SEI seeks to convert outsourcing sceptics

Pennsylvanian asset management giant SEI Investments is staking its future on the worldwide wealth management industry.

Well known for its quirky office arrangements, which see its CEO hot-desking alongside his secretaries, SEI has made a name for itself in Europe purely as a fund manager. Now it is to reposition itself as a “wealth management services company”.

Instead of offering investment funds alone, SEI plans to develop a full suite of services aimed at wealth managers, including back and middle office processing, as well as the existing fund management proposition. In short, SEI is to become an outsourcing provider for wealth managers.

The step is not as much of a leap as it might at first seem, since to some extent the firm is already in this position in the US, where it started life as a technology outsourcing provider for banks’ trust departments in 1968 in Oaks, Pennsylvania.

The firm only branched out into fund management in 1994, pioneering the so-called multi-manager approach, which involves hiring and blending external fund management firms, as opposed to managing assets in-house.

Currently, SEI administers $242bn (E197bn) in mutual fund and pooled assets. Its multi-manager fund management division runs $87bn. Recently the firm clinched significant deals in Europe to supply its fund management products to Commerzbank, Old Mutual and the private bank C Hoare.

Yet in the US, SEI has for a long time positioned itself as both fund manager and administrator. In Europe and elsewhere, the move into the back office will come as more of a surprise, but the hope is that the US record will provide credibility.

Market research

The shift towards the wealth management services proposition was first mooted two years ago by SEI’s charismatic CEO Al West. He hired Francis Jackson in mid-2002 from Citigroup’s securities services division to look into the wealth management market. Mr Jackson, SEI’s managing director for global private banking, conducted a study into the wealth management sector. The findings, revealing in themselves, have provided the basis for SEI’s repositioning. In conjunction with independent research firm Scorpio, SEI spoke to 67 senior executives at wealth management institutions. It found private banks under increasing pressure from every aspect of their business. The survey suggests outsourcing certain areas of business could provide relief – and the wealth managers believe this to be the case. However, the private banks are reluctant to outsource because they fear loss of control.

According to SEI, this fear stems from a lack of credible providers. To fill this perceived market gap, SEI will offer a full outsourcing service for private banks.

It could be argued that the back-office outsourcing market is already saturated. The large securities services players – State Street and The Bank of New York – have a stranglehold on large swathes of the market. State Street alone has assets under custody of $8,800bn, amounting to 15 per cent of the world’s tradable assets.

Niche offering

Yet none of the giants have services tailored solely to the needs of private banks. Instead they service a wide range of institutions, from pension funds to asset managers. Neither do any of them provide a proprietary fund management service as an integral part of their offering to private banks.

“The big custody names are too large to do wealth management”, says Mr Jackson. “We have intentionally not moved our business to compete with the big boys.”

The SEI proposition will combine asset management, client administration and back-office processing specifically for wealth managers, ranging from large private banks down to small independent financial advisors. A team of 30 people are building the IT platform that will make this possible. The service is scheduled to be rolled out in Europe at the end of 2004. “We are re-engineering the existing US process from front to back,” says Mr Jackson.

Practice what you preach

SEI has not been shy of doing some outsourcing of its own as part of the project. The Indian company Smartstream has been drafted in to create a process management tool, while a French company is working on a corporate actions management system.

Mr Jackson says at the same time as undertaking the project he is talking to private banks, including Barclays and RBS, in order to ensure their needs will be met – and no doubt also in the hope of winning a few converts.

The key selling point of SEI proposition will be that it takes the private bank’s existing system and completely replaces it.

In a veiled attack on some competitors’ ways of working, Mr Jackson says: “It is not enough to take broken processes and simply recreate them under another roof.

“You can transfer your process to India and it may be cheaper, but unless you replace the system, it will have the same old problems”.

Mr Jackson believes the wealth management business will be worth $150-160m in annual revenue to SEI within five to six years. By this time he is aiming to have signed up 50 to 60 clients, which should amount “a couple of million accounts”.

But even if SEI fails to meet this target, its own operations and existing US clients will be moved onto the new platform, so Mr Jackson is confident that it will serve its purpose.

Survey: Resistance to outsourcing

Private banks would like to outsource, but are afraid to do so, according to a study by SEI Investments and independent research firm Scorpio Partnership.

The researchers spoke to 67 CEOs, CFOs and senior executives of wealth management institutions. Of the banks surveyed “70 per cent said they would not outsource because they don’t think there’s anyone out there who can give them the quality of service they want at a price they want and without losing control,” said Mr Jackson.

The survey found senior decision makers feel a growing need to focus on how to win and retain clients. At the same time, they are squeezed by cost pressures. Both problems could be alleviated through outsourcing.

The theory is that outsourcing a capability shifts its cost to a fixed basis, since the outsourcing provider is paid a set fee at regular intervals. It should also make the capability cheaper for the private bank to deliver because the outsourcing provider runs the service for a number of clients, creating an economy of scale.

But the research partners found distinct resistance to outsourcing among the wealth managers, stemming from “the fear of losing control over service and advice provided to the client”.

The survey further found that those who had outsourced components of their operations were very positive about their experience. This led SEI and Scorpio to conclude that while there may be scepticism about outsourcing, experience shows this is ill-founded.