While most investment firms are satisfied with their vendors, selecting an unfit partner can hurt more than help your operation.
There are many benefits in choosing an operations partner, and more and more firms recognize the value of such partnership.
As an example, one study found that in 2022, nearly one-third of investment management companies looked into outsourcing their middle office, up from 17% in 2017.
And 85% of investment firm leaders believe that partnering with third-party providers in general is essential to the success of their firm in the near to immediate future.
And while the majority of firms that work with third-party operations providers are satisfied with the experience, not all providers will be the right fit
And sometimes it goes beyond just an improper fit; the wrong vendor can actually harm your operation.
Some vendors might not follow best practices in cybersecurity.
Inadequate security policies for electronic and non-electronic devices, email communication, and sharing/storing data are a few areas where vulnerabilities lay bare, thus breaches can occur.
In May 2023, more than 371,000 Fidelity retirement plan participants had data exposed in a breach. The point of failure was an attack on encrypted file transfer software provided by a third-party provider. But the consequence is a breach of trust between Fidelity and its clients.
Trust is the most important aspect of a client relationship. The real cost of compromising a client's financial future is more than the sum of losses from the breach. It’s lost business and a damaged reputation.
To prevent these issues, do your due diligence on the vendor’s cybersecurity track record. Find out if they’ve had client data breaches before and what they’ve done to fix the issue.
Also, check if they have their SOC reports and ISO certificates as proof that they follow best practices around information security and data management, just as Empaxis does.
It’s not just about lax data security.
The information may be secure, but if your systems are populated with bad, missing, or improperly formatted information, that creates issues downstream.
Accounting and performance report numbers are off, fee calculations are done incorrectly, among other complications…
And bad data has financial implications.
Based on the info, you might over-charge or under-charge the clients. Also, misrepresenting investment portfolio or accounting numbers will erode clients’ trust in you. If they can’t rely on the numbers, they’ll take their business elsewhere.
For some firms, the damage is already done, but for others looking to avoid a similar fate, it all goes back to due diligence.
Find an operations provider that has a solid track record with data management, and see if they have quality assurance systems in place. Speak with client references if possible.
Also, make it clear your requirements for how data is entered, formatted, or calculated.
Check the vendors’ capabilities for data and systems integration. To have systems communicate with each other, rather than rely on manual efforts, that will be a more efficient approach.
And see if they have ISO reports, which will validate the vendor follows best practices around quality data management.
The wrong operations vendor will create compliance headaches for investment firms.
If data and security are issues, most likely there is little outside oversight and transparency into their setup.
When an auditor, team member, or stakeholder asks for a review of third-party vendors, the operations provider will have little or nothing good to share that builds confidence in their practices.
This could be problematic for wealth and asset managers, especially now that the SEC has increased its oversight of firms using third-party vendors.
Failure to comply threatens a firm’s good standing with the SEC, and if you’re in poor standing, your business could be forced to shut down.
It all boils back down to due diligence.
Knowing that the SEC requires better oversight of vendors, think not just about the quality of service the vendor provides to you, but will they make your job easier when it’s time to submit compliance reports?
Ultimately, the SEC wants to ensure that investment management clients are not negatively impacted because of third-party involvement, and it’s your job to select an operations partner that will positively impact you and ultimately the clients.
Partnering with the wrong operations vendor is a financial risk because you might spend several months or years trying to get the right solution(s) in place, only for everything to fall flat.
You were expecting higher output, better quality, and ultimately lower costs, but with so many issues, the costs add up.
The vendor messes up the numbers, and now you’re paying in-house staff to fix them.
Projects could take longer than expected and go over budget, and the deliverables are less-than-convincing.
And if it negatively affects clients who leave as a result, then money becomes an even bigger risk.
Set clear timelines when you need the work done, how much you expect to pay for it, and what are the standards that determine quality outcomes.
If those timelines, budgets, and standards are not met, find out what the reasons and see how they can repaired.
But if things aren’t working out, identify the issue sooner rather than later, and know when to terminate the partnership.
Do not allow yourself to pay for someone else’s incompetence.
Wasted money is certainly a concern, but time is something you can never get back.
The wrong operations partner will ultimately waste your time.
Maybe you’ve been with them 6 months, 12 months, or beyond, and the results aren’t there.
You’ll have feelings of regret, saying “If I had a better partner, I could have accomplished X or Y in that same time.”
And now your firm is set back several months or years not just from what the vendor failed to improve, but from the harm they brought on to your business.
Just like with money, set expectations for timelines, budgets, and standards.
Make it clear that your partnership with the vendor is dependent on them meeting deadlines consistently and performing at a high level.
And failure to meet the standards will result in termination of the partnership.
Of course, it all goes back to due diligence. If you take the time to thoroughly vet your partners, you are less likely to have the issues with wasted time and money.
Wealth and asset management firms all have their own unique ways of operating, and they need an investment operations partner that is willing to work them.
But some vendors take a ‘my way or the highway’ approach.
They’re very rigid in terms of hours they’re available (and not available), their pricing structure and what is included, technology they use, and the degree of customization in reports and deliverables they’re willing to provide.
Business needs change; there are periods you ramp up or down. Workflows themselves change, and the vendor must be flexible with those adjustments, within reason as set by the contract.
The last thing you want is to pay for unused hours or find out some of those unused hours won’t carry over to the next month when workloads pick up.
Make it explicitly clear what you need and the methods you require to get the work done.
If necessary, have it explicitly spelt out in the contract.
If the vendor cannot meet your requirements and are unwilling to make changes, find out before entering into a partnership.
When signing a contract, it is a legally binding agreement with the vendor.
And the language in the agreement might have looked fine… until it isn’t.
If you have a dispute with the vendor, the signed contract will dictate the outcomes.
But if you don’t read the fine print carefully, the terms in the agreement could work against you.
Scope of work, liability, payment schedules, conditions for termination of partnership… these are just a few points to look over in earnest.
Otherwise you might end up paying for things you didn’t need, deliverables that never came, or penalties as a result of ending the contract.
If you have an outside lawyer or General Counsel, have them read the fine print.
Have them point out any contract terms that could hurt your business if issues arise.
There may be room for negotiation, and your legal team can work with the operations partner to create a revised agreement with your firm’s interests at heart.
If this vendor and contract won’t work, it’s worth it find another one rather than being stuck in a bad deal.
Finding the right operational partner can be challenging.
While there is always some level of risk involved, you can mitigate the risk.
And to summarize some of the points above, here are a few tips for choosing the right partner:
At Empaxis, we know investment operations.
And wealth and asset managers have been coming to us for nearly two decades because of our expertise.
We understand the value of quality and secure data, the importance of timely and accurate deliverables, and the need for solutions that lower costs and deliver long-term ROI.
Additionally, clients enjoy a customized approach to their operation with a Empaxis, and we make sure a partnership is something both sides can agree on.
Ultimately, every investment management firm must do their due diligence, and by doing so they’ll find a partner to be pleased with.
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