When a bad economy hits profit margins, outsourcing middle-office operations helps investment managers in ways simply beyond cost savings.
Prolonged downturns in the market often reflect greater weakness in the economy, and in such cases, wealth and asset managers begin to worry about their portfolios.
- How severe will a market correction be?
- How long will the slump last?
- How will the firm’s financial situation hold up?
With projected financial losses, the CFO will tell all departments to tighten their belts, and that includes operations.
Outsourcing middle-office functions could help reduce the firms financial challenges, in addition to bringing other benefits.
Reasons to Outsource Middle-Office Operations in a Bad Economy
Cost Savings for Investment Management Firms
Lower operational costs for wealth and asset management firms might be the biggest and most immediate draw, and rightfully so.
Based on nearly 15 years of experience, Empaxis has seen its clients reduce average annual operations costs by 30%. In some cases, firms have cut operating expenses over 50%.
These are not insignificant numbers. Depending on a company’s size, a 30% reduction in costs could be worth tens or hundreds of thousands of dollars, even millions.
When revenue streams slow down, middle-office operational cost savings can help firms withstand the brunt of a bearish economy.
And even without an economic downturn, wealth managers’ profit margins have fallen by a third since the late 2000s, according to the Financial Times. Outsourcing could be helpful regardless of economic situation.
Get More for Less Money
Outsourcing middle-office operations doesn’t have to be a compromise between cost and quality.
In fact, quality could increase with the right vendor.
The reason is simple: fund administration outsourcing providers specialize in running middle-office operations for wealth and asset managers.
The founders of an investment firm go into business to do what they do best: investing. Running an efficient operations is important, but it’s typically not an organization’s strength, and operations alone doesn’t generate revenue for firms.
A middle-office outsourcing company has the resources and scale to do things a firm’s in-house operation may not be able to:
- recruit, hire, and retain an army of experienced portfolio accounting specialists.
- be at the forefront of adopting new technology, like robotic process automation.
- develop reporting error detection and advanced quality control systems.
- be available 24/7
The outsourcing vendor’s capabilities can bring positive benefits for their clients:
- more accurate reconciliation reporting
- quicker reporting turnaround times
- i.e. reports delivered before the markets open
- no more worrying about reports not getting finished because someone is out sick, on vacation, or left the firm.
Investment operations outsourcing has come a long way; it’s a sophisticated industry with many players competing for market share.
And under free market principles, the competition will pressure operations outsourcing firms to keep their costs low and deliver a world-class service.
Wealth and asset managers are the beneficiaries of that competition.
Be Well-Positioned for Growth and Scaling Up
When money is tight, people have no choice but to develop better money-saving habits.
And those who maintain good savings practices will benefit even more once their economic situation improves.
Likewise, a firm might have opted for middle-office outsourcing because an economic recession took a toll on company finances, and outsourcing was a way to reduce costs.
But once the recession was over and the markets improved, outsourcing kept the firm’s costs low and stable. The investment management firm could then enjoy increased revenues and higher profit margins.
The outsourcing provider made it easy for the firm to ramp up its operations by supplying the portfolio accounting talent very quickly and seamlessly.
The investment firm no longer had to recruit and train new employees, incurring expenses along the way.
Middle-Office Outsourcing a Solution to Weather a Down Economy
But they might realize they get more than just reduced costs.
A firm can still maintain (or even increase) their reporting quality because the outsourcing company has the resources to deliver a quality of service that an investment firm couldn’t produce internally.
Plus, companies can maintain outsourcing’s cost savings and enjoy increased margins when the markets finally turn around.
Outsourcing middle-office operations isn’t just a matter of helping a firm survive, but also thrive.
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