The explosion of technology advancements in the RIA and Asset Management middle office space are grabbing the attention of firms who are looking to differentiate their services and position themselves to meet the growing hyper-competition of the marketplace. To meet the market’s evolving needs, industry administrators and other tech providers need to make a substantial investment in providing the latest operational best practices, hiring seasoned professionals, and continuously enhancing their firm’s technology stack and services, specifically for the middle office space. This is leading to a growing interest in outsourcing.
To better understand the modern-day dynamics of middle-office tech and outsourcing options, we recently sat down with Institute member Paul Wahmann, Head of Middle Office Services, for Ultimus Fund Solutions – one of the largest, independent fund administration services and middle-office solutions providers for RIAs in the country. We asked him to share with us his perspective on technology trends affecting RIAs and asset management firms and how outsourcing non-core company functions, like a firm’s middle-office, can be a very strategic and competitive decision.
Hortz: Can you help define and map out for us the “middle office” of a financial firm? Where exactly does it begin and end between the firm’s front and back office? What are the most important functions that reside there?
Wahmann: Middle office can mean a lot of different things for different people. Specifically, to buy-side asset managers, it has always historically been thought of as the place to hold functions that do not have a logical fit anywhere else. The general view of the role of middle office is to support both the front-office investment team’s needs as well as the asks of critical internal stakeholders and clients of the investment manager’s firm.
Our view of “middle office” places the emphasis on delivering critical data resulting from these operating functions in a consistent and efficient manner. At its core, the majority of investment managers include within their middle office activities such as post execution trade settlement, investment book of record or IBOR, performance analytics, reconciliation, collateral management and client reporting & invoicing. As investment managers grow, these functions usually start out by being supported via offline manually intensive processes which over time become unscalable and unsustainable. As a result, they may evaluate solutions that range from technology-based platforms they operate themselves to full outsourcing functions and or lift-outs to service providers. However, the wide range of options in the current marketplace can present difficult decisions for C-Suite leaders as the wrong solution or option could significantly impact their operating model in the future.
Hortz: With industry and technology changes happening so quickly, what are the current and growing needs of an effective middle office?
Wahmann: RIAs and asset managers must continuously adapt to market and regulatory driven changes which impact their operating model. Recently, the tightening of settlement timeframes with added regulatory financial penalties, the ever-growing addition of complex investment strategies and products, and compounded by the changed operating models we now live by in the post pandemic environment, have caused asset managers to increasingly focus on staying ahead of these challenges.
Most importantly, the need for real-time consistent data coming out of a high straight-through-processing (STP) environment has gained more strategic focus from asset managers’ leadership. Both full-service outsourcing providers, as well as recent additions from the Fintech community, are now providing numerous options to meet asset manager needs in varying degrees.
The ability to quickly consume, aggregate and normalize multiple providers’ data is deemed critical to supporting these middle office functions. Modern technologies, such as data messaging via APIs, machine learning tools, and the ability to quickly execute the onboarding of these offerings, have dynamically shifted asset managers’ approach to their operating model. Asset managers now have a wide range of solution opportunities at their disposal, many of which can be tailored to specific operating model challenges and future strategy.
Hortz: What new firm capabilities and services are now possible by upgrading your middle office with new technology?
Wahmann: First of all, the implementation of a more efficient operating model will have a significant impact on a firm’s use of human capital—which is even more important recently considering the resourcing challenges many of us have encountered coming out of the pandemic. The ability to offer enriched roles to staff can directly impact retaining headcount to keep up with a firm’s growing business strategy.
Specifically, ready access to timely and improved data quality and analytics resulting from these new technologies and models provide tangible enhancements to both internal stakeholders and added value to their clients. Opportunities to utilize data architects to promote value-added data usage versus pure data gathering and reconciliation is just one of many examples investment managers can now use to leverage their new middle office as a commercial strength supporting their investment products and sales.
In addition, the ability to utilize technology tools that offer white label data distribution capabilities to their underlying clients can present a strong competitive advantage against their peers. Investment managers need to think outside of the box to leverage these new tech platforms much more opportunistically versus just for closing a historical operating gap.
Hortz: Can you detail for us the kind of services and technology stack you provide to strengthen RIA and asset manager middle office functioning and efficiency? What are the benefits they offer?
Wahmann: We feel we have a unique product offering with the ability to align with the specific business criteria RIAs and asset managers are currently looking for. The Ultimus middle office platform is modular, which is key to our strategy and offers flexible solutions designed to meet the exact requirements for each client, providing efficiencies and standardization across each client’s entire range of investment products, including registered and private funds, ETFs, pooled vehicles, and separately managed accounts. We can offer these services in a modular format so that our clients do not need to be captive to one all-encompassing solution and thus investing in services which are outside of their scope and needs.
Our technology strategy is co-sourced where we leverage best-in-class vendor technology specific to our servicing needs, then augment it with our uSUITE® client front-end technology which allows client flexibility for data management and delivery. We then overlay our tech platform with our award-winning service team which is well versed and experienced in the needs of RIA and asset manager investment operations. Our recent release of the uANALYZE™ direct client portal is a prime example of this strategy, which provides users with front end access to their accounting, performance, and analytical data with the functionality to configure their data to meet the specific need of their business.
Some of the benefits our clients realize by leveraging our model include: a full end to end, straight through trade settlement service employing industry best practices such as SWIFT and FIX messaging and direct access to core market utilities for matching and settlement instruction maintenance. An additional core benefit of our platform is the ability to be agnostic to source intake data. Our clients have the flexibility to utilize their choice of custodians, order management systems, market data, and counterparties. In addition, our data consumption and normalization capabilities allow us to provide our clients with a single, consistent view of their entire book of business. For foundational technology platforms, Ultimus partners with market leading firms such as FIS for IBOR, Xceptor for data integration and reconciliation, and Optoro to support our performance and analytics products.
Lastly, our development roadmap is designed and managed to deliver specifically to the needs of our clients. We recognize a primary value of our service needs to be focused on execution and delivery of our roadmap as we evolve and meet the standards our clients require and expect.
Hortz: Why and at what point of growth of a financial firm should they consider outsourcing their middle office?
Wahmann: There are several different drivers which should be incorporated into an asset manager’s decision on when and how to outsource. Historically, one of the primary drivers has been cost, and while cost alone drove many decisions to outsource—as seen from the large lift-outs which occurred over the course of the last 10 to 15 years—that has now shifted to other dynamics driving these decisions.
An approach to outsourcing should now be weighed in alignment with a firm’s long-term strategy and accompanying growth. Dynamics such as changes in asset complexity and resulting volumes, new investment product offerings, and the need for geographic expansion and coverage should be considered. In addition, firms should review their organization’s overall IT platform taking into consideration business needs, contractual renewals, and the evolution of innovative technology and how it may fit into a manager’s broader platform, inclusive of front office, trading, and back-office needs. Managers should also integrate into their decision a consensus on a full outsource versus a software solution which they would operate themselves, or a hybrid approach between the two.
Firms considering outsourcing should prioritize their specific needs so they can be appropriately weighed into the decision process. It is always a challenge after the fact to reset against changed priorities which has led to some of the downfalls in the past of many large, outsourced lift-outs. A clearly defined model and business requirements are critical to the success of when to outsource the selection process and execution once the selection is made.
Hortz: How practically do you go about transitioning your middle office to an outsourced solution? What are the steps you take?
Wahmann: The key to a successful transition, whether it be a full outsource to a service provider or implementation of a technology platform, is all about proper planning and execution. Key tenets in planning for the transition should include reviewing priorities, dependencies, setting a realistic timeline and expectations, looking at a phased approach and timeline aligned to these priorities and objectives, ensuring proper project leadership is applied by both organizations inclusive of oversight and transparency, and ensuring your provider has adequate and consistent resources available to execute in alignment with the proposed timeline.
For the transition itself, key milestones should include:
First, a full due diligence of the operating model. Lessons learned from past engagements show that adequate due diligence is rarely performed within the sales process, so it is key for both parties to perform the deep dive into the day in the life processes within the current environment.
Two, outline and verify all development requirements, dependencies, associated costs, and timelines to develop are formalized and mutually agreed in order to meet assumed live date commitments and budget.
Three, level-set service plan requirements ensuring appropriate service level agreements (SLAs) and service guidelines with key performance indicators (KPIs) are in place before the live date.
Four, plan for appropriate day two items and confirm that a path towards business as usual is included in the plan and budget.
Lastly, establish formalized ongoing vendor oversight to help these long-term relationships remain healthy post transition.
Hortz: Can you please give us a brief case study example that illustrates how outsourcing your middle-office can support different firms’ needs or goals?
Wahmann: Market surveys find that key common elements that lead managers towards outsourcing their middle office are gaining operating efficiency and eased access to normalized data.
A recent case study of ours relates to post-execution trade settlement support. As markets have evolved recently with the onset of regulatory changes such as the Central Securities Depositories Regulation (CSDR) and tightening settlement windows in many markets, investment managers now need more than ever to be streamlined in their trade matching, instruction messaging, and their exception management models. These now have added importance to help managers from encountering financial penalties as a result of failed or delayed trading activity.
An outsourced trade settlement operating model with access to real-time trade status data now allows investment managers to leverage our technology and data platform utilizing provider agnostic API connectivity, machine learning, and custodian bank transparency via real-time status across all aspects of the platform. Outsourcing the ability to leverage our technology has allowed these managers to significantly shift the roles of their human capital from manual data gathering and operational activities, while also sunsetting costly third party and/or legacy internal technology, to focusing more on their core investment products, strategy, and client engagement.
Hortz: What advice can you offer to financial firms on how best to respond to this environment of accelerating business and cultural change they are now operating in?
Wahmann: Investment operations models are in constant change, impacted both by asks from firm stakeholders and the external marketplace. There are growing opportunities to partner with service providers for outsourcing options and Fintechs offering their newest technology offerings. Asset managers must have an open mind, now more than ever, to the wide range of solutions that may meet their evolving needs.
Firms need to take a forward thinking, long-term, strategic view on their operating model verses a tactical approach to closing immediate gaps. Consider vendors and providers under your review as strategic partners versus vendors, with common long-term objectives and strategy.
Secondly, be open minded to all potential solutions. Service providers, and especially the wide range of new Fintechs in the market, are continually offering new options aligned to both investment manager’s operational and data needs for the future. A firm’s operational model can also include multi-provider and hybrid approaches and your partners should be willing and able to connect and interface with each other to support your consolidated needs.
Most importantly, gain up-front consensus and commitment from all key internal constituents. Any large-scale initiatives whether it be for a full outsource or a heavy technology implementation requires full cross-organizational buy-in to guarantee its success.
The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their next-generation growth, differentiation, and unique community engagement strategies. The institute was launched with the support and foresight of our founding sponsors – Ultimus Fund Solutions, NASDAQ, FLX Networks, Advisorpedia, Pershing, Fidelity, Voya Financial, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.