Private bankers, beware! The outsourcers are coming!
Private banks have been snapping up talent to build out their front office ranks, but mid- and back-office jobs could be threatened as the industry increasingly opts for outsourcing.
Amid mounting costs to comply with regulatory changes and meeting client demands that have emerged since the financial crisis of 2008, wealth managers have been outsourcing more jobs in global custody, securities lending, client servicing and accounting and settlement of trades, and some firms are beginning to outsource their financial planning functions. Roles like product development, marketing and fraud management are still largely done in-house.
“Wealth managers confront a host of immediate challenges that make outsourcing a potentially attractive strategic option,” says Peter Amato, vice president of wealth manager services for State Street.
An industry that has long been focused on tight client-manager relationships is still slow to give up functions such as client administration and client accounting and reporting. A quarter of wealth management firms outsource these jobs, and that’s only expected to grow by 9% for client administration and 16% for accounting by 2016, according to Advent Software. A recent survey by Advent found that outsourcing is less developed in private banking than in other financial services sectors, and that wealth managers are most likely to outsource only simple transaction processes like payments and settlements, while keeping client data in-house.
“Our research now shows that as reporting and IT systems improve, so the bond between an individual relationship manager and the client weakens, and, instead, clients’ loyalty to the institution’s service experience strengthens. This has potentially profound implications for how a bank invests in different elements of client service delivery and its talent,” says James Edsberg, senior partner at consultancy Gulland Padfield.
The trend may be slowing, with just 14% of firms considering further outsourcing within the next three years, according to Advent. For now, many wealth managers are motivated by the short-term cost savings.
A recent study by consulting firm Celent found that firms could save between 20% to 30% of costs over a three to five year period, as managers look to trim or shutter operations in certain markets while seeking to expand in others.
As private banks aggressively poach talent from rivals, the industry is ripe for consolidation including in the vendor space where so many product offerings are essentially the same.
Wealth management firms that operate globally must have a solid regulatory infrastructure, including compliance experts with strong knowledge of local regulations and IT systems capable of supporting the various regulatory measures, before they enter new markets. The World Wealth Report 2013 from Capgemini and RBC Wealth Management suggests that “one effective approach is to outsource compliance to firms that have the requisite infrastructure and local regulatory expertise. This approach helps firms focus on their core advisory services with confidence that compliance processes are in knowledgeable and capable hands.”
Across the globe, wealth managers are slowly outsourcing front office functions.
Washington Trust Bank's Wealth Management & Advisory Services last month announced it would use the SEI Wealth Platform for front-, middle-, and back-office processing services to strengthen its client relationships.
Ashcourt Rowan Asset Management said in May it will outsource its portfolio, settlement and custody services to TD Wealth Institutional, which uses JHC Systems’ Figaro system.
Earlier this year, Swiss wealth manager Falcon Private Bank turned over its banking platform to Swiss outsourcing market leader B-Source in to focus on its strategic expansion in emerging markets.
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