March 4th, 2009
The most valued attributes of a good wealth manager, after producing strong returns, are discretion and security. As a result, wealth managers are reluctant to hand over back-office functions to third parties. However, under pressure from the financial crisis, they are considering outsourcing.
Charles van der Merwe, chief executive of Pershing, a subsidiary of the Bank of New York Mellon, said outsourcing has helped wealth managers and asset managers reduce middle and back-office costs. He said: “There is no doubt that costs have been a strong driver for outsourcing.”
A survey of private client wealth managers from consultancy Summerson Goodacre found that the two most important factors that firms take into account when outsourcing are cost and quality and more than half of respondents said outsourcing provided more cost benefits than keeping administrative functions in-house.
This need to cut costs has driven custody banks to increase their focus on European wealth managers, particularly in the UK.
Brandon Sharrett, managing director at asset manager SEI, said: “Managing money in prospering markets is obviously a lot easier than in the current market. As a result, people have become more open to outsourcing expertise from third parties rather than trying to do it themselves. Other countries in Europe are moving in this direction but Italy and Germany are not as far down that path as the UK.”
The three largest custody banks – Northern Trust, the Bank of New York Mellon and State Street – have all said they expect revenues from the UK wealth management sector to rise this year, not only from new business but possibly from acquisitions too.
Mario Orphanou, product marketing manager at Odyssey Financial Technologies, said wealth managers have not been outsourcing as much as they should. “If a firm wants to continue to attract new customers, and probably more importantly keep them, it has to continue to provide the best tools and facilities to effectively manage more.”
But it is not a simple decision to make, no matter how pressing the financial motivations. Most respondents to Summerson Goodacre’s survey said quality, reliability, stability and control of service were better without outsourcing.
Kevin Bonar, chief operating officer of securities and funds services for Emea at Citigroup’s Global Transaction Services, said: “Wealth managers worry about sharing client information and allowing service providers to get too close to their customers. This is always going to be a decision point for them when it comes to outsourcing.”
While data protection is a common concern for wealth managers, Martin Ross, product manager at banking software provider Temenos, said: “We always have privacy agreements in place. The customer data that we receive is scrambled and everything is properly stored on an internal private network. Over time if you have a relationship of trust with your supplier it becomes less of a concern.”
The financial crisis and the need to retain clients have made wealth managers think more about customers. Chris Pitt, lead business consultant at technology provider Focus Solutions Group, said: “Competition in this market is only increasing so managers are looking for tools to help them know their clients better whether it is family situations, financial goals or favourite philanthropies.”
Wealth managers are looking at outsourcing a broader range of capabilities. Bonar said: “They want a bank or provider that can give them access to markets, products or scale that they would otherwise not have. They also want to look for an outsourcer that can support them as they grow and broaden their asset allocation options and product offerings.”
He said wealth managers are less interested in the administrative function because there are no economies of scale and the cost is too high, but they are looking for providers that can help them with customer relations and client reporting, while family offices are looking at consolidating all their accounts, jurisdictions and banks.
Bonar said: “They would like to sweep cash to where it is needed. They would like tools that make comparing asset management performance easier.”
Orphanou believes more managers will look at front-office solutions that allow them to use pay-per-use models. New user licences could be added or subtracted, making them more agile and adaptable to periods of growth and downturn, but without the need for financing big infrastructure changes.
He said: “Wealth managers could realise a reduction of internal costs for a predictable monthly fee, making it easier to measure profitability and costs.”
Package solutions also allow development expenses to be shared across all users and the time taken to install and deploy packaged systems is reduced.
Clearly there is money to be saved from turning to third-party service providers. However, Jervis Smith, managing director at Citigroup’s Global Transaction Services in London, said: “If a firm looks at outsourcing a large part of its operations purely for short-term cost savings, then they might find it difficult over time and could even regret the way they went about it.”
Entry Filed under: Why Outsource?