Outsourcing allows wealth managers more time and resources to focus on growth.
And with growing fears of a recession and the ongoing US-China trade war dragging on, the markets will likely not react kindly, and a firm’s revenue would go down.
Combine said challenges with existing in-house operational efficiencies, the mix of internal and external threats makes it very hard for investment management companies to grow their business.
Outsourcing could be a way to control those threats, as opposed to being controlled by threats.
Wealth Management Outsourcing Strategies to Grow the Firm
Outsourced CIO (OCIO)
An outsourced CIO is a third-party investment manager that provides expert, objective investment advice and strategy to other investment firms. The OCIO can offer more products and services that a smaller, resource-limited wealth manager couldn’t.
According to the Institutional Investor, more private wealth managers have turned to an outsourced CIO over the past decade.
And a Northern Trust Asset Management survey of 680 respondents (36% of whom are RIAs) found:
- 40% are using an external manager (OCIO)
- 96% are happy with an outsider manager
- For firms with over $3 billion AUM, there is 100% satisfaction
There are three major benefits to hiring OCIOs, according to survey respondents:
- Generation of above-market returns
- The ability to spend more time with clients instead of exhaustive investment research and analysis
- Exposure to a wider variety of investments
Even if the outsourced CIO has high fees, the fees may be worth it if it results in higher return and higher yield investments (more revenue for the firm).
And the ability to service more clients is another way to offset additional costs.
Like an outsourced CIO, middle-office outsourcing brings scalability to investment management operations.
While an outsourced CIO gives a firm an ability to service more clients, a middle-office outsourcing provider makes it possible to generate those clients’ reports timely and accurately.
An investment operations outsourcing company has the labor and technology resources to efficiently produce reports, including reports of high complexity, like separately managed accounts.
In the process, the outsourcing company can pass on cost savings to investment firms.
In addition, the vendor’s services could limit in-house operational risk:
- employee turnover
- over- and under-staffing
- reporting errors
Regulatory demands on investment managers show no signs of slowing down.
According to a Duff and Phelps survey of 183 asset management senior staff, the results found firms typically spend 4% of their revenue on compliance, and that percentage could double by 2022.
“It is estimated that some firms could spend 10% of their revenues on compliance within the next few years,” said Muhammad bin Ibrahim, Governor of the Central Bank of Malaysia.
Increased compliance costs are not all that far-fetched, as Thomson Reuters revealed:
- nearly 2/3 of firms expect an increase in their total compliance budget.
- 2/3 expect the cost of senior compliance staff to increase
- 43% expect the size of their compliance team to grow
To combat the complexity and costliness of compliance, investment firms can look to outsourcing.
In fact, 1/4 of firms already outsource all or part of their compliance functions, according to Thomson Reuters.
Compliance outsourcing could provide:
- lower costs
- simplified responsibilities
- the ability to align compliance costs with a business’s specific needs
- legal and regulatory expertise that’s otherwise unavailable in-house or beyond the budget to hire
- more time and resources to focus on clients and investing
Wealth Management Companies Have a Ways to Grow
In a nutshell, outsourcing allows wealth managers to focus on tasks that generate revenue rather than deal with tasks that eat into revenue.
An outsourced CIO gives a firm new investment strategies and offerings to clients, all of which could result in more money for the organization. Middle-office outsourcing can handle reconciliation reporting while reducing operational costs and risks. Compliance outsourcing also reduces costs while providing expertise.
Whether a firm chooses one or all of the ideas, the freed up resources should translate into more time dedicated to serving clients and effort marketing to new ones.
Nobody goes into business for the cost of doing business, and outsourcing can help firms adopt a mindset of organizational growth and expansion, not just staying afloat.
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