Financial Services Fee Compression: How Your Operation Can Manage

Financial services fee compression threatens firms and should not be taken lightly. According to a Nationwide survey from June 2018, 69% of RIA and fee-based advisors are worried about the effects of fee compression on their business over the next 12 months.

Investment managers fear earning less money due to downward pressure on management fees while rising compliance costs threaten firms' profit margins, as mentioned in one of our earlier posts.

A financial squeeze is reason to seek out operational inefficiencies, and idle employees are one of those resource-drainers. Across all industries in the United States, idle time collectively costs employers $100 billion every year.

Hedge funds and asset management firms often have idle employees in their back-office during the non-peak processing times, and to play their part in the fight against fee compression, operations directors must leverage existing resources to the fullest.

Combating Financial Services Fee Compression by Dealing with Idle Employees

Don't Over-Hire in Your Back-Office

Hiring is never an easy task, especially when the labor market tightens, as one of our earlier blog posts mentioned.

But once you've found qualified candidates, know how much work is available for them.

According to a survey of 1,003 people across 29 occupations, 78% of respondents experienced idle time at work. Furthermore, in all 29 occupations, more than 50% of respondents had idle moments.

Considering the peak and non-peak processing time nature of back-office reporting, investment operations staff have likely experienced idle time, too.

Use time-tracking tools to gauge how long it takes to complete routine tasks. With that data, establish appropriate turnaround times for assignment completion. Once you've set expectations, you can identify when idle time is most likely to occur and for how long.

Now you'll have a better idea of how many staff members you really need, what kind of tasks they can work on during non-peak processing time, and even determine if the nature of the work is part-time rather than full-time.

Facing threats of fee compression, hiring with the assumption you're paying for idle time or in anticipation of higher volumes of work in the future should never be accepted.

Leverage Existing Technology and Staff

When tracking time for tasks, think about if you're fully utilizing the portfolio accounting system (PAS). Software is constantly getting smarter, and the PAS can do more of the work. Leveraging the system will get you a better ROI on your investment in technology.

Automate as much as you can; one of our recent blogs explains how investment operations can profit from automation technology.

When you've identified when and how long you expect an employee to be idle, think about what work they can do to stay productive and sharpen their skills.  Leverage your existing staff by teaching them how to leverage the technology. Either you train them or have them learn from more experienced back-office staff.

Get the most out of your team, but don't overwork them. The Harvard Business Review notes that long hours backfire for people and companies, citing higher rates of absenteeism and turnover, as well as higher healthcare costs. Be smart in your leveraging.

Outsource Operational Functions

Technology and operations costs are rising, and according The Exchange's 2017 Survey of the Asset Management Industry, more than 76% of firms planned to increase spending on investment operations in 2017, up from 74% in 2014 and 2015. Idle staff only adds insult to injury.

As fee compression tightens its stranglehold, it's unlikely operational costs will decrease on their own anytime soon. Outsourcing routine back-office tasks is a possible way to alleviate some of the financial risk, as well as avoid worrying about dealing with idle employees if you only needed them for the routine work, which may be only a few hours of the day.

Daily reconciliation and performance reporting, pricing, billing and cost basis entry are some of the activities a third party could perform for you at a lower cost, and the outsourcing provider could help leverage your existing technology if you lack the in-house expertise.

When it comes to investment operations outsourcing, do your research. Find a company that understands your systems and excels in the work you need done. Our previous blog can also help in your search by giving you good questions to ask middle- and back-office operations outsourcing companies.

Don't Let Fee Compression and Idle Employees Hurt Your Operations

Fee compression in financial services is a pain, and even worse is seeing inefficient use of labor and resources in the form of idle workers.

Operations directors must tackle the idle worker problem by improving their leadership and management skills, which includes knowing how to hire the right amount of labor to match the workload while leveraging technology and employee capacity to the max.

Outsourcing is another possible solution in reducing advisories' financial burden, and these firms should have the resources and talent to help you get the most out of your technology.

Dealing with shrinking fees and rising costs will be a challenge, but by taking the right steps to handle idle workers, you'll overcome the challenges. Operational efficiency is within your reach.

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