Where size does not matter
It has surely been a long time coming, but it would appear that asset management outsourcing has finally turned the corner, with a host of new arrangements being unveiled in rapid succession during the closing months of 2003.
It would appear that fund managers have set aside their long-standing misgivings about outsourcing. In the current economic climate, the opportunity to reduce their fixed cost base, which had become so bloated due to short-sighted over investment in technology and staff during the boom years of the late 1990s, while refocusing on their core competency of managing money, simply proved too compelling.
Europe’s private banks have not yet made that leap of faith, however. As a recent study* by SEI Investments highlights, the sector finds itself in a similar position to that occupied by fund managers two or three years ago. Private banks are under increasing pressure from every aspect of their business, with market performance, investor caution and regulation cited as key concerns at this time.
“In order to survive, private banks need to focus their resource commitments and change their business model by outsourcing key areas of the business,” SEI noted. However, while private banks recognise this need to outsource, at the same time they are put off from doing so by what they perceive to be a lack of capable providers in the marketplace. Seventy four per cent stated that their biggest concern was loss of control, while 62% voiced concerns over their ability to guarantee service quality. Sound familiar?
That said, the study confirmed that the experience of those firms which have embraced outsourcing has been overwhelmingly positive – 94% say outsourcing the back office has been as successful as expected, and 80% cite success in outsourcing investment management. Forty six per cent reported a reduction in operational costs, while 29% stated that outsourcing had improved their company’s strategic focus.
A specialist asset management solutions provider best known in UK for its manager of managers offering, SEI is already one of the leading providers of wealth management services in the US, administering some $242bn (EXXXbn) in mutual funds and pooled assets and processing investment transactions worth almost $50trn annually. With an eye on the main chance, the firm is now developing a new wealth management service aimed squarely at the European private banking market which combines asset management, client administration and back office processing.
The project is being overseen by SEI’s managing director for global private banking services Francis Jackson, who spent 15 years in the custody business – latterly at JPMorgan, Deutsche Bank and Citibank – before joining SEI two years ago. “It is clear the European wealth management business model is set to change – a reduction in resource commitments to non-core areas is inevitable,” he says.
“In the 1990s, when the market was booming and private banks were growing assets very aggressively, but they weren’t growing those assets any faster than they were growing their expenses. Post-2000, the market goes belly up and they find themselves saddled with high costs but all their fees relate to asset values, and those asset values have halved,” continues Jackson.
“At the same time a lot of the new clients they have brought on were not old money but newly wealthy, and they were far more demanding in terms of the services they required – rather than a quarterly briefing over port and a cigar they wanted an electronic message to their PDA telling them what their investments had done in the past five minutes.”
Accordingly, the private banks have been forced to invest heavily in front end technology; at the same time, they have had to deal with the onerous regulatory burden imposed by the new anti-money laundering initiatives that sprung up post 9/11. “In capital terms, however, these are relatively small banks, so it is imperative that their investment dollars are focused on revenue generating business lines rather than back office processing,” Jackson adds.
“As a result, the marketplace is desperate for an outsourcing solution that combines full back office with asset management. From my days in custody, I recognise that many private banks have long had big issues when it comes to processing. For years they have been looking for partners to help them outsource a lot of the core back office processing – from trade execution through to settlement, custody, portfolio administration and reporting down to their client level – but the institutional custodians weren’t in the position to give them that assistance,” he adds.
Jackson is confident that SEI’s new offering will help fill this gap. “We are now the largest provider of outsourced investment processing to private banks and trust departments in the US, so not only are we focused on private banking and we have a fully scaleable solution,” he says. “If you have £1bn (E1.45bn), custodians love you – just so long as it is in a single account. Our clients, by contrast, may have 300,000 accounts and only $20bn in assets overall.”
* SEI surveyed 67 CEOs, CFOs and senior executives at major wealth management institutions in 10 European countries