Four dimensions for asset & wealth managers considering outsourcing

In a bid to bolster efficiency, agility and value-added to business activities, asset and wealth managers are increasingly contemplating outsourcing their Middle and Back office functions to Third Party Administrators (TPAs). Finding the right outsourcing partner is however no easy task – Jeroen Bolsius and Arie Verburg, both consultants at Alpha FMC, reflect on four key dimensions asset and wealth managers should take into account when considering an outsourcing transition.

Cultural Fit

Can both parties eventually work well together on an operational level? Cultural aspects must be respected in order to meet the overall business goals of the clients, the asset manager and the TPA. Matching servicing location, language, importance of the relationship to a TPA, continuous investments, etc. are hugely important in building a successful partnership. Therefore, trust and the strength of the relationship is one of the key selection criteria for selecting a TPA.

Capital Fit

Is a TPA financially fit? To what extend do they find themselves liable to a client in case of damages? Are their capital ratios in line with the industry and in compliance with regulatory requirements (e.g. Basel III, UCITS V, AIFM-D)? Questions that need to be asked as TPAs are usually responsible for implementing and funding any changes required by: (a) applicable law or regulation or convention of any regulatory body, market, exchange, securities system, depositary or other similar component of market infrastructure, or (b) instruction addressed to either the asset manager or the market in which the asset manager operates.

Capability Fit

Which value added services are TPAs offering? In which do they excel? Questions that very much require a solid view on the (future) strategic business requirements of the Asset Manager. If most of the business is or will be done in the USA choosing a US based TPA might be the right choice of action. However, it’s not only location or time-zone related, but also transition and change capabilities of a TPA are key. A structured engagement with reference clients and site visits as part of a due diligence process are vital in getting beyond the marketing and sales chatter. 

Cost Fit

Obviously, cost is still a very important element as one of the pillars of outsourcing is to gain cost efficiencies. During the pre-contract phases it’s important to be able to compare apples with apples and therefore a closer look at the proposed services and commercials is required. However, in the end the focus should not be to bring down the price to the bare minimum as this could very well turn out to be more expensive down line as TPAs will have to charge more for additional services. Moreover, in terms of partnership both parties should feel they have a fair deal and it will protect both sides as much as possible from changes in circumstances.

Conclusion

The four key dimensions are obviously high-level dimensions and going down the path of outsourcing requires a whole lot more strategising and operational streamlining before going to the market. It is clear that TPAs are today far more sophisticated with their platforms, products and services than ever before. Given the current market conditions, in which it’s difficult to create alpha and pressure on cost reduction are ongoing for most asset managers, it is key for players in the industry to review whether or not to keep their Middle and Back office activities in-house. 

Related: 100 largest alternative asset managers grow collective assets beyond $4 trillion.