Various references in financial publications recently highlight the challenging world of investment management, where there is an intensely competitive market environment to capture fund inflows, reduce fees and remain competitive in the challenging world of asset management.
One key way that managers are looking to remain competitive is by reducing their management fees, becoming ever more efficient and cost conscious. In one recent WSJ article we see how Blackrock lowers their management fees for ETFs. This is something that may cause other investment management teams to follow their lead and force downward pressure on management fees. Smaller investment managers all over the world will likely follow suit, reviewing their management fees and cost structure to ensure they remain competitive.
This intense pressure on costs is one of the key drivers for why investment management firms are continually looking at outsourcing non-core business processes and reap the benefits that can be derived for their organization. Often times these are processes that are either too costly or onerous to maintain or they are not seen as necessary to maintain by their own team. In efforts to reduce costs and be more efficient investment management teams are looking at a broad range of processes and back-office procedures that are not considered part of their unique value proposition. These are the ones that firms are looking to generate cost savings and that are being outsourced. Managers will look to retain in-house those procedures that are considered to be their secret sauce. With this growing trend of using service providers for outsourcing, an increasingly large part of the equation is in also understanding the service providers who provide the service.
One key reason we have seen for outsourcing to service providers or financial technology vendors is because maintaining fixed resource costs internally can inflate the cost structure, whereas many fund managers are adopting a “thin” model where they utilize technology and scalable services. Contributing to this trend has been the changing regulation that mandates new processes and the emergence of many new technologies that provide a significantly expanded scope of services.
This represents a new opportunity for investment management teams, seeking to outsource different non-core business processes as a way to provide an optimized approach to their business. Efficiency and streamlined efforts are critical in a race to reduced fees, enhance yield and improve risk mitigation. Whether to build out the infrastructure or buy from an external service provider is a key consideration and it’s important to ask if that is a process that you want to own, from beginning to end. There may be both good and bad reasons for either decision. Also, if you’d like to read more about this topic and have future articles delivered conveniently to your inbox, please sign up for our newsletter.
For example, an investment manager may be comfortable outsourcing components that are not central to their investment process, such as downstream back-office processes, yet at the same time want to control all investment or client facing facets to the business. This is a big shift from what has been seen historically, where teams would manage all tasks in-house, which would also have translated to more staff overhead. This would likely have been less of an issue in an upward trending market, but in times of regulation imposed changes and close evaluation of costs, it would not be wise to overlook anything.
At Anevis Solutions, one area we have seen varied investment management teams comfortable with outsourcing is in the creation of factsheets and regulatory fund documentation. This is an area that many see as important but not necessary or business critical to warrant the management in-house, especially as these document creation requires a significant resource investment and maintenance. In an effort for those specialized and boutique investment managers to compete with some of the largest household investment managers in the world, it is through outsourcing of services that could be seen as a strategic move and help them to further develop their niche.