How to evolve from manufacturing data to analyzing your data to make better investment and business decisions
By Ultimus Fund Solutions
While most investment advisers have been outsourcing back-office functions for years, some are still reluctant to cede control of the middle-office – or perhaps they have and they’re not getting the support they need. Some may feel the middle office is too close to their core business to let go. Others may have chosen a middle-office provider whose primary focus is now on larger advisers. No matter the reason for staying the course, it’s becoming clear that many advisers are spending too much time on their middle-office functions — missing opportunities to optimize resources, improve decision making, and improve their client relationships which collectively can take their businesses to the next level.
Buried in middle-office data demands
When investment professionals establish advisory firms, few if any, plan on building a technology infrastructure and operations group to maintain massive amounts of investment data – It just happens.
There’s no question that the number and complexity of investment products is on the rise. Couple that fact with increasing investor demand for more transparency along with detailed performance reporting, an ever-growing set of regulatory requirements, and the amount of data being generated out of a single adviser’s middle office can be staggering. In the current dynamic where data demands are multiplying by the day, most advisers default to becoming data factories — doing all they can to simply manufacture the data required to satisfy the basic needs of the firm, its clients and regulators.
As a result, advisers have neither the time nor the focus to get the most value out of their middle-office information. In the best case scenario, middle-office data can and should be used to support three primary functions; 1) Your Investment Decision Process, 2) Investor Reporting, and 3) Regulatory Reporting. Advisers are far too often caught up in their own daily data processing to realize there’s a problem or to take the time fix it. Like many issues, the first step toward a solution is recognizing there is a problem. But how does an adviser know if they’re spending too much time manufacturing data and not enough analyzing their mission critical data?
Recognizing the signs that your firm has become a data factory – significantly elevating your firm’s risk profile.
There are a few telltale signs, and whether an adviser recognizes it or not, the symptoms are most likely already there — data processing issues, low investor service levels, inefficiencies from a makeshift platform cobbled together from disparate and often antiquated technologies. If it’s not obvious here are some questions to help diagnose the problem:
How many different software systems am I utilizing to support my middle office? How well do they talk to each other?
Is my core investment accounting/recordkeeping system keeping pace as my business changes?
Is my accounting software vendor continuing to invest in R&D – or is it dying a slow death.
Do I still have mission critical data in spreadsheets?
What would our regulators and investors think about our firm’s data governance policies? Do we even have a data governance strategy?
Can we meet the newly proposed SEC reporting requirements for SMAs?
Form PF type reporting (currently required for private funds)
Maintenance of underlying data required to support our GIPS performance reporting
How many dedicated professionals do I have supporting my middle office functions? How could I better utilize those resources to enhance my investment process?
Do we have key man risk in our operations and/or technology team?
Are we delivering our investor’s data using the latest secure methods and protocols or are we still delivering our client’s hard copy statements via unsecure email?
Are we ready for mobile reporting options required by the next generation of investors?
How often am I renewing software licenses or upgrading software systems and how much am I paying when I do?
If you step out from amongst the trees and see the entire forest, you may realize that you too are running a technology business within your investment firm and maybe now is a good time to evaluate your alternatives.
Realizing the real value of the middle-office
The true value of the middle office isn’t in the generation of data, it’s leveraging that data as a decision support tool to drive other key functions of an adviser’s business. The front office uses this data to make better investment decisions, investors use it as an indicator of an adviser’s value and regulators use it to help determine whether a firm is committed to maintaining a culture of compliance. But decision support doesn’t coincide with data manufacturing. And for most advisers there comes a time when they realize it’s time to start looking to an outside expert to help them manage the middle office more effectively.
More and more firms are now turning to service providers to take over various middle-office operations, including daily record keeping, reconciliation with custodians, performance and attribution, GIPS composite monitoring and reporting, and client billing and statements among others. With the pace of change from both a technology standpoint and a data requirement perspective, the performance efficiencies, resource allocation and decision support advantages gained from outsourcing have become too strong to ignore.
The outsourcing advantage
By using an outsourcing provider, advisers can immediately enhance their middle-office capabilities, better utilize internal resources and protect themselves from the accounting system obsolescence.
The recent consolidation of many of the industry’s accounting systems under a single provider has left many advisers feeling vulnerable. There is a valid concern that many of the existing systems may be decommissioned leaving advisers who have built all their processes around those systems to scramble for a new solution. Partnering with a firm that uses industry standard systems (with significant annual R&D), can protect advisers from that problem today while eliminating considerable technology costs in the future.
Firms can avoid ongoing maintenance costs and large upfront capital expenditures for new systems, and some information technology personnel can focus on taking your business to the next level.
Outsourcing is also about risk transfer. The level of compliance technology and competency that can be achieved working with the experienced team of an outside partner often far exceeds what limited internal resources can deliver. There are economies of scale and a depth of expertise that a provider can achieve that are simply not possible for a single adviser. And that is becoming more and more important in what is a constantly evolving and increasingly onerous regulatory environment.
Perhaps the most important benefit for advisers is the ability to focus on their core business. Advisers can dedicate their time and talent to investment performance, to client relationships and to gathering and maintaining the critical assets that drive their business.
An underserved market
It’s no secret that larger outsourcing providers are under serving or shedding altogether advisers they deem to be too small and unprofitable. In many cases those advisers, typically with assets under management between $1 billion and $10 billion, have felt they either have to accept a lesser level of service, pay much higher service fees or develop an in-house middle office solution. Recently providers focused specifically on this underserved segment have entered the marketplace to fill the gap with institutional-grade offerings for mid-market advisers.
However, some providers focus too much on delivering baseline hard copy reports rather than the increased level of customization and transparency required by advisers, their investors and their regulators. The most sophisticated providers are delivering on all of these things to help streamline middle office operations and to provide a better digital reporting experience for investors.
Choosing the right partner
The challenges for many advisers involve choosing the right middle-office provider, creating the right kind of business relationships and agreeing on the best service level agreements to ensure accountability and desired outcomes. However, the right partner can mean different things for different advisers.
Top-notch technology and expertise should be considered table stakes when choosing a middle office business partner. What really sets partners apart is how well they fit within a firm’s culture and how much they tailor their services to meet a firm’s goals and specific business requirements as opposed to driving a pre-determined process. It’s important that an adviser understands how a provider operates, who will be on the team and what the day-to-day interactions will be throughout the course of the relationship.
Advisers should ask to speak with a provider’s existing clients. They should feel confident that they are aligned with a provider’s typical client profile. Some providers may take on smaller advisers but really focus their business and best resources on advisers with a much higher level of assets — and those relationships don’t work for anyone. But advisers don’t always know the right questions to ask to ensure the best partner fit, especially if they have never outsourced before. Below are some proven questions to ask service providers in order to help advisers drive a strategic selection process and increase the probability of success.
Do you have clients with investment products and investment strategies similar to our firm?
Do all of your middle office operations (Trade Processing, Investment Accounting, Performance, Client Invoices and Statements etc.) support the asset classes and data volumes of our firm?
Do your technology partners make significant annual reinvestment in their platforms?
How much of your technology is proprietary and do you use spreadsheets and other bespoke technologies within your middle office service offering?
Do you have any experience working with my front office decision support platforms (Trading/OMS, Risk Management System, FactSet, Proxy Services etc.…?)
What is the average industry experience of your middle office operations team?
Please provide bios on the team that will service our firm?
Describe your problem resolution process (issue tracking, escalation procedures, etc.)
Describe the ideal staff member(s) that will liaise with your middle office team (how many, industry experience, required skill sets, etc.).
Describe your onboarding/transition process. Specifically, how will you convert my accounts/positions/taxlots and performance data from my current provider and or in-house systems?
Describe how your solution supports our data governance policies and all required regulatory reporting requirements.
How do you ensure that your operations and technologies are keeping up with the latest industry regulations?
Describe your cybersecurity, disaster recovery, and business continuity policies.
Does your fee structure support a variable cost model (i.e. will our fees increase as we grow and decrease if our business contracts)?
Making the move
With the due diligence done and the decision made, the last step in the process is actually making the shift to outsource your middle-office operations – for many advisers it’s the biggest challenge of all. It requires a commitment to the process and a change in mindset. It demands a level of trust with the new partner and that starts with a clear and transparent process.
Advisers must feel confident that they understand all the steps in the transition and beyond. They must have clear expectations for outcomes, for roles and responsibilities and for costs. They must buy into the strategy and feel comfortable discussing any issue at any time with their provider.
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