Outsourcing: The way forward for asset and wealth managers

Asset and wealth management firms outsource processes such as research, sales, and marketing to improve their functioning and gain cost efficiency. Collaboration with third-party vendors helps them to enhance compliance; technology, data, and innovation capabilities; bottom line; operational flexibility; scalability; and time to market.

A lack of regular face-to-face interaction amid the pandemic is driving asset and wealth managers to increase their marketing efforts. They need assistance from vendors with expertise in creating marketing material in different formats (podcasts, social media posts, etc.); developing product, customer, pricing, branding, and differentiation strategies; and evaluating the competition by assessing news, thought leadership, investments, capability enhancements, social media footprint, and more.

Moreover, functional outsourcing and the adoption of managed services can help firms simplify their operating models, aid cloud adoption, and give access to third-party technology. Although most firms were initially concerned about their functions being physically separated, the unexpected pandemic-induced shift to remote work has shown them that offloading some of their operations to a service provider may be an easy and efficient way forward.

Apart from that, the pandemic has given way to the Great Resignation, creating a tight labor market for asset and wealth management firms and forcing them to opt for outsourcing. In a tight labor market, outsourcing can offer cost benefits and access to a wide talent pool.

Asset and wealth managers will need to improve their profit margins to face new competitors and regulations. Also, the conditions that drove markets to record highs in 2021 are poised to reverse. An upward trend of hot financial markets lifted almost all listed players last year, and pandemic-related cost savings have significantly supported managers’ earnings. However, the gap between the two ends is anticipated to increase in 2022. Moreover, as managers gear up for investing in their growth, a future and potentially more prolonged drawdown would likely damage operating margins. On the other hand, amid the US government’s decision to retract fiscal stimulus, the US central bank’s move to rein in asset purchases, increasing fee pressure on fund houses, and growing market share of prominent fintech players, outsourcing is expected to continue supporting asset and wealth managers to trim costs and stay on top of their game.

“The pandemic forced a lot of C-suite executives to press pause on making massive commitments in 2020. But once that freeze lifted in the second half, people were no longer wedded to services, data, people, and solutions all between their four walls.” – Chris Coleman, Head of Global Client Coverage, State Street.

In 2021, many large fund companies outsourced a vast majority of front- and back-office functions, such as data analytics, portfolio accounting, and trading, which they had kept close to their chest for a long time. Most asset and wealth management firms are now focusing on implementing unified systems and processes that work across geographies, asset classes, and products. This is redefining the breadth and depth of their outsourcing relationships.

Many large asset and wealth management firms such as Invesco, Franklin Templeton, JPMorgan, and T. Rowe Price have already announced that they will outsource some of their functions to third parties to redeploy critical resources and attain a consistent global operating model.

As per a survey by Funds Europe, about 73% of asset and wealth managers want to increase their outsourced services in the next two years. About 83% expect more comprehensive services from asset servicing and tech partners to connect mid- and back-office services straight to their front-office tools and investment book of records. In another survey, conducted by Linedata, about 49% asset and wealth managers ‘agree’ or ‘strongly agree’ that while core functions such as portfolio management, client advisory, and other client services will remain in-house, all non-core functions will be outsourced by 2030.

“Asset managers will continue to outsource non-core activities because it is a way to drive down costs and increase the capacity to invest in areas of greater differentiation, like China, ESG, and personalization at scale. Anything related to managing money or clients I want to own. Anything else I want to outsource.” – George Gatch, Chief Executive Officer, JPMorgan Asset Management