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After Being Laggards, Wealth Managers Increasingly Embrace Outsourcing - Celent

Tom Burroughes

24 July 2012

The use that wealth managers are making of outsourced services to reconcile rising client demands and increasing costs after the 2008 financial crisis is explored in a new report by Celent, the advisory and consultancy firm.

Many firms are “increasingly looking at outsourcing as a viable alternative”, says the report, called Wealth Management Outsourcing - A Global Market Perspective.

Cost-cutting remains the primary driver: estimates of what wealth managers could save range from 20 per cent to 30 per cent of costs on average. Second, outsourcing providers are viewed as enabling a firm's ability to quickly scale operations up or down.

The recent Scorpio Partnership Benchmark study of the world's wealth management industry showed that the 20 largest wealth managers' average cost-income ratios fell slightly in 2011 to 78 per cent from 79 per cent a year before. A number of firms, such as Pershing (part of BNY Mellon) and SEI, the US firm, say industry pressures on costs will continue to boost the case for outsourcing.  

“In the aftermath of the financial crisis, wealth management firms are facing a number of challenges, including having to lower costs, improve efficiency, reduce turnaround time, scale up or down operations, mitigate risk, and adhere to stringent regulations. All of these have brought technology centre stage in managing financial institutions,” the report says.

The financial services industry has been familiar with outsourcing for some time but wealth managers have been slower to adapt, the report said.

“This hesitancy to use outsourcing can be largely attributed to confidentiality and privacy issues inherent in managing wealth of highly-valued clients,” it says.

Even so, the meltdown of the sub-prime market and associated market pyrotechnics has encouraged firms, facing higher costs and regulations, to examine the outsourcing idea with more vigour, the report said.

“Generally speaking, the further a wealth management function is from a client 'touchpoint', the more likely it is to be outsourced,” the report said.

For example, wealth managers have rarely outsourced front office activities; it is more widespread to outsource functions such as global custody, securities lending, client servicing, and accounting and settlement of trades in complex financial instruments.

The report said firms will increasingly engage outsourcing providers in the areas of: client-facing technology, advisor/relationship manager-facing technology, channels, data management, CRM, client reporting, providing mobile presence, portfolio management/order management for execution services, and seamless integration of channels for various products and services delivery.