The wealth management sector has embraced outsourcing as a strategic option, but this is a journey which must be carefully embarked upon, one expert cautions.

Outsourcing can deliver great benefits, but careful thought needs to go into both its configuration and the provider. Here, Tom Wooders, Group Head of Sales at Titan Wealth, offers a checklist of considerations to help institutions make the right choices. This piece forms part of this publication's new report "Technology Traps Wealth Managers Must Avoid 2022," published in partnership with EY, which is available for complimentary download now.

According to a wealth industry report recently commissioned by Titan ("The link between outsourcing, profit and scale", November 2021) outsourcing wealth managers have outperformed those firms which have retained their in-house technology and operations infrastructure, in terms of both higher assets and revenue growth, over the last five years. Titan’s report suggests that those wealth managers deploying outsourced platforms employ on average circa 20 per cent fewer staff in the performance of day-to-day operational tasks, demonstrating the productivity benefits on offer.  

Defined as proportionate value derived from available business resources, productivity has a direct impact on overall business margins; the holy grail for all wealth managers being an increase in profit margins on revenue at a rate that outpaces associated percentage cost. According to the same report, only 37 per cent of wealth managers are currently growing revenue faster than costs, suggesting a poor track record overall regarding business scalability. The same report finds that only 11 per cent of overall operational costs have been expended by wealth managers, indicating a reluctance to embrace outsourced solutions and a relative failure to reallocate resource away from traditional in-house cost centres.  

Reasons for reticence over outsourcing   
The reasons for this reticence are manifold; including perceptions regarding dilution of control over future business direction, a restricted ability to retain staff where business functions have been outsourced, and potential complication of existing business models. Another historical area of concern has regarded perceived “one size-fits-all” outsourced platforms lacking the nimbleness to support bespoke client solutions or failing to provide white-labelled client portals and reporting that encourages client allegiance with their wealth manager. 

Such concerns highlight the need among wealth managers to source solutions that are capable of accommodating ongoing innovation and scalable growth, facilitating increased productivity through process enhancement and automation and therefore an increased focus on generating added value to the manager’s end clients. The end result of delivering higher quality client service is increased revenue and ultimately margin enhancement, with technology a key contributor.  

Tech’s amplified role     
Through process automation and augmented risk mitigation, new generation wealth platforms can reduce administrative burdens, simplify client onboarding and onward engagement, and thereby act as a spur to greater cost efficiencies and overall business productivity. The role of new technology in generating the above business benefits has been amplified by the Covid pandemic; having clearly demonstrated the need for digital client interaction, the last couple of years have seen an accelerated pace of digital transformation in how wealth managers conduct their day-to-day business. 

This has engendered increased investment across front, middle and back-office technology; many wealth managers do not have the bandwidth or expertise to develop their own digital platforms and are still deploying legacy systems that are either functionally inflexible or have highly fragmented process architecture. While implying a high replacement cost, legacy systems also typically require retention of ever more expensive specialist technology support and integration expertise. Technology that pre-dates open architecture and API connectivity does not lend itself to fast-paced innovation and adaptability and therefore contrasts with newer, digitised solutions encompassing consolidated data and more flexible client administration and reporting.

How to calibrate outsourcing  
In evaluating outsourced technology solutions, wealth managers must decide which of their business processes best lend themselves to outsourcing. When considering the deployment of outsourced solutions wealth managers must consider the following: comparison versus the cost of maintaining in-house systems, the ability of existing systems to meet an ever-increasing regulatory burden and an ongoing capability to innovate to meet new market and client expectations.  

Any new technology platform also cannot materially restrict business flexibility or functional coverage. Set against the perceived risk of loss of control and business autonomy, wealth managers must also assess the benefits of tapping into the broader industry expertise and inherent economies of scale of outsourced platform providers.  

Outsourcing can also convert fixed operational costs to variable, for example where outsourced platforms are charged based on usage (typically the preferred model of smaller wealth managers) or based around assets under management (AuM) where firms can more easily predict the cost implications of business growth and factor provider charges into end client fees models.  

These variable models are fast displacing traditional licence-based fee structures where ongoing minimum services fees are often dictated on the basis of long-term contractual commitments. The report we commissioned found that while wealth managers do not expect to sign short-term agreements when committing to new outsourced relationships, they do want to see pricing models that incentivise growth, for example via tiered charges or capped service minimum fees.  

Ever more exacting expectations 
Client expectations have become increasingly sophisticated regarding digital interaction with investment managers, including account set-up and how investment decisions are made. Wealth managers must weigh the opportunity cost of investment in digital technology, including ongoing pressure on margins where middle and back-office processes remain manually intensive and therefore engender disproportionate operational costs. According to the Titan report cited previously, less than half of wealth managers in the UK have increased their margins in the past five years. The report does not see a direct correlation between AuM value and profit margins, but a common thread across wealth management firms is that the front office is the area of greatest expense and therefore has most potential drag on profitability where key client-facing functions are not sufficiently productive.  

As mentioned above, the right technology can offer seamless client interaction and a single source of client data, but as a means of maximising productivity and value, insourced systems must also be able to integrate easily with wealth managers’ existing business governance, compliance and back-office functions. In this respect new technology must be easy to use and deploy, including modular application where new systems are connected to retained platforms and processes.  

Close relationships required 
Providers of new technology and services platforms must also have the requisite resources available for training wealth managers’ personnel and then providing ongoing support following the initial, crucial deployment phase. These aspects go beyond best-of-breed technology and reference the necessity of there being a close business partnership between the wealth manager and its technology services provider, where the wealth manager concerned can have absolute confidence that its initial and ongoing business needs will be readily understood and supported by its outsourcing partner. 

Such a partnership must include on the part of the platform provider an appreciation of the wealth manager’s core business needs and alignment to strategic goals, so that provision of outsourced services reduces business complexity and is sufficiently flexible to allow for targeted market solutions and ongoing functional innovation. While outsourcing is not simply a cost-cutting exercise, an appropriate service’s commercial framework can facilitate appreciable cost efficiencies as the wealth manager’s business grows. 

Working with the right services partner can result in improved costs control, where clearly defined and agreed business objectives are formalised at the outset and in providing access to new generation technology that will align with existing systems infrastructure and sustain an increased processing workload as business volumes increase. In order to do so, any newly-adopted technology must facilitate more scalable business processes that free up wealth managers’ internal resources and by delivering improved productivity allow firms to achieve enhanced profit margins alongside continued business growth.  

This is, admittedly, quite a lot for wealth managers to consider if they are to make the right outsourcing decisions. However, taking the time to do so will undoubtedly pay off.

About Titan Wealth 
Titan Wealth Holdings was launched in summer 2021 with the investment backing of Ares Management, Maven Capital Partners, and Hambleden Capital. Bringing high-quality execution and administration to the asset and wealth management sector, Titan intends to grow its AUA to £30 billion+ over the next 3 to 4 years, both organically and through targeted acquisitions. Titan has to date acquired wealth solutions and custody provider Global Prime Partners Ltd (GPP), Tavistock Wealth Ltd (the DFM entity of Tavistock Investments Plc) and Cardale Asset Management Ltd.