Aug 25, 2021

This next decade will bring significant change to our industry, forcing many asset managers and asset owners to transform their operating models to adapt to these changes and future-proof their businesses.

Although most firms understand this, they may not realize that they also need to alter their way of thinking, as many of these discussions about transforming their operating models are still based on, or limited by, outdated constructs. There are more options now, and outsourcing could be one of them.

While the solution may still involve decisions related to all-in-one versus best-of-breed, or whether to outsource or not, the discussion (or perhaps debate) has now evolved ─ and it’s no longer one-dimensional. New opportunities for transformation have emerged, involving flexibility, interoperability, and optionality.

For the consumer, what this all means now is choice.

Under Pressure

Trends Driving Transformation: Multiple internal and external factors are motivating change among asset managers and asset owners across the globe

Our industry is changing, and today’s low-interest rate environment is pushing asset managers and asset owners toward more complex assets, which test the capabilities of legacy systems and put strain on existing operating models. At the same time, external pressure adds another layer of complexity, with increasing demands from regulators and heightened expectations from clients and boards in terms of cost, performance, and transparency.

Asset managers have been facing industry-wide fee-compression for some time, as more investors are favoring lower-cost passive strategies over active management. This puts a strain on margins and increases the focus on controlling costs. To compete and to achieve growth, asset managers need to develop new products or expand through mergers and acquisitions. According to a report by the investment bank Piper Sandler, by 2030 attrition and consolidation are expected to reduce the number of asset managers by half. The industry will then be dominated by a small group of massive global firms, with only some specialist managers able to compete in a field of industry giants.

Asset owners have been trending toward insourcing asset management. Allocations to alternatives are increasing in order to meet capital requirements and future liabilities, and increasing numbers of investment boards are looking for more control over their investments, so co-investment and direct investment are on the rise. At the same time, regulatory and solvency requirements continue to evolve.

COVID-19 added to these challenges and exposed flaws in the operating models at many investment firms that have relied heavily on spreadsheets and manual processes that proved inefficient and problematic in a remote environment. Service providers, on the other hand, with various centers of excellence, have generally been able to scale or move work around the globe to minimize COVID-19’s impact, although they face some of their own challenges due to the extent of the pandemic.

A Changing Landscape

While the age-old debate between all-in-one and best-of-breed solutions rages on, and outsourcing remains a controversial topic, the landscape is changing, and investment firms now have various models or choices available when it comes to finding the right solutions approach.

And this is why the conversation has shifted.

Software or a Service?

The lines between software and service providers are blurring. Vendors known for software are extending their managed service offerings into data management, custom reporting, and even traditional areas of investment operations.

Vendors known primarily for their services are now building their own technology stack, while making a series of acquisitions along the way. At the same time, some of these firms are also working together. For example, Bloomberg has entered into partnerships with BNY Mellon and Northern Trust to offer better integration and turnkey solutions for asset-servicing tasks, while BlackRock started this move with Aladdin Provider, giving access to service providers to perform tasks on the asset manager’s system.

Platform Ecosystems

Cloud-based technology has also given rise to platform ecosystems, and this is altering the age-old debate between all-in-one and best-of-breed solutions. In the past, best-of-breed offered innovation and solutions that were fit for purpose, but integration and maintenance grew problematic over time. All-in-one offered a solution, but firms understood that they would need to make sacrifices for the greater good, so they could take advantage of the common data model and simplification that the platform offered.

Furthermore, the term all-in-one was a misnomer from the start. There has never been, nor will there ever be, a single solution that meets all your requirements across all asset classes.

What’s different today about these emerging ecosystems, however, is that they offer the benefits of each approach. The vendor takes care of all the “plumbing” and connectivity, hosting alleviates many maintenance headaches that can lead to version lock, and data can be aggregated and maintained with consistent practices.

At the same time, platform vendors can also offer best-of-breed components and services that are augmented by new opportunities created with an open architecture. An open architecture approach allows the platform to serve as a marketplace that connects the client with other third-party providers. These could be established providers, for example, that offer risk analytics, or fintech startups that the client may never have heard of.

The platform ecosystem vendor does not have to necessarily keep pace with the front office or specialize in any one area to the detriment of others ─ the vendor just needs to connect you with the right systems that fit your needs.

So, What’s Next?

The landscape is changing, with more choices now than in years past. The lines are blurring between software and service providers, and, in fact, some service providers now directly compete with software providers for insourced operating models.

More service providers offer modular solutions and optionality, allowing asset managers and asset owners to decide which functions to outsource and which ones to retain in-house.

As firms consider their future state, the good news is that today they’ll find multiple ways to get there.

Coming Soon

As part of an upcoming series and research report, Cutter will discuss some of the drivers for outsourcing, model options/service coverage, and considerations that you should keep in mind, such as cost and oversight requirements. We’ll also provide an update on leading service providers and how they’re helping firms future-proof their businesses.

In the meantime, if you have any questions and would like to speak with a Cutter analyst or consultant, please contact us at connect@cutterassociates.com.