Empowering boutiques: The optimal model
In the last of a series, Brian Allis, asset manager sector head at State Street Global Services, discusses the outsourcing model as it is being implemented by boutique managers.
In the final instalment of our series of articles exploring the opportunities and challenges for boutique asset managers, we look at why outsourcing has become an increasing part of the conversation as boutiques face raised levels of regulatory complexity and other potential distractions from their core focus.
The Optimal Model
Recent data from independent research company Celent indicates that asset managers’ middle- and back-office outsourcing volumes are picking up again, after declining during 2007 to 20091. This trend is primarily due to the heightened search for efficiency in an extremely challenging business environment, as well as to recent gains that industry providers have made in enhancing their outsourcing platforms.
There has been a rapid expansion in the types of outsourced services available to asset managers, and the range of services available to boutique asset managers is on the rise. Services range from custody and fund accounting, and compliance and risk management, to pre-trade compliance and trade execution. These services can be costly and time-consuming for asset managers to develop for themselves, particularly over the long term. In partnership with asset servicers, managers may be in a better position to navigate regulatory complexity, maintain closer control on operational risk, accelerate time to market for new products, expand their geographic footprint and much more. Importantly, outsourcing these services means that boutiques are able to focus on what they do best and what differentiates them in the eyes of their clients: delivering strong performance and service excellence.
The outsourcing possibilities continue with a push further into the front office. The goal is to provide asset managers with an end-to-end, integrated suite of services that allows them to focus exclusively on investment decision-making and strategically growing their businesses.
Another important trend in the market for outsourced services is data warehousing. Here, the service provider combines the boutique’s internal data with data from third-party sources and delivers it to the boutique as one comprehensive, flexible database. The 2012 State Street Global Survey of Boutique Asset Managers, conducted by the Economist Intelligence Unit, confirms the scale of the challenge for boutique managers. More than half of respondents said that providing a high level of detailed and quality data to clients is the biggest data management challenge for the industry.
Traditionally, smaller players have relied on specialist software suppliers to plug in specific capabilities – but these are not always as scalable or as easy to integrate with other solutions as they would like. In many cases, existing systems are not keeping pace with the information needs of clients and regulators, prompting boutiques to look to asset servicers for fresh solutions.
While the scope and nature of outsourcing arrangements may differ from manager to manager, a best-of-breed approach is a top priority. Boutiques are seeking deeper, more consultative relationships with asset servicers, and want to leverage the insight that servicers can provide in areas such as regulation and global expansion.
They want to engage in deeper conversations with providers – conversations that centre on their precise requirements and integrated solutions that meet their needs over a five- to seven- year timespan. It is incumbent on the asset servicer to have a clear understanding of the boutique’s business strategy and, critically, the qualities that make this market sector unique.
When evaluating potential service partners, boutiques should consider the following factors:
– Breadth of service, which should ideally include back-, middle- and front-office capabilities and value-added services such as FX
– Access to the continuum of services from a single, global platform
– Fluency in the nuances of the regulatory process to help ensure compliance with new rules and improve speed to market
– Strong relationships with consultants and financial intermediaries, and knowledge of investor preferences globally
A new frontier in outsourcing is empowering independent boutique managers. The successful boutique of the future will remain entrepreneurial, performance driven and nimble. It will continue to distinguish itself by focusing on its core strength, which is delivering innovative, specialised investment strategies to meet the evolving needs of today’s investors
For more details of how boutique managers view their operational effectiveness, see the full report at www.statestreet.com/vision.
1Celent, Global Custody Market: At the Crossroads, July 2012