Is it better to be a big fish in a small pond?

Different sizes of outsourcing providers offer different benefits. Roxane McMeeken reports. The wealth management industry is currently buzzing with high-minded notions of open architecture. But behind the impressive talk of institutions opening up their product lines to use of external managers lies a formidable task for the back office. As a result, the impetus to outsource is gathering momentum. The big question is which type of outsourcing provider should be used. Private banks are aiming to offer clients an increasing array of funds managed by third parties. Fund managers are adding products to their ranges that are manufactured by rival firms. Other asset managers are using non-proprietary distribution channels. US manager Northern Trust, for example, recently clinched a deal to distribute its multi-manager funds through the UK insurance company Scottish Equitable. Third party funds For banks and fund managers seeking to off-load the fiddly task of arranging for their clients to get in (and out of) multiple externally-run funds, Banque Générale du Luxembourg (BGL) claims that smaller specialist providers offer the best service. A subsidiary of Belgian giant Fortis, BGL has considerable experience of looking after such back-office needs because its private banking arm has long offered third party funds. Mario Feierstein, head of business development at the bank, says for the past three years, BGL has been actively marketing this capability to private banks and fund managers, which means the firm has been in the business a relatively long time. The core of the service is an “order placement hub”. This allows clients to settle all their customer’s orders through BGL, rather than deal with hundreds of different fund managers and transfer agents directly. For the past year order placement has been automated following a mandate from Fortis. Mr Feierstein says the system can handle 1m orders a year. Currently, it handles just 150,000, but Mr Feierstein puts this down to current market conditions and is confident the service has a bright future. He says the key advantage of using a smaller provider like BGL is the flexible service received. “Customers have more weight with us than if they are with Bank of New York.” In other words, it is better to be a big fish in a small pond. Mr Feierstein adds that as with all outsourcing, fund managers and banks should benefit from having their back office costs switched to a fixed basis. Big is beautiful Unsurprisingly, the Bank of New York (BNY) advocates going with a big global provider. BNY recently added a new module to its “Rufus” offering, which works similarly to BGL’s order placement hub. Rufus (retail funds system software) administers retail fund products on one integrated system without the need for sub registers. It ensures clients meet all regulatory requirements and allows them to provide customers with consolidated valuations and statements. It even suggests potential cross-selling opportunities. Yet the “deal aggregation subsystem”, which allows clients to put third party funds through Rufus, was added in February/March, 2002. So far one client, a UK fund supermarket, has signed up. But Bill Hookings, head of retail funds product development for BNY in Europe is confident the service will attract more clients. He is currently in talks with new entrants into the fund supermarket arena as well as a number of existing clients planning to add a few external funds to their range in order to “fill gaps” in their capabilities. Mr Hookings believes a key driver of new business in the UK will be the imminent freeing up of the market – depolarisation, which is likely to encourage banks to offer wider fund ranges. He argues that BNY has the edge over smaller operators because it has economies of scale. “The business is becoming more pan-European and we have the capacity to build systems supporting multi currencies, languages and regulatory requirements. It’s harder for smaller players to find the money.” Smaller providers might have one advantage over BNY. Mr Hookings says many have white label agreements with fund managers. Under such arrangements clients seeking to offer a particular fund would not have to form their own agreement with the fund manager as the outsourcing provider already has one in place. External distribution Fund managers seeking to outsource their links to multiple distribution channels face a similar choice. The small Luxembourg-based operation European Fund Administration (EFA) offers a comprehensive transfer agency service. Christophe Lentschat, head of product development and servicing, says EFA provides clients with access to distribution partners in any European country, taking on full responsibility for meeting local regulatory requirements. For example, “In Italy you need to appoint a correspondent bank and link through them to the distributor. The bank will keep a record of all holdings and collect withholding tax.” But clients do not need to concern themselves with this, since EFA appoints the correspondent bank on their behalf. EFA also provides all information to the distributor on its clients’ positions in the asset manager’s funds, as well as online transaction monitoring. EFA will even provide the distributor with all the documentation on the fund aimed at the underlying investors – with the distributor’s own logo if required. Again, the advantage of the smaller provider is flexibility, according to Mr Lentschat. He says: “Big custodians want to standardise every process as much as possible. But in Europe you have different countries and distribution partners, so it is very difficult to achieve a high level of standardisation. Smaller companies who are more focussed can do it better.” The STP challenge But Bill Hookings at the Bank of New York responds that once again, providers with scale offer a better service. He concedes that when it comes to setting up relationships in different European countries, “smaller players can do just as good a job as larger firms”. However, he says the real challenge is building straight-through processing (STP) solutions. With the current meagre volumes of trades, he doubts that smaller businesses can afford the repeated investments necessary to keep pace with developing industry standards. This is especially so because such investments will not begin to pay off for several years. The final extra string to BNY’s bow, Mr Hookings says, is experience in STP, gained from both being a well-established custodian and having started out in the US. So the back office support for open architecture pioneers is far from standardised. Some providers are more experienced in certain fields than others, while others offer a more tailored service. The choice of provider must be addressed with care.