their clients.
While a middle office outsourcing provider may compensate for material errors as defined in their contract, they will not repair the reputational damage done to the product or asset manager.
The benefits of insourcing go beyond risk mitigation. Efficient insourced investment operations offer more control and flexibility of asset classes over their investment strategies. This translates to lower financial risk, as there is less reliance on a third-party, middle-office outsourcing provider who may not understand the unique needs of the portfolio. Insourcing gives investment managers greater agility when scaling middle office functions and operations as their business evolves.
The choice between middle office outsourcing and insourcing investment operations comes down to understanding the risks and rewards of each approach. While outsourcing may seem like the less expensive and more convenient option, it can also come with significant hidden costs and risks. Insourcing may require a greater investment upfront, but it offers asset classes greater control, flexibility, and peace of mind in the long run.
HOW MERADIA CAN HELP WITH MIDDLE OFFICE OUTSOURCING SERVICES
Operations and technology teams are the drivers of value. Creating strategic, forward-looking plans for operations and technology is crucial. Understanding core business objectives, market value, operational costs, and competitive advantage and regularly assessing whether operations, trade processing, and technology align with them is key to achieving future business goals.
Deciding between middle office outsourcing and insourcing investment operations is a watershed moment for an asset-class organization. Our team of consultants at Meradia has the expertise to assess transaction management, office services, and your trade book. We recommend outsourcing partners or strategies to leverage internal operations and modern technology to maximize value for your business.