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View the article online at http://citywire.co.uk/wealth-manager/article/a621926

Outsourcing dilemma: should you relinquish back office control to cut costs?

by Danielle Levy on Sep 27, 2012 at 09:50

Outsourcing dilemma: should you relinquish back office control to cut costs?

With the processes and systems of investment management firms under heightened scrutiny from the FSA, now more than ever could be the time to consider whether outsourcing back office operations is more attractive than carrying them out in-house.

It can like a minefield. Service providers offer differing capabilities, charging structures, service levels and functionality. This goes some way towards explaining consultants Knadel’s estimate that only 5-6% of private client investment management firms currently outsource their back office.

While the outsourcing market for institutional firms is longer established, new entrants into the wealth management market are now making the outsourcing option more attractive and accessible, according to Gilly Green, a consultant at Knadel.

She says a larger propensity to outsource among institutional players could help explain why the average operating margin in the institutional market comes in at 33% versus 21-22% for wealth management firms. ‘Credible suppliers have been a huge barrier to outsourcing in the past, but this is changing and it is changing quite quickly,’ she said, highlighting relatively new players such as SEI and Multrees (formerly IM Wealth).

In her view, one key question to ask when considering whether to outsource is: ‘What is the value of having your back office in-house?’ Adding that building your own technology can make it difficult to adapt to change.

Her sentiments are echoed by one chief operating officer from a boutique that is considering switching from their existing provider, who would prefer to remain anonymous. He welcomes the string of new entrants and hopes this will bring down charges further.

‘The downward pressure on custody fees will continue and I expect that 10bps for up to £500 million will soon become the average,’ he says. ‘Transactional fees must fall as clients begin to realise that a £20 charge by the custodian to settle a bargain which happens with no human intervention in the back office is unjust.’

In his view, insourcing is not viewed as a credible alternative. ‘The need to build and manage a team; meet additional regulatory requirements; maintain capital adequacy and risk diluting resource from our core business makes this a non-starter. The main factor is why try and reinvent the wheel?’ he says.

Brooks Macdonald, on the other hand, took the decision to bring its back office in-house last year, having formerly partnered with TD Waterhouse.

Chief executive Chris Macdonald [pictured] said the firm had sought to have complete control over both its front and back offices viewing it as integral to ensure client service levels are maintained. ‘Service is a big thing – and not falling over because of someone else’s delivery,’ he adds.

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2 comments so far. Why not have your say?

David Templeton via mobile

Sep 28, 2012 at 16:44

Rumours abound re Multrees scalability as key staff now leaving.

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Christine FERRAND

Sep 29, 2012 at 10:12

The problem with Multrees as a serious player is that current management have attempted to replicate previous offering by former employers BBH which was not sustainable and in the end failed. Hence the movement away of core staff. This is a pity as the original team from Adam were successful and understood the culture and service standards as Custodian and systems provider to Private Client Investment Managers.

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