EY - 7 changes to asset management operating models

7 changes to asset management operating models

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Our survey of COOs and heads of investment operations reveals how asset management firms are evolving their operating models to deal with these key market forces:

  • Increased competition, including new products, distribution channels and regions
  • The complex, shifting and sweeping regulatory environment
  • Demands for more transparency and reporting from investors and others
  • Pressures to reduce costs and improve margins
  • New technology that can reduce complexity and increase opportunities for outsourcing

Firms are responding to these forces by transforming their operations in seven ways, detailed below. They understand that standing still is not an option if they hope to compete successfully.


1. Driving growth by expanding distribution channels and focusing on client experience and brand management

EY - Primary drivers of change in operating model

Facing declining margins, firms are focusing on distribution and brand management to spur growth. Across all respondents, improving distribution channels is the most commonly cited driver of change for operating models (see chart).

US firms are investing significantly in marketing and brand awareness in Europe, partly because they rebounded from the financial crisis more quickly than their European counterparts. Meanwhile, firms in all locations are assessing how to expand the direct-to-consumer model.


2. Adopting a strategic approach to regulatory compliance

EY - Top three challenges for investment operations

The regulatory landscape is complex and poses substantial cost burdens. Respondents report that complying with regulatory requirements is the top challenge for investment operations over the coming year (see chart).

Firms are meeting the challenge by taking a holistic approach. Medium to large asset managers, in particular, are implementing compliance programs that incorporate changes to organizational structure, functional alignment, processes, systems and data.

Effective data management is particularly crucial. This includes all of the related aspects of data management such as quality, timely delivery, analytics and reporting.


3. Defining and implementing the next generation of global location strategies

EY - Location strategy

Global firms are increasingly looking to leverage their footprint by creating a global operating model in which the technical and data infrastructure supports more business processes across front-, middle- and back-office operations. This model must balance trade-offs such as proximity to senior management, travel costs, information security, access to skilled resources and political and environmental factors.

Nearshore locations help firms save money and diversify site risk while maintaining operations in the same workday, which is particularly important for trading support processes. Offshore locations offer scale, a 24-hour clock and greater availability of talent.

In our survey, more than three-quarters of respondents said their primary location strategy is maximizing the use of nearshore or offshore locations, with the majority (55%) opting for nearshore (see chart).


4. Expanding use of third-party outsourcing throughout operating model

EY - Sourcing of operations functions

The question is no longer whether to outsource. Instead, firms are considering which functions can be outsourced, the optimal number of providers and how providers can be integrated effectively.

Respondents report that internally focused functions, such as trade processing and reconciliation, are most likely to be outsourced (see chart).

However, outsourcing has also penetrated the middle office and moved closer to functions that traditionally interact with the front-office investment team such as performance measurement and attribution. Even firms unlikely to outsource use third-party providers for products such as ETFs and UCITS.


5. Identifying cost savings in existing shared services organizations

EY - Use of shared services for insourced functions

Shared services yield many benefits. They streamline operations prior to outsourcing or relocation. They increase the effectiveness of operations that are too mission-critical to outsource. And, of course, they reduce operating costs.

Centralizing and standardizing processes, including reconciliation and certain technology functions, are mature practices across the industry. In total, about seven of 10 firms surveyed maximize the use of shared services organizations for in-house functions (see chart). The structure is fully adopted by all of the largest firms we surveyed.


6. Expanding and maturing data management and information security

EY - Top five data management challenges

Data management touches all aspects of an organization, but it is especially relevant to cost management and regulatory compliance (see chart). Firms recognize this, and they are committing significant resources toward data management.

Approaches differ, however, particularly around standardization. For instance, half of survey respondents have adopted common standards across the firm, while 43% employ a hybrid model with enterprise-level and local standards. Not surprisingly, the tendency toward a hybrid model increases as firm size increases.


7. Rationalizing business applications, adopting vendor solutions and driving toward simplicity throughout the infrastructure

EY - Budgets for maintenance versus strategic investment

Asset management firms have been successful in reducing infrastructure cost and complexity, thanks in part to software that supports the scale and scope of global organizations.

They are replacing legacy custom applications with flexible vendor solutions and rationalizing the overall number of applications. In the front office, for instance, firms are consolidating three or more platforms onto a single trading and order management platform.

However, consolidation is relatively slow in large, complex infrastructures. Illustrating that point, strategic spending consumes a higher percentage of technology budgets in larger firms. Smaller firms spend more of their technology budgets on maintenance (see chart). Simply put, larger firms have further to go in the drive toward simplicity.


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EY - Primary drivers of change in operating model
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EY - Top three challenges for investment operations
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EY - Location strategy
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EY - Sourcing of operations functions
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EY - Use of shared services for insourced functions
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EY - Top five data management challenges
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EY - Budgets for maintenance versus strategic investment
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