The Asset Management Middle-Office Muddle

John looks at how a neglected middle office is a millstone around the neck of some asset managers.

gears

While the front and back offices of asset management firms receive the lion’s share of attention and investments, the middle office is often left to fall into rack and ruin. Or, from another perspective, it’s a great time to be an outsourcing provider to the buy side, John says.

You might be familiar with the “Middle Child Syndrome” concept: While the privileged first-born and over-indulged youngest children receive their parents’ attention and nurturing affection, the middle child can often be neglected and might misbehave simply to get noticed at all.

It’s a similar situation to what is occurring within the technology structures of many asset management firms. The front office is showered with the latest and greatest technologies to keep traders generating alpha, while the back-office is, or at least should be, a well-oiled machine that gets regular tune-ups to get everything ticking along smoothly.

But where does that leave the middle-office? More often than not, it is underfunded and unable to scale, or worse, neglected. Pricing, valuation, collateral management, market risk—these are all vital elements for an efficient asset management operation, yet they are areas that time and again are left alone to fall into disrepair.

That might sound like editorializing, but it’s an issue I often hear when speaking to buy-side firms. One London-based investment management CTO told me that if the decision was left to him, the entirety of his middle office would be outsourced so that “someone else had to deal with the whole bloody mess.”

Outside Opportunity

Those that continue to focus only on the front and back offices are going to find themselves lagging ever further behind.

Many buy-side firms are turning to fund administrators or outsourcing aspects of the middle office to help solve these issues. For example, Houston-based asset manager Salient Partners, which oversees $12 billion across traditional and alternative investments, recently tapped an SS&C solution for its outsourced middle-office and accounting processes.

Salient is a good example of a mid-sized asset manager that doesn’t have the clout that its larger counterparts possess to keep everything in-house or carry out large-scale projects like ripping out and replacing a middle-office system without affecting operations. 

Right now, it’s a great time to be an outsourcing provider. The benefits for a buy-side firm to outsource its middle-office operations seem too good to be passed up; lower costs + greater efficiencies in scalability and functionality = big win for everyone.

But that approach also brings risk, particularly in the arena of regulatory reporting, where the powers that be demand ever more transparency and ease-of-access to data and reports; if an asset manager has outsourced that reporting responsibility to a fund administrator, then the issue becomes a lot more convoluted when the regulators come knocking.

Outsourcing providers and fund administrators are increasingly looking to develop new strategic services for those asset managers that want rid of the problem, and the future of this dynamic looks to rest on reducing the gap between the two groups.

Inside Job

There are other options that can keep the middle office happy and healthy. The Investment Book of Record (IBOR) is hardly a new concept, but it is a system that’s become somewhat bastardized since its introduction to the market. For some, it’s a back-office record of truth of sorts, but that’s really missing the point. 

An efficient IBOR, with data fed in from the OMS, will form an enterprise-wide data warehouse that provides accurate, real-time and historical information from trading desks and operations to accounting and governing bodies, housing the data from which risk and performance are derived.

That’s not to say that implementing a solid IBOR is a silver bullet, because there’s no doubt that middle-office operations won’t be solved by one solution alone. Big data is often cited as an area where investment managers are looking to increase investment, but, again, it’s not a new concept, and asset managers often struggle to fully understand what it is and what to do with it.

Attitudes are starting to change on the big data issue, such a large part of the middle-office muddle, as buy-side firms realize the value of the data that they hold and begin to find better ways to feed it into systems across the enterprise, thus improving the quality of insight generated.

But those that continue to focus only on the front and back offices are going to find themselves lagging ever further behind counterparts that have gotten their houses in order, middle children included. 

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