BBH increases the scope of outsourcing

Brown Brothers Harriman (BBH) has always looked to service wealth managers. And by extending the scope of service provision from simple custodian, to execution venue and in some cases helping with ‘added value’ functions then service providers can help boutique wealth managers to flourish, according to Andrew Tucker, partner for Europe at BBH. “Within the financial institution segment, many of our clients are wealth managers at the high end of the market. We believe that by having a relatively disciplined focus and not trying to be all things to all people that we can have a real communication with our clients and a significant understanding of industry trends. In this way we can be one step ahead and future proof our clients,” he says. Evolving roles Mr Tucker points out that the industry has seen significant evolution since BBH started out 20 years ago. “Like all custodians, we began by providing custody services to our clients, including those in the wealth management business. As the world has changed and become more complex then the role of custodian banks has also evolved,” he says. As a part of that change, the comfort zone of BBH’s clients has also extended to increase the scope of functions that clients are willing to pass onto the firm. As a consequence he thinks the overall client experience and relationship bears little resemblance to 20 years ago. “In the private banking sector banks used to be their own global custodians, using a network of sub-custodians around the world,” he explains. “Over time they realised that they could have a single, global sub custodian to handle every market outside their home market. Eventually, they realised that even being a custodian in their home market made little economic sense, so they outsourced the custody function altogether. It became clear that economies of scale weighed in favour of outsourcing.” A next step for many wealth managers was the outsourcing of their execution function. “When a service provider can provide both custody and a comprehensive brokerage capability then clearly cost savings can be had,” says Mr Tucker. “The broker/custodian can also help the wealth manager monitor and report on best execution, something that is seeing a lot of attention at the moment.” And from appointing the custodian as a global one-stop-shop broker, it is but a short leap of faith for the wealth manager to think about outsourcing the trading function altogether. In today’s increasingly automated world, where orders can flow in straight through processing (STP) fashion right from the portfolio managers desktop down to the exchange ‘floor’ (or, more likely these days, one of the many alternative electronic trading venues) without human intervention, why does the wealth manager need an expensive trading operation anymore? “STP can not only achieve cost-savings by automating a once paper-intensive process, from order initiation right the way through to confirmation and settlements, but several layers of human intervention can be stripped out as well,” says Mr Tucker. And in the context of the myriad of legislation such as the Markets in Financial Instruments Directive (MiFID), over the last five years then it is no wonder that wealth managers are happy to seek the expertise of a third party. Keeping up with new regulatory requirements takes more time, effort and money than many wealth managers have. Outsourcing, although it incurs a charge, is seen increasingly as the most practical option particularly when it means extending a relationship with a service provider that is already working harmoniously. Mifid compliance Mr Tucker comments that over the last five years it has become virtually impossible for wealth managers to do everything themselves. “Smaller managers have been penalised in the past for lacking the scale to update technology or keep abreast of trends and developments that seem to have crept into all our lives,” he says. MiFID may just be the most recent regulatory development, but it is a significant driver of the outsourcing process. Indeed, service providers able to effectively operate in a MiFID compliant way are very valuable, even if the responsibility to offer best execution, reporting and the like rests with the actual portfolio manager. “As a result of developments like MiFID, custody banks are now providing functions that extend into the middle office to help wealth managers keep up with new developments in an efficient way,” says Mr Tucker. He explains that this can even mean the service provider taking over other functions such as client reporting and leaving the wealth manager to concentrate on the portfolio management. “Effectively everything bar the actual portfolio management can be outsourced in theory,” he says. Indeed, he goes as far as to say that extending the remit of the service provider may actually help boutiques to survive. “While consolidation of the wealth management industry is happening at a rapid pace, a similar trend to the one seen in other financial services areas, paradoxically there are a lot of new wealth management start-ups appearing at the same time as individuals leave large institutions to set up on their own,” he says. But by offering turnkey wealth management solution in a box, players like BBH thus allow the profitable operation of smaller outfits. “They should not have to worry about their middle and back office,” he says. This one-stop-shop includes the full gamut of traditional middle and back office functions, from execution to trade-matching to reconciliation, post-trade compliance, settlement, safe-keeping, valuations, client accounting, reporting, tax and so on. BBH’s offering also includes, should they be required, functions normally associated with the front office, such as portfolio modelling, what-if analysis, pre-trade compliance and order management. Such tools, for example, allow the portfolio manager, looking to reduce his clients’ allocation to equities from say 60 per cent to 50 per cent, can generate a routine that will tell him or her what stocks to sell across the entire client base, without triggering any compliance, tax or client preference ‘rules’ that have been modelled into each portfolio.” Again here scale is the issue, with larger wealth managers able to buy in systems and integrate them into existing in-house systems. “Otherwise an outsourced solution that can be white labelled needs to be found to help the smaller players,” he says. Still, it is clear that full outsourcing to include accounting and reporting type functions is still in its infancy at least in wealth management. However, in other segments like institutional business it is starting to take hold and so it will be interesting to see how it works and whether it can be usefully applied to wealth managers. The client experience This is especially relevant when high net worth clients now expect to have online access to real time information. “This can be a problem for wealth managers: they want to keep control of a quality front end client service but again lack the scale and budget to provide the most up to date service,” says Mr Tucker. “So again service providers have an opportunity to extend their remit and provide investment accounting, client reporting, web access and link all the information in to the provision of client reports,” he adds. Mr Tucker predicts that wealth managers will be slow to relinquish this sort of function – widely regarded as a core and bespoke operation. “There’s a real sense that the business is about the client experience as well as the actual asset management and that the way that information is presented to client is simply too important to outsource,” says Mr Tucker. “As a result, there will be many institutions which will choose not to outsource. For them the client experience is an integral part of what they do. Indeed, there are still some institutions that believe this as well. Fidelity being a classic example, as it outsources only custody.” He thinks that the advent of complex investments will help to drive the process. Data aggregation from multiple sources can be highly complex and technical and best suited to a third-party provider who has extensive involvement in this type of activity. “Data aggregation is another important role for the third-party service provider. In today’s open architecture world, wealth managers have to deal with multiple third-party transfer agents. In addition, many of the very wealthy clients use a manager for only a portion of their investable assets, but want to see a consolidated view of their entire wealth,” he says. “Being able to aggregate client data and provide it online so the client has the access to portfolio information at their fingertips is becoming a basic necessity of the wealth management industry. Getting this information on nicely embossed letterhead is all very well and a nice touch; providing the same information by the internet is fast-becoming a must.”