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Wealth Managers Discover Outsourcing

The goal of outsourcing: to reduce the operational costs, risks and even time involved with doing the work in-house.

For mutual funds and other institutional asset managers it has meant offloading middle- and back-office operations to technology firms or other service providers.

The idea-and rationale-is now taking hold among wealth managers, who manage investments in mutual funds, exchange-traded funds and other types of assets for high-net-worth individuals, small business owners and families that want or need special attention to their financial affairs.

Outsourcing is coming to wealth management in the nick of time. A recent survey conducted by custodian bank State Street showed that wealth managers spend 16% of their time on administration and fixing errors. That is nearly as much time as they spend on marketing and prospecting and double the time they spend on investment research which means that advisors can't be doing enough to keep their clients happy.

Wealth managers can't afford to take that approach in a competitive market of over $13 trillion in assets where Wall Street wirehouses, banks, independent broker-dealers and registered investment advisors are battling it out for a chunk of the same dollars.

"Wealth managers confront a host of immediate challenges that make outsourcing a potentially attractive strategic option," said Peter Amato, vice president of wealth manager services for State Street in Boston.

Those challenges include supporting business growth, cost reduction, risk management, becoming more customer-oriented and ensuring regulatory compliance.

Although small to mid-tier wealth management firms are more likely to outsource most of their trade processing work, larger firms are quickly seeing the merits of a selective approach. "The further the function is from client interfacing the more likely it is to be outsourced," said Jim Morris, senior vice president of SEI Global Wealth Services in Oaks, Pa., which services over 250 wealth management firms, including banks and independent wealth advisers in the US and UK. "Wealth managers want to differentiate themselves on client-centric experiences."

Among the most common areas of outsourcing of middle- and back-office operations: client account opening, reconciliation of cash and securities positions, scrubbing of performance data, processing of benefit payments, client reporting and clearance and settlement of domestic and international securities transactions.

Wealth managers also need to quickly consolidate market data, transactional data and position data to come up with the correct valuation and performance metrics of a customer's account, according to Rick McCarthy, a managing director of DST Global Solutions, which offers the Anova hosted data aggregation platform.

The most commonly outsourced function: client relationship management. "Solutions that help advisors automate and track key client activities related to sales, service, marketing and compliance will become more critical," said Sophie Schmitt, senior analyst in the wealth management unit of Boston-based research firm Aite Group. Those include hosted and cloud services that allow firms to access sophisticated client relationship management (CRM) functions for a fraction of the cost of owning the software.

These hosted and cloud CRM services have also formed partnerships with other critical outsourcing providers such as clearing firms and custodian banks to allow advisors to integrate their portfolio information with relationship data. Doing so allows them to generate a complete view of the client relationship and set up alerts on changes in client portfolios to automatically schedule a call.

Schmitt estimated that spending on cloud based and software as a service platforms for customer relationship management came to about $100 million this year and will grow about 15% over the next five years, particularly among smaller to mid-sized wealth managers. "The spending will be driven by registered investment advisers as well as small to mid-sized independent brokers looking for more robust CRM solutions to replace their basic contact management," through Microsoft Outlook email, said Schmitt.

Among the dozen CRM providers, Salesforce stands out among the lot in catering to both large and small wealth managers alike. The version of its online service for wealth managers allows them to keep track of financial account balances and holdings data for each client. The platform also include a separate know-your-customer section that can be sent to compliance officers for review.

Prima Capital in Denver takes client relationship management one step further than just managing communications and reporting. "The wealth management industry is facing a pretty challenging time and advisors need help in making investment decisions," said Gib Watson, president of Prima Capital, an affiliate of Broadridge. "Portfolio modeling is one way to do it."

Prima Capital, which provides due diligence and research applications to wealth managers, will help bank trust departments develop globally diversified asset allocation models across the risk spectrum and hire the best managers for separately managed accounts, mutual funds or exchange-traded funds.

Criteria used to select managers include risk-adjusted performance analysis, benchmarking and qualitative analysis. As part of Prima Capital's PrimaGuide Plus platform, wealth managers also gain access to detailed product research and tools that mimic the investment results the client would have received had it relied on the asset allocation and fund managers recommended by the wealth manager.

Merits aside, outsourcing isn't to be taken lightly, experts warn. For starters, wealth managers should consider using any external provider or hosted platform unless they are willing to make a three-year commitment. "After three years, if a wealth management firm brings the process back in-house the costs of ramping up can be expensive," said DST's McCarthy.

Yet another sore spot: just how much customization can be done.

"Wealth managers want far more tailored front-end connectivity to their customers than mutual funds because the data requirements are far more sensitive," said State Street's Amato.

The bank offers websites for its wealth management outsourcing customers to generate reports and communicate with their clients. Because the arrangements are on a private-label basis, the end investors have no idea of who is operating the a similar approach should be used for selecting vendors.