Investment managers are adopting service models | Gresham

It seems there is no end to the volatility in the financial markets as strained supply chains, rapid inflation, and oil and gas concerns drive prices up further. This has significant implications for how investment managers control various risks and deal with the growing volumes and complexity of data and reconciliations.

At the same time, investment managers have been experiencing significant growth over the last two years. Traditional and alternative asset managers in the U.S. and Canada saw another record year of growth in 2021, up about 15% in assets under management (AUM) while median fee capture grew by 7%. Simply put, firms must have a future-proof plan to take on new clients and assets and scale to growth.

These rapid shifts are precisely why firms are turning to different types of outsourcing and managed services models – to help alleviate the pressure on and optimize lean operations teams, control infrastructure costs, and reduce the risk and disruption caused by staff retention challenges.

The talent challenge

In the midst of the Great Resignation and the war for talent, firms are looking to take the pain out of managing data and operations, controlling cost and risk, and scaling the business. Key-person risk caused by high turnover rates and staff rationalization is a big threat, especially for firms that are outgrowing their technology and staffing footprints.

Back-office teams become fatigued when their work is not optimized, rarely staying in those roles for the long term. As a result, firms find themselves in a constant cycle of recruiting, hiring and training staff to manage data and handle reconciliations and other post-trade processes.

The problem is not just limited to retaining and replacing existing staff. As a firm grows, its ability to meet the operations demand of high volumes of data and reconciliations by adding more staff is neither sustainable or cost-effective.

Data volume and complexity

Financial data is growing exponentially. New assets entering the market will only increase volumes further, adding to the already high volumes and complexity of data and reconciliations amid ceaseless volatility.

The average, medium-sized buy-side firm takes in 59 data feeds from custodian banks, prime brokers, and other institutions every day (source: Gresham’s Data Services), and that number increases for each firm, year over year.

But the data challenge is not limited to dealing with volume. The combination of increased data complexity, low data quality and disparate formats coming from external sources, and delayed delivery can quickly lead to operational and audit risk, revenue loss, and compliance and reputation issues. In addition, dedicating hard-to-find staff to the task every day often leads to high churn rates.

Exponential growth

Investment managers must be able to scale effectively to asset and account growth, with many firms turning to recruiting and hiring more operations staff as the answer to handling the increasing demand. But this cannot and should not be a long-term plan strategy.

Instead, firms should take a careful look at how well they are optimizing their people, data and process:

• People: How well optimized is your current team? Are they spending most of their time bogged down with repetitive, tedious or redundant tasks? Could they instead focus their time on more strategic tasks that help to reduce risk, enhance customer experiences and the bottom line?
  
  
• Data: As you take on additional and more complex data, how much time is your team spending collecting, reformatting, reconciling, and distributing the data internally? Are you able to easily use the data for multiple functions and platforms? Is this the best use of your team’s time?
  
  
• Process: Is your current process manual, fragmented, or redundant? Is the total cost of owning and maintaining your internal infrastructure becoming a burden on your IT or operations teams? Should they be spending their time on more strategic projects that add value and help differentiate your firm’s offerings?

When you look at it, all three of these components are connected and interdependent. Process can only go so far without data and people. Data has no value if the process is inefficient. Process and data cannot fully replace people, and vice versa. And it doesn’t make sense to increase staff to work a poorly designed process.

Finding the right service model

As firms make changes to their financial technology stacks to meet new client demands and gain efficiencies, finding the right combination of people, data, and process is a key challenge.

When you have an inefficient, not automated, infrastructure-heavy process, you’ll needlessly spend on infrastructure and extra staff to solve the problem. Even in the best of times, finding and retaining skilled operations professionals is always a challenge. This is not sustainable.

But it’s the key reason why managed services and hybrid outsourcing models are growing in demand in the investment management industry. In fact, the adoption of our managed services offerings has grown by 95% over the last four years.

And speaking of the ability to scale:

An institutional investment management firm turned to Gresham (formerly Electra) to outsource parts of its reconciliation process to alleviate the strain of sourcing talent as it grew. Since adopting managed services, the firm grew from $3 billion in AUM to $107 billion in AUM over eight years, and easily absorbed a doubling of its AUM in just the last 18 months.

A Canadian asset manager grew from $3 billion to $10 billion in AUM in two short years. After adopting managed services, the firm doubled its AUM to more than $20 billion, easily adding $3 billion in assets in the last year alone.

Going forward, firms have to be smarter about how to achieve and sustain growth. That means figuring out how to best allocate resources today and in the future. Adopting cost-saving, cloud-based technologies and outsourcing repetitive processes can help drive economies of scale, decrease complexity, and accelerate responses to market dynamics.

We’re helping firms reduce cost and risk while scaling to growth through flexible data outsourcing and reconciliation managed service models. Learn more by scheduling a call or demo.

Gresham will be at InvestOps USA in Tampa, March 28-30, 2022. Book an on-site meeting to learn more about how to get a better handle on your data, reconciliation and fee billing operations.