The nature of their business, and the resulting desire to keep tight control of operations and technology, means that wealth managers have understandably been “late to the party” on outsourcing. And while WealthBriefing research shows openness towards it growing strongly  (i) , it seems that actual adoption lags behind. According to Tom Wooders, head of sales, clearing and wealth solutions at GPP, too many are still overlooking the manifold benefits outsourcing can bring, although a growing vanguard is seeking to use it to transformative effect.

To shine a light on just one of its markets, research commissioned by GPP found that UK Discretionary Fund Managers only tend to be outsourcing 10 per cent of their operational activity. In fact, Wooders observes that, “outsourcing in the UK wealth management community is relatively small overall in comparison to other financial sub-sectors like sell-side or large-scale asset managers.”

In his view, a number of drivers should be drawing firms towards outsourcing (in both its technology and business process outsourcing guises), yet chief among them should be that it offers a pragmatic path to scalability.

Scalability and specialisation
Wooders first adds some important nuance to the notion that outsourcing is all about cost-cutting. Although wealth managers can certainly make significant savings by leveraging outsourcing providers’ economies of scale and eliminating bottlenecks, he sees gaining predictability over costs now figuring much higher in their thinking, whether that be in terms of hardware, software or human resources. They are looking to the future here too.

WealthBriefing research has shown that 68 per cent of wealth managers plan new business lines over the next few years; while 63 per cent are targetting new client segments; and 42 per cent are broadening their investment offerings (ii). This ambition is heartening, yet firms are having to build their growth strategies on shifting sands when it comes to technology, regulation and client expectations. The best outsourcing relationships are therefore geared to grow responsively alongside businesses, Wooders argues.

“Outsourcing firms should negotiate a fee schedule aligned with their goals for business growth and so gain assurance of predictable, proportionate cost increases,” he says. “In fact, many providers now, ourselves included, offer fee schedules which reward growth in terms of assets and transactional volume. That’s increasingly what clients expect today.”

Specialisation should be another watchword: “Our research showed growing appetite to outsource more commoditised activities like back-office, asset servicing and settlements that wealth managers consider non-core. These firms say they want to focus their energies on clients and where they add value, which is where they make their profits.

“At the same time many of this cohort want to enhance the quality and consistency of their operational processes through outsourcing to specialists. It’s not `How do we do the same for less?’ – far from it.”

Gaining – and maintaining – competitive advantages
Wooders also hears wealth managers citing third-party technology as a means to gain (and more easily maintain) competitive advantages on the industry’s key battlegrounds. Standing on the cusp of the biggest intergenerational wealth transfer in history, and amid rocketing expectations generally, client-facing technology is arguably the main theatre in the war for wallet share.

“Wealth managers must do more to distinguish themselves digitally - among their competitors, but also from all the disruptors encroaching upon their territory,” says Wooders. “The executives we’re talking to increasingly see that outsourcing can help them attract and retain new client segments since it ensures their technology stays right up to date without them having to become technology companies themselves.”

As Wooders highlights, the outsourcing issue has always been bound up in one of the industry’s most vexed technology questions: What is the right level of customisation when spiralling costs, barriers to future development and key man risk can be the price of pursuing it to its furthest extremes?

Here again, he sees pragmatism winning out, noting that, “There is a lot of focus on the back-office, but our clients particularly like that we can do everything associated with providing end-investors with digital access too, including a white-labelled client portal for portfolio views and reporting.” For firms wanting to respond decisively to rapid changes in the industry, there may be a lot to like about “off-the-peg” solutions.
 

Compliance comfort
This may be even more true in the compliance arena, there being both safety and savings in numbers. “Firms want to know that they’ve got access to the learnings of a wider peer network through us, and appreciate the benefit in what we’ve developed not being ultra-specific to any one client,” he explains. “This means that whenever we build something for a new market, or a new regulation, all the clients get the benefit of that.”

The effect this has in levelling the playing field for firms with more modest technology budgets is easy to understand; so is the reduction in compliance risk that can come from using tools used by comparable organisations facing comparable complexities. Technology firms’ superior security might be another significant factor.

Recent WealthBriefiefing research indicates that no wealth manager is completely sure of their ability to tackle the cybersecurity threat today, confidence dwindling as an appreciation of the threat’s magnitude has grown. With the EU’s General Data Protection Regulation and the California Consumer Privacy Act threatening massive penalties for inadequate defences, here too there may be great comfort in working with a heavyweight technology partner.

The human factor
However, Wooders also counsels against focusing too much on the technology to the exclusion of the human factors upon which long-term outsourcing success rests. He explains: “As one COO said, ‘Many tech firms have 80 per cent of what you want, but getting the remaining 20 per cent will kill you if they don’t understand the real drivers and requirement set’. You need the functional provision, but also the business expertise, know-how and service. That’s why our key people have decades of experience in wealth management operations.”

Wooders sees the best outsourcing arrangements as “living breathing things” where although robust Service Level Agreements are in place “you’re not having to refer to them all the time”. The best providers will lead with their flexibility, in the shape of the solution as well as its price. As much as wealth managers, technology providers are showing a healthy recognition of their strengths and the varying configurations they may need to fit into, which for GPP may be anything from individual modules though to a comprehensive investment administration platform.

In Wooders’ view, “collaborative competition” is simply the reality of today’s technology landscape and any good provider will be focusing on interoperability between systems and allowing fi to pick best-of-breed solutions as their needs dictate. “’Agility’ and ‘flexibility’ really came through in our research, but that’s actually in our DNA,” he says. “Our wealth management system is API-driven and is built on the premise of connectivity to our clients’ third-party systems, for example SIPP [Self-Invested Pension Plan] administrators and advisor platforms.”

The possibility of an API-driven, modular approach to outsourcing should also allay any lingering fears about further disrupting business at a time when change fatigue must be running high in many organisations. “We see many firms looking to integrate best-of-breed components into their architecture on a modular basis,” Wooders concludes. “This gives them more flexibility and ease of implementation, so there is minimal disruption to the enterprise. This also allows them to go on extracting value from technology that they aren’t ready to move away from yet.” And so, another objection to technology upgrades can be headed off.

The case for outsourcing technology and non-core processes as far as makes strategic sense would seem compelling – and for a very wide range of firms which are looking to cut costs, stand out and scale up sustainably in today’s rapidly evolving markets. But this has yet to translate into levels of outsourcing anywhere near the levels its merits would predict. 

It seems that many wealth managers could be overlooking their outsourcing options and therefore losing opportunities to achieve greater operational efficiency, economies of scale and improvements to service.

This forms part of this publication’s latest research report, Technology Traps Wealth Managers Must Avoid. Download your free copy by completing the form below.

References:

 i “C-Suite Confidential - Ten Key Tech & Ops Trends for the Wealth Management Sector Looking into 2020”, WealthBriefing, 2019

 ii Ibid.