Investment Management Outsourcing: An Operational Risk Solution to Weather Financial Storms

June 4, 2018 - Andrew Orr

Investment management operational risk is increasing, despite global markets being in their best shape since the 2008 global financial crisis.

Although the world economy has otherwise improved, we are seeing signs of strain.

The question is, are these just blips in an otherwise upward trajectory, or are these troublesome signs of a prolonged downward trend?

The last two months have been dominated by the off- and on-again nature of a trade war between the United States and China, and in the last week, rumblings of another potential Eurozone currency crisis have spooked investors. Lower than expected US GDP growth and emerging market capital outflow have also been a concern.

In response, your trading team will reduce risk by looking for safer investments, and operations managers can play their part in reducing risk by outsourcing middle- and back-office functions.

Investment Management Operational Risk Reduced by Outsourcing

An Added Financial Layer of Protection for RIAs

Middle- and back-office outsourcing can reduce operational costs, potentially exceeding 50% year-to-year for some firms.

One of the reasons for lower costs is because you only pay for what you need: labor. In addition, you’re not paying recruiting fees along with benefits and perks to entice new hires.

With tens, perhaps hundreds, of thousands of dollars saved each year, investment management firms have increased flexibility for when the markets turn sour and revenue streams slow down.

The extra cash as a result of cost savings can also be reinvested into your organization, improving areas management sees fit… or maybe your firm would rather use the money and host an epic holiday party at the end of the year!

At a minimum, outsourcing is the low hanging fruit when it comes to cost savings, providing hedge funds, wealth and asset managers an extra financial lifeline when the good times aren’t rolling like they once used to.

Access the Empaxis white paper on Making Outsourcing Work

No More Operational Turnover Woes

Most back-offices have their “super person”, and this individual is a firm’s portfolio accounting master. There’s nothing they can’t do for their operations… until they decide to leave.

Operational performance suffers when key personnel depart. Either you rely on lesser talented staff to pick up the slack, or you have to hire someone of equal caliber, and good luck with that. The tightening labor market has made it harder for investment managers to attract top talent, as our previous blog highlighted.

And then it’s back to the hiring process. You’ll pay a hefty recruitment fee to the headhunter, offer the new operations associate a competitive salary and benefits package, and it might take a year or two before you’ll get a return on your investment for the new hire. Cross your fingers they don’t leave at the first sight of greener pastures.

With outsourcing, operations heads can avoid the headache and seemingly never-ending cycle of hiring, training and replacing staff, once and for all.

Leveraging the experience and expertise of a middle- and back-office outsourcing company is the best way to ensure your organization’s portfolio accounting needs are always met, as the outsourcing provider has the resources to develop a bench of reliable specialists to get your work done whenever you need it.

Operations performance should always be strong even if the investment climate is weak. Market factors are out of your control, but accurate and excellent reconciliation reporting is in your control by finding the right outsourcing company.

More Efficient Use of Time and Resources

Simply put, an investment management firm’s goal is to earn money for their clients by making the right investments. Operations is a necessary component of an organization, but operations itself does not generate cash flow. The best an operations department can do is cut costs for the company while providing support for other parts of the organization.

COOs and operating managers should not view their role as lesser just because they aren’t on the front lines bringing in revenue for the firm, but keeping in mind the goal of reducing expenses will make outsourcing ever more appealing for your firm.

One of our blogs provides tips on how to train your operations staff, but for many advisories, the time and resources are not there to do this. A fund administration middle- and back-office outsourcing company can streamline your operations and run your portfolio accounting system.

Investment Management Outsourcing Is the Solution to Operational Risk

For as much opportunity as there is for investment management companies, there is an equal amount of risk. Whether it’s the threat of a political and currency crisis in Europe, or the recent unpredictable nature of global trade relations, one bad event could send markets in a tailspin, threatening your firm’s investments and bottom line.

And if the threats are not coming from erratic market behavior, the risk will come from high levels of operational turnover and lack of resources to train competent middle- and back-office staff.

Whatever type of storm threatens your firm, outsourcing provides shelter, ensuring lower costs and a guarantee that reconciliation and reporting work gets done, regardless of employee turnover.