The pressure to reduce costs is constant. In the fund industry where cost ratios directly affect fund performance and price, asset managers continue to look for ways to reduce costs.
At the same time they are looking to cut costs, many also strive to increase efficiency. And on top of all of this, investor and regulatory pressure for transparency is also in the mix. In order to meet these often conflicting needs, asset managers are increasingly outsourcing operational functions to third-party administrators.
A study of European domiciled mutual funds found that funds that outsource are likely to have 11% to 14% lower subscription fees in relation to overall average fees. Of the 13,000 funds studied, 41% use an external administrator. In contrast, with the complexity associated with hedge funds, it is no surprise that a 2014 report showed 80% of hedge fund AUM administration is outsourced. Similarly, outsourcing for private equity is also on the rise and administrators see this as a growth market.
According to MainstreamBPO, outsourcing to third-party administrators will continue to grow in 2016. And as willingness to outsource continues to grow, asset managers are increasingly looking for more services and functions to be taken on by their third-party administrators. With the increase in recent years around regulation, outsourced regulatory services are on the rise as asset managers demand that their administrators take on more of these onerous functions. In turn, administrators are also looking for new ways to service their clients to increase the penetration and value they have within those organizations.
At a high level, third-party administrators provide such services as:
- NAV Calculation
- Preparation of semi-annual and annual accounts
- Financial reporting
- Maintenance of the fund’s financial books and records
- Reconciliation of daily and monthly broker statements
- Payments of the fund expenses
According to an article by Capital Analytics, the benefits of outsourcing to third-party administrators include:
Increased Credibility – Independent fund administration is seen as a strength to investors and within the industry is seen more and more as a best practice.
Reduced Cost – Outsourcing allows asset managers to reduce head count, administrative costs, technology costs, etc., thus reducing overall expenditures of the funds.
Expertise – Third-party administrators, with their size and resources, provide asset managers with additional capabilities and expertise they may not have in-house.
Technology – Many smaller asset managers do not have the budget to take on larger enterprise level and sophisticated software technologies. Many see the ability to outsource as the opportunity to leverage additional technology advantages within the third-party administrator. These advantages open the door for third-party technology solutions to be the backbone of third-party administrator services.
Operations – Many see the third-party administrator as a strategic partner that can provide additional operational services to their organization.
Risk Management – Separating risk responsibilities allows managers to concentrate on performance and leverage the reporting and analysis provided by the administrator to make more informed decisions.
There seems to be no slowing down the influence of third-party administrators as more and more outsourcing is occurring within the small to mid-size asset manager firms who seek to benefit from outsourcing as highlighted above.
And, it looks like outsourcing to third-party administrators will continue to grow in 2016 as well. The increase in outsourcing will result in asset managers continuing to look for more services and functions to be taken on by their third-party administrators. In turn, administrators are also looking for new ways to service their clients to increase the penetration and value they have within those organizations. As we move further into 2016, it will be interesting to keep a close eye on the influence of third-party administrators and its effect on the balance of operations in the financial services industry.