Upload
vomien
View
227
Download
1
Embed Size (px)
Citation preview
Middle Office: A hidden source of
competitive advantage2016 SEI Middle Office Survey of Investment Managers
seic.com/ims
Executive Summary
An Evolving Landscape
- What is the middle office?
- More change, growing complexity and higher costs
- Current business models
Staying Competitive
- Middle office as a strategic focus vs. cost center
- Scalability, agility, flexibility and predictive analytics
- Transparency
- Regulatory compliance: the biggest operational hurdle
- Risk management
- Technology vs. people vs. process
- Data management
The Future of the Middle Office
- Areas of near-term focus
- Key drivers for middle-office investments
- Planned investments in people, processes and technology
- The changing outsourcing landscape
Conclusion
About the Research
1
2
2
4
5
7
7
8
9
9
11
11
12
13
13
15
16
17
19
20
2016 Middle Office Survey | 1
Executive SummaryInvestment management firms have traditionally equated competitiveness with the
performance of their portfolios. While this remains true to a degree, a rapidly changing
competitive landscape means evolution and adaption are increasingly critical components
of success. Acquiring new clients, gathering new assets, keeping investors and employees
satisfied, shoring up profit margins, and even investing successfully all depend more than
ever before on squeezing competitive advantage out of every part of the organization.
Even the firms that go to the trouble of formulating a corporate strategy don’t go far
enough. Sir Brian Pitman, former CEO of Lloyds TSB, has been quoted as saying, “There is
always a better strategy than the one you have; you just haven’t thought of it yet.”1 This is
particularly true in the asset management world where the value created in conventional
business models came from the front office.
A growing number of investment organizations, including managers of traditional as
well as alternative strategies, have come to realize that there’s value throughout their
firms, not solely on the portfolio management front. We explored this idea in detail
in our 2015 white paper “Evolving in the New Operational Frontier.” Our research
showed that an increasingly complex, expensive and risky operating environment
meant all functions and processes need to work together seamlessly if firms are to
be competitive. By looking beyond the status quo and transforming their middle
offices from support functions to strategic assets that are scalable, agile and
nimble, the most thoughtful firms will be best prepared to successfully adapt to
changing market dynamics.
An Evolving LandscapeWhat is the middle office?Any discussion of an investment organization's middle office needs to begin with an attempt
to define what the term actually means. The definition has always been somewhat nebulous, a
fact confirmed by interviews with senior executives. Middle-office functions vary from manager
to manager and firm to firm, depending on their business models as well as investment and
trading strategies.
Many people would probably agree that the middle office is responsible for the administrative
aspects of trades and transactions undertaken by the front office. This falls short of being a
complete description, however, since it does not distinguish between middle- and back-office
functions. A more precise definition would highlight the fact that, while back offices focus on
processing, the middle office is more likely to involve activities that require analysis and decision-
making. Examples here might include risk management, collateral management or compliance.
Because no two firms are likely to agree on an exact definition, survey participants were asked
which functions they considered to be part of their middle office (Figure 1).
2016 Middle Office Survey | 3
FIGURE 1 Functions Viewed as Middle Office
Source: 2016 SEI Middle Office Survey.
Most respondents agree that trade capture and settlement are middle-office functions. Pre- and
post-trade compliance are also viewed by three-quarters of diversified managers as middle office,
although this falls to only 60% of alternative managers (defined here as those running hedge funds
or private equity funds). Differences between these two groups can be significant.2 More than half
of all diversified managers, for example, consider client reporting and billing to be middle-office
functions, compared to a much smaller number of alternative managers. Regulatory reporting and
performance attribution, on the other hand, are seen by two-thirds of alternative managers as
middle-office functions, while there was far less consensus among diversified managers
regarding these functions.
Trade capture, matching and a�rmation
Trade settlement
Pre- and post-trade compliance
Settlement or fail reporting
Collateral mgmt
FX execution
Trading
Data mgmt
Performance
Reporting
Accounting and administration
Other
Security master maintenance
Data mgmt/data governance
Performance mgmt
Performance attribution
Risk attribution
End-client reporting
Regulatory reporting
Risk profile reporting
Expense reporting
Corporate action and income processing
Investment accounting
Portfolio administration
Portfolio reconciliation
Reconciliation reporting
Client billing
Custodian/prime broker selection and mgmt
Technology provision
Expense mgmt
0% 20% 40% 60% 80% 100%
Diversified asset manager HF and/or PE manager
More change, growing complexity and higher costsAsset managers today operate in an entirely different business environment than the one that
existed prior to the financial crisis. Growth strategies have had to be balanced with cost control
measures. This conundrum has provoked many firms to re-examine their business strategies,
causing some to focus on new investment solutions, adopt new operational models, and/or
resort to new marketing and sales tactics. Research done for the white paper “Evolving in the
New Operational Frontier” found that asset managers now face nine serious challenges that are
causing many of them to take a renewed look at their operational capabilities in an attempt to
identify new sources of competitive advantage (Figure 2).
The current environment has pushed managers to enter into new markets, roll out new investment
vehicles, and launch new strategies in search of growth. Along with a shift in emphasis from
security selection to asset allocation, investments in new and innovative investment strategies
continue to grow. As alternative investments become mainstream, allocations have surged.
According to McKinsey, alternatives are expected to account for 15% of global assets under
management and 40% of the revenues in the global asset management industry by 2020, as
compared to 12% and around 30% currently.3
FIGURE 2 Nine Key Operational Challenges Facing Asset Managers
1 A more competitive business climate
2 Increasingly complex investment strategies
3 Proliferation of vehicles and distribution channels
4 Growing compliance burden
5 Less favorable economics
6 Amplified risks
7 Heightened investor demands
8 Leveraging big data
9 Managing technology
Since these instruments are more complex, asset managers require increasingly sophisticated middle
offices, featuring more effective business systems that can effectively support an evolving and
complex investment operational infrastructure. The majority of traditional asset managers’ investment
systems aren't equipped to handle the current surge in alternatives nor the intricacy of these
investments. Asset managers must re-evaluate their operations and systems to support complex asset
classes, new reporting requirements, and transparency to meet investor and regulatory expectations.
Managers specializing in alternative investments aren't immune. Their operational infrastructure
may already be optimized for these types of strategies and vehicles, but a growing compliance
burden, more vocal investors, and stiffer competition are all putting a different kind of pressure on
them to revisit their business models.
2016 Middle Office Survey | 5
As a result, middle-office costs have risen across the industry. Since middle-office functions play
such a vital role in a firm’s overall operations, firms dedicate a considerable percentage of overall
operational expenses to their middle offices. More than one out of four firms now devotes 20%
or more of total operating expenses to middle-office functions (Figure 3). Another 37% of survey
respondents spend 11% to 19% of their total operating costs on middle-office expenses, although
diversified asset managers tend to spend slightly more than alternative managers.
FIGURE 3 Middle-office Expenses as a Percentage of Total Operating Costs
Source: 2016 SEI Middle Office Survey.
Current business modelsFaced with rising costs, greater complexity and increased risk, outsourcing some or all middle-
office functions has now become a legitimate option for many managers.
Many middle-office functions are still performed in-house, but more than three out of four firms
in the survey report that they now outsource some functions to external service providers.
Outsourcers can take over entire functions or be used in a hybrid role, where they share the
responsibility for certain functions with in-house teams. While 52% of firms surveyed wholly
outsource their investment accounting function, another 29% report using a hybrid model.
Many other functions are also commonly addressed with one of these two approaches
(Figure 4). Functions that today are most often tackled in-house also include FX, risk attribution,
and regulatory reporting and performance attribution.
“We would like to outsource performance, attribution and administration but we need to be careful about costs. We do outsource most regulatory compliance.”
— Chief Operating Officer, U.S. $430 billion asset manager
Diversified asset manager
Less than U.S. $5 billion
More than U.S. $50 billion
U.S. $5 billion to U.S. $50 billion
Hedge fund manager
49%
17%
10%
9%
4%1%
10%
Mutual fund/ETF manager
Both private equity and hedge fund
manager
Wealth manager
Private equity managerOthers
37%
32%
31%
TOTAL OPERATING COSTS
5% TO 10% 11% TO 19% ABOVE 20%LESS THAN 5%
11% 26% 37%
26%
Cost reduction may figure into decisions
to outsource, but it's rarely the only
factor considered. By outsourcing
middle-office functions to third-party
providers, a growing number of
investment managers are discovering
that a well-managed middle office can
add real value to their organization.
Rather than keeping all the complexity,
compliance and operational risks, and
fixed costs in-house, third-party service
providers can help firms respond
quickly to market, client and regulatory
demands. Outsourcers also offer access
to advanced, scalable technology
that permits more efficient data
management and dangles the prospect
of improved data-driven decisions
across the organization.
In the current environment, asset
managers are increasingly looking
for outsourcing flexibility that can be
tailored to their business requirements.
Some will continue to outsource on an à
la carte fashion with multiple providers.
Others will embrace a more wholesale
approach that treats outsourcers
as strategic partners and allows
them to focus solely on investment
management. In either case, the
industrywide drive to reduce costs, limit
risks, provide transparency, improve
security, and better employ data means
that more and more managers will
continue to outsource middle-office
functions.
FIGURE 4 Outsourcing Model by Function
Source: 2016 SEI Middle Office Survey.
“Capability, not cost, drives our middle-office outsourcing decisions.”— Chief Compliance Officer, U.S. $53 billion asset manager
Diversified asset manager
Less than U.S. $5 billion
More than U.S. $50 billion
U.S. $5 billion to U.S. $50 billion
Hedge fund manager
49%
17%
10%
9%
4%1%
10%
Mutual fund/ETF manager
Both private equity and hedge fund
manager
Wealth manager
Private equity managerOthers
37%
32%
31%
Investment accounting
End-client reporting
Trade capture, matching and a�rmation
Security master maintenance
Portfolio administration
Reconciliation reporting
Portfolio reconciliation
Client billing
Trade settlement
Corporate action and income processing
Settlement or fail reporting
Performance mgmt
Expense reporting
Data mgmt/data governance
Technology provision
Expense mgmt
Mgmt reporting
Collateral mgmt
Pre- and post-trade guideline compliance
Performance attribution
Risk profile reporting
Regulatory reporting
Risk attribution
Custodian/prime broker selection and mgmt
FX execution
HYBRID MODEL FULLY OUTSOURCED
0%% of firms 20%20% 40%40% 60%60% 80% 100%
2016 Middle Office Survey | 7
Staying CompetitiveMiddle office as a strategic focus vs. cost centerMiddle-office functions came under pressure as managers attempted to rein in costs in the wake of
the financial crisis.4 Research by PwC reveals that these efforts may have produced short-term cost
savings, but they also had a number of undesirable side effects including greater operational risk, less
scalability and decreased flexibility. Ironically, these cuts came at a time when many parts of the asset
management industry were once again exhibiting signs of vibrant growth. Many firms simply did not
consider their investment in middle-office operations as a strategic asset, hindering growth prospects.
Even as some firms were dealing with the consequences of their cost-cutting actions, others were
taking the opportunity to re-evaluate and redesign their middle-office processes. By thoughtfully
integrating their own organizational strengths with the capabilities and expertise of external
partners, these firms are transforming middle offices from simple cost centers to potent sources of
competitive advantage. But there is no shortage of remaining challenges.
It will probably come as no surprise that most asset managers in the survey cited regulatory
compliance as one of their biggest operational challenges (Figure 5). However, it's data
management that's most often seen as the single most important challenge, followed closely by
legacy IT systems and complex investments. The variety of challenges facing managers is striking.
The fact that areas such as business continuity and global operations also aren't cited more
frequently is probably because these matters have already been dealt with in many cases.
FIGURE 5 Middle-office Operational Challenges for the Asset Management Industry
Source: 2016 SEI Middle Office Survey.
Investment performance
Cost reduction
Operational complexity
Global operations
Complex investmentsData mgmt
Legacy IT
Client demands
Regulatory compliance
Business continuity
TOP 5 CHALLENGE BIGGEST CHALLENGE
0%
% of firms
20%20% 40%40% 60%60% 80%80% 100%100%
“We are always looking at improving client reporting. We are trying to be as flexible as possible to customize reports within reason.”
— Head of Operations, U.S. $4.5 trillion asset manager
As diverse as the challenges are, they also underscore the size of the opportunity. Middle-office
functions have the potential to contribute to the bottom line because of their direct link to the front office.
In an ideal scenario, the front office would be wholly focused on investment performance and asset
gathering. Yet missing data, reporting errors or inefficient processes are likely to do more than simply
distract front-office personnel. If not addressed by the middle-office team, problems like these can
reduce alpha, cause employee and client dissatisfaction and erode profit margins. In this way, middle-
office efficacy can contribute in very real ways to a firm’s success or failure in an increasingly competitive
marketplace. Many asset managers, for example, now consider collateral management services as a
function that can improve their returns and investment performance.
“Resources go to compliance but the middle office is doing the grunt work with fewer staff.”
— Senior Vice President, U.S. $97 billion asset manager
Scalability, agility, flexibility and predictive analyticsThe current competitive environment and global business operations have forced asset managers to
differentiate themselves by adopting innovative investment strategies. The complex nature of current
investment strategies and instruments are driving the need for robust systems and processes that
are sophisticated, product-agnostic, scalable, agile, secure and highly flexible to navigate evolving
industry dynamics.
Access to timely, accurate and high-quality data is critical to driving investment performance and
maintaining a competitive edge in this market. Unfortunately, the legacy systems at many investment
firms make anything more than short-term fixes nearly impossible, and ultimately add complexity,
cost and risk rather than reducing them. Analytical insights are few and far between when middle-
office personnel are focused on putting out fires.
Since the middle office is where most investment data is captured, stored, reconciled and dispatched
across the firm, forward-thinking asset managers are increasingly focusing on how to better manage
data. Asset management firms of all sizes are increasingly looking to leverage predictive analytics
to turn data into actionable insights. Applications have so far ranged from the integration of social
media statistics into investment decision-making to the shaping of distribution strategies.5 Risk
assessment and performance are additional areas that can clearly benefit from predictive analytics,
and we should expect to see more firms working to understand how it can be effectively applied to
these activities.6
Success today, and in the coming years, will largely depend on an asset manager’s ability to derive
cutting-edge insights and business value from their investment data. Investing in data analytics tools
and services is not only an effective way to manage risk and satisfy investors and regulators, but can
also ultimately boost operational efficiencies and create a competitive edge.
Diversified asset manager
Less than U.S. $5 billion
More than U.S. $50 billion
U.S. $5 billion to U.S. $50 billion
Hedge fund manager
49%
17%
10%
9%
4%1%
10%
Mutual fund/ETF manager
Both private equity and hedge fund
manager
Wealth manager
Private equity managerOthers
37%
32%
31%
Diversified asset manager
Less than U.S. $5 billion
More than U.S. $50 billion
U.S. $5 billion to U.S. $50 billion
Hedge fund manager
49%
17%
10%
9%
4%1%
10%
Mutual fund/ETF manager
Both private equity and hedge fund
manager
Wealth manager
Private equity managerOthers
37%
32%
31%
2016 Middle Office Survey | 9
TransparencyAsset managers of all types have faced the call for more transparency from investors and regulators
in recent years. Regulatory changes have brought a significant increase in the levels of transparency
required. Furthermore, investors have independently demanded that their fund managers provide
better and timelier reports on their holdings and how they mitigate risk. Investors also want to make
sure that their managers are compliant with all applicable regulations, in addition to generating
attributable alpha or cost-effective beta. Moreover, investors value information at their fingertips,
preferably via intuitive and user-friendly reporting dashboards. Those dashboards enable them to
generate customized reports and manipulate data to generate personalized and aggregated views
of their portfolio.
Regulatory compliance: the biggest operational hurdleAs asset management firms expand their global footprint, their business operations are becoming
manifold and geographically diverse. At the same time, regulatory requirements continue to grow
significantly. These factors are creating a new set of risks that many firms find difficult to monitor and
manage. There are at least 20 major regulations currently being discussed or implemented around
the world that directly or indirectly affect the asset management industry. As a result, some managers
will once again be forced to make fundamental changes to their organizational and operational
structures in order to comply with these rules. Organizations that have partnered with outside firms
to manage compliance functions are likely to be in a superior position, as they'll be better positioned
to more quickly adapt seamlessly to new regulatory schemes in multiple jurisdictions.
Today, asset managers must comply with evolving and complex regulatory requirements on a
global scale. This has placed additional demands not only on compliance departments, but also
on investment operations teams. The entire investment operations — processes, controls and
infrastructure — are affected by the changing regulatory environment. Many firms are implementing
new compliance programs by restructuring existing processes, workflows, systems and data to
manage compliance for regulations, such as the Dodd–Frank Act, FATCA (Foreign Account Tax
Compliance Act), AIMFD (The Alternative Investment Fund Managers Directive), and others.
Keeping up with these regulatory pressures has resulted in higher compliance and operational costs,
with more than two-thirds of financial services firms predicting higher compliance budgets in 2015.7
Asset management firms spend significant amounts of resources to ensure compliance instead of
focusing on their core competencies and more strategic activities.
“More transparency and customized reporting is costly. However, we need to spend the money to provide our clients with detailed reports, although we are trying to standardize as much as possible.”
— Chief Compliance Officer, U.S. $53 billion asset manager
Diversified asset manager
Less than U.S. $5 billion
More than U.S. $50 billion
U.S. $5 billion to U.S. $50 billion
Hedge fund manager
49%
17%
10%
9%
4%1%
10%
Mutual fund/ETF manager
Both private equity and hedge fund
manager
Wealth manager
Private equity managerOthers
37%
32%
31%
According to survey respondents, the top regulatory challenges faced by the asset management
industry are the Dodd–Frank Act, the ’33/’34/’40 Acts, ERISA (The Employee Retirement Income
Security Act), AML (Anti-Money Laundering), FATCA, and KYC (Know Your Customer). Although
the regulatory challenges of some reforms, such as Dodd–Frank and FATCA, are felt across the
industry, the specific top regulatory challenges affecting firms vary according to the nature of the
business and manager’s investment strategies (Figure 6). Most firms have indicated that they'll
increase the size of their compliance staff to cope with increasing regulator demands. Looking
forward, more are likely to also seek out external expertise to make their compliance programs
more flexible, efficient and global in nature.
“Keeping up with compliance is a constant. We are starting to see the European and U.S. regulations become more similar, but as a global player, we have to meet the most restrictive regulations and apply them across all markets.”
— Head of Operations, U.S. $319 billion asset manager
FIGURE 6 Top Regulatory Challenges by Type of Firm
Note: Percentage figures are for respondents citing each regulation as a major concern.Source: 2016 SEI Middle Office Survey.
Diversified asset manager
Less than U.S. $5 billion
More than U.S. $50 billion
U.S. $5 billion to U.S. $50 billion
Hedge fund manager
49%
17%
10%
9%
4%1%
10%
Mutual fund/ETF manager
Both private equity and hedge fund
manager
Wealth manager
Private equity managerOthers
37%
32%
31%
Investmentperformance
Costreduction
Operationalcomplexity
Globaloperations
0%
20%
40%
60%
80%
100%
Complex investments
% of firms
Data mgmt
LegacyIT
Clientdemands
Regulatorycompliance
Businesscontinuity
TOP 5 CHALLENGE
GREATESTCHALLENGE
Mutual fund and ETF managers
Private equity and hedge fund managers
Dodd–Frank Act
83%’33/’34/’40
Acts83%
KYC50%
Form PF50%
Dodd–Frank Act33%AIFMD
33%
FATCA60%
Form PF60%
Dodd–Frank Act50%MiFID
40%KYC40%
Diversified asset manager
% of firms
ERISA46%
Dodd–Frank Act40%
AML34%FATCA
30%KYC30%
Hedge fund managers
2016 Middle Office Survey | 11
“In the past few years we have experienced more challenges with talent retention.”— Chief Financial Officer, U.S. $430 billion asset manager
Risk managementEfforts to control risk have played an important role in the growth of middle-office outsourcing, but
it would be a mistake to view outsourcing as a risk panacea. Of the asset managers interviewed,
some expressed concerns that shifting processes to a third party would not only result in a loss of
operational control, but could potentially expose their data to data privacy and security risks.
On the other hand, most managers believe that outsourcing middle-office functions provides the
firm with more transparency into data. With core data management functionality handled by an
external partner, in-house resources can be directed at reviewing and analyzing data. The more
mundane tasks of compiling and processing data are done elsewhere.
The conclusion is that there is no one-size-fits-all solution. Asset managers must regularly perform
their own risk-benefit analyses and decide which middle-office functions to keep in-house and
which functions to outsource to expert service providers that can add value.
Technology vs. people vs. processMiddle-office functions are being stressed in a number of ways. In addition to cost pressures,
regulatory demands, risk management requirements, and so on, middle offices across the industry
have to deal with growing transaction volumes and complexity.
Asset management firms have historically tried to alleviate these stresses by adding additional
staff. More bodies and expertise are still viable approaches, but firms are attempting to address
these challenges in a more sustainable and cost-effective way through investments in the
underlying processes and technology systems.
Investments in technology can help integrate middle-office reporting capabilities, leading to
timelier, less error-prone and less manually intensive processes. Technology-driven middle-office
offerings from third-party service providers have also matured.
The overall pace of investment in technology is higher compared to investments in people and
process (Figure 7). More than nine out of 10 (91%) survey respondents are expecting to spend
more on middle-office technology over the next 12 to 18 months. Alternative managers are more
likely to spend on re-engineering processes, often with an emphasis on automation. Less than half
of the firms in the survey say they plan to spend more on human resources over the short term.
In fact, more than one in five predicts cuts to middle-office personnel costs, hinting at increased
outsourcing activity.
Diversified asset manager
Less than U.S. $5 billion
More than U.S. $50 billion
U.S. $5 billion to U.S. $50 billion
Hedge fund manager
49%
17%
10%
9%
4%1%
10%
Mutual fund/ETF manager
Both private equity and hedge fund
manager
Wealth manager
Private equity managerOthers
37%
32%
31%
FIGURE 7 Planned Increases to Middle-office Spending
Source: 2016 SEI Middle Office Survey.
Data managementFor any investment management firm, enterprise data is a strategic asset. Access and control are
critically important. With the availability of quality data, it allows managers to make smarter tactical
and strategic decisions, and enables the middle and back offices to better control risks and costs.
However, it's often commented that asset managers are lagging behind other industry sectors in
leveraging big data and analytics. According to a 2014 survey of broker-dealers, asset managers
and hedge funds conducted by Thomson Reuters, 41% of respondents lacked a big data solution.8
Since data management is at the core of an asset manager’s investment operations, firms need a
solid data management strategy that can not only support trading, but also improve compliance,
support business development, and drive down operational costs.
Smart data can also deliver a competitive edge by empowering asset managers to respond quickly
to new investment opportunities. In addition, data helps managers monitor counterparties, provide
regular and accurate reports to regulators and clients, and derive critical insights into investor
behavior. A robust data management framework can enable asset managers to pull the right
information quickly, easily and cheaply from the mammoth store of enterprisewide data, and use it
for strategic decision-making.
“Regulatory challenges are causing us to look at providers that are experts at Form PF and regulatory data gathering.”
— Head of Securities Operations, U.S. $319 billion asset manager
Diversified asset manager
Less than U.S. $5 billion
More than U.S. $50 billion
U.S. $5 billion to U.S. $50 billion
Hedge fund manager
49%
17%
10%
9%
4%1%
10%
Mutual fund/ETF manager
Both private equity and hedge fund
manager
Wealth manager
Private equity managerOthers
37%
32%
31%
Diversified asset managers
PeopleProcessTechnology
HF and/or PE managers
80%
100%
80%92%
83%
68%
% of firms
2016 Middle Office Survey | 13
As processing power continues to increase and machine learning becomes a reality, the very
nature of data management will change. Maintenance will be replaced with creativity, and data
fluency will become one of the most important skill sets available to managers. Whether they
source these skills internally or externally, asset managers that treat data management as an
opportunity, rather than a hurdle, are likely to be rewarded with much more productive and
efficient middle offices benefiting the entire organization.
The Future of the Middle Office Areas of near-term focusMiddle-office operations continue to become significantly
more complex and important due to heightened demands from
regulators and investors for increased transparency, accurate
data, better risk management, lower expenses, and due
diligence. More asset management firms are also starting to
recognize the strategic value of middle-office functions and their
ability to positively influence investment results and business
competitiveness. As a result, these asset managers are looking at
ways to enhance their current middle-office capabilities.
“Regulatory compliance” was most often cited by survey participants as an area of focus over
the coming 12 to 18 months (Figure 8). It was not, however, most often chosen as the “most
important” area of focus. That honor goes to “IT innovations” aimed at supporting products across
geographies and currencies. “Scalability” was seen as the “most important” focus area by the next
biggest group of firms, followed by “data management” initiatives.
Due to their diverse business models, diversified asset managers and hedge funds have different
priorities. Hedge fund managers focus more on ensuring regulatory compliance, not surprising
when one considers that compliance is a relatively young discipline in a sector that historically
enjoyed relatively light regulation. Diversified asset managers, on the other hand, are keener to
improve their IT systems, data management and scalability of their business operations.
FIGURE 8 Key Focus Area for the Next 12 to 18 Months
Source: 2016 SEI Middle Office Survey.
Top Focus Area
20%
Top 5 Focus Area
33%
59% 28%
57%
25%
23%
71%
59%
59%
75%
39%
8%
16%
61%
14%
13%
13%
10%
14%
Re
gula
tory
com
plia
nce
T
ight g
overn
ance
procedures
Relationships with counterparties Innovative IT & operational processes Scalability Data m
gmt/data governance
Overall cost saving Disaster recovery/redundancy Keeping up with client demands
E�cie
nt risk
mgmt
% of firms
80%
100%
60%
40%
0%
2016 Middle Office Survey | 15
Key drivers for middle-office investmentsThe emphasis on scalability and multiple geographies makes perfect sense when considered in
light of the factors driving middle-office costs. More than half of the firms surveyed stated that new
products were likely to be the single biggest driver of new investments into their middle-office
functions over the coming 12 to 18 months. Evolving investor needs are driving fund managers
to introduce new investment vehicles and strategies to differentiate their offerings. These new
investment products are often complex and global in nature, therefore, contributing to the growing
need for middle-office excellence and investment in technology.
In addition, regulatory reforms play a vital role in how managers view their business operations.
Regulatory compliance is putting significant pressure on asset management firms to improve
their processes, governance, risk management practices and IT systems. Similarly, competitive
pressures on asset management firms are driving asset managers to enter into new and more
complex asset classes and geographies. When an asset manager introduces a new product,
new vehicle strategy or enters a new geography, its investment systems may not be flexible and
scalable enough to support the new business requirements. To be successful, firms must scale
up their IT systems to be more robust to support these growth objectives.
FIGURE 9 Key Drivers for Increasing Middle-office Investments
Source: 2016 SEI Middle Office Survey.
“We just hired a chief data officer to help us get to a single front engine data source that staff can access.”
— Senior Vice President, U.S. $97 billion asset manager
Diversified asset manager
Less than U.S. $5 billion
More than U.S. $50 billion
U.S. $5 billion to U.S. $50 billion
Hedge fund manager
49%
17%
10%
9%
4%1%
10%
Mutual fund/ETF manager
Both private equity and hedge fund
manager
Wealth manager
Private equity managerOthers
37%
32%
31%
New investment products/instrumentsRegulatory complianceBusiness Development
Client servicesEnhance risk mgmt
0%10%20%30%40%50%60%70%80%90%100%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Most Important
Less Important
Somewhat Important
Most Important Less ImportantSomewhat Important
New investment products/instruments
Regulatory compliance
Business DevelopmentClient servicesEnhance risk mgmt
New investment products/instrumentsRegulatory complianceBusiness development
Client servicesEnhance risk mgmt
Planned investments in people, processes and technologyIn the past, middle office was often viewed as a cost center and not a revenue enhancing function.
As a result, the middle office often received less attention from investments in technology and
resources than other areas such as the front office. As the industry has evolved, more asset
managers are recognizing that an efficient middle office can streamline investment operations,
help meet the needs of clients and regulators, and potentially produce competitive advantages
that allow a firm to outperform its peers.
It has already been noted that asset managers are beginning to favor investments in technology
over investments in people, due in part to the growing acceptance of outsourced business models.
Smaller firms in particular are focused on technology investments and process improvement to
enhance their middle-office capabilities at the expense of further investments in human resources.
On average, diversified asset managers expect to increase their middle-office IT investments
by 12% over the next 12 to 18 months (Figure 10). Alternative managers face a different set
of challenges and tend to be less focused on technology. While middle-office IT spending is
set to grow an average of 3% among hedge fund and private equity managers, spending on
people is expected to accelerate by 13% over the near term. Meanwhile, investments in process
improvements will cause spending to surge by 18%.
FIGURE 10 More Spending on People, Processes and Technology
Source: 2016 SEI Middle Office Survey.
“We don’t have data stored the way we need, so reporting according to a concise regulatory timeline is a challenge.”
— Head of Operations, U.S. $319 billion asset manager
Diversified asset manager
Less than U.S. $5 billion
More than U.S. $50 billion
U.S. $5 billion to U.S. $50 billion
Hedge fund manager
49%
17%
10%
9%
4%1%
10%
Mutual fund/ETF manager
Both private equity and hedge fund
manager
Wealth manager
Private equity managerOthers
37%
32%
31%
Diversified asset managers HF and/or PE managers
18%
3%
13%
3%
9%
12%
PeopleProcessTechnology
% of firms
2016 Middle Office Survey | 17
The changing outsourcing landscapeThe confluence of many factors is driving the transformation of the middle office.9 Expanding product lineups
include more esoteric asset classes, complex investment strategies and geographic breadth. Fee pressure
is resulting from the continued growth of indexing, greater demands for transparency and more assertive
investors. An evolving regulatory environment is placing additional compliance demands on managers. And
the historic underinvestment in middle-office functions has left personnel shortages that indicate that the
emphasis has generally been on transactions rather than strategic decision support.
The newfound emphasis on operational efficiency should, therefore, come as no surprise. As a result,
outsourcing relationships have expanded beyond the back office and are becoming thoroughly ensconced
in many middle offices as well.
When asked which middle-office functions organizations might consider outsourcing over the next 12 to
18 months, 30% of diversified asset managers and 20% of PE and/or HF managers said that they would be
interested in outsourcing corporate actions and income processing functions (Figure 11). Data management
and governance was deemed far more likely to be outsourced by alternatives managers than diversified
managers, although trade capture, transaction settlement and regulatory reporting were the next three most
selected functions for both types of managers.
With the exception of custodian/prime broker selection and management, and expense management,
every function listed as an option was under consideration to be outsourced by at least some firms. Some
functions are already handled externally to a large degree, but this latest wave of outsourcing will mean that
virtually every aspect of middle-office operations will be outsourced by more than 50% of firms.
One additional factor that may accelerate the outsourcing of the middle office is the scheduled introduction
of T+2 settlements in the U.S. by third quarter 2017. Asset management firms will need to change operating
processes and workflows to accommodate a shortened (two-day) trade cycle, but many asset managers are
unlikely to meet this requirement with existing systems and staffing levels. Asset managers need to ensure
that appropriate modifications are made to post-trade processes and systems to comply with new regulatory
requirements. At least some will choose to outsource more of their middle-office functions, but those that
wait too long may find that that implementation pipelines have already been filled.
“It’s a challenge to simplify our operating models with our existing service providers.”
— Head of Securities Operations, U.S. $74 billion asset manager
Diversified asset manager
Less than U.S. $5 billion
More than U.S. $50 billion
U.S. $5 billion to U.S. $50 billion
Hedge fund manager
49%
17%
10%
9%
4%1%
10%
Mutual fund/ETF manager
Both private equity and hedge fund
manager
Wealth manager
Private equity managerOthers
37%
32%
31%
FIGURE 11 Middle-office Functions Considered for Outsourcing in the Next 12 to 18 Months
Source: 2016 SEI Middle Office Survey.
Corporate action and income processing
Trade capture, matching and a�rmation
Transaction settlement
Regulatory reporting
Mgmt reporting
Pre and post-trade guideline compliance
Reconciliation
Risk reporting/attribution
Client billing
Security master maintenance
End-client reporting
Collateral mgmt
FX execution
Investment accounting
Expense mgmt/reporting
Data mgmt/data governance
Technology provision
Settlement or reconciliation reporting
Performance mgmt/attribution
Custodian/prime broker selection and mgmt
DIVERSIFIED ASSET MANAGERS PE AND/OR HF MANAGERS
0%% of firms 20%20% 40%40% 60%60%
Corporate action and income processing
Trade capture, matching and a�rmation
Transaction settlement
Regulatory reporting
Mgmt reporting
Pre and post-trade guideline compliance
Reconciliation
Risk reporting/attribution
Client billing
Security master maintenance
End-client reporting
Collateral mgmt
FX execution
Investment accounting
Expense mgmt/reporting
Data mgmt/data governance
Technology provision
Settlement or reconciliation reporting
Performance mgmt/attribution
Custodian/prime broker selection and mgmt
DIVERSIFIED ASSET MANAGERS PE AND/OR HF MANAGERS
0%% of firms 20%20% 40%40% 60%60%
2016 Middle Office Survey | 19
ConclusionDespite not even sporting a consistent definition, the middle office has emerged as a critically
important operational component of investment firms ranging from traditional asset management
firms to those managing a diversified mix of traditional and alternative strategies. Even as
consensus builds that middle offices are largely untapped sources of value, they are also being
placed under considerable stress from a variety of sources, including heightened regulation,
growing investor demands, stronger competition, and rapidly growing complexity and globalization
of products and strategies.
Some firms are choosing to meet these challenges with additional headcount and tactical
upgrades to their processes and procedures. This approach may be quicker and less complex, but
the more strategically minded organizations may prefer to view this situation as an unparalleled
opportunity that could allow them to unlock valuable insights from their data, helping them acquire
new investors more efficiently, retain existing clients more effectively, and boost investment
performance along the way.
As a way to mitigate the higher costs and longer time frame of this latter approach, a growing
number of firms are turning to one or more outsourcing partners. This approach has the added
benefit of allowing firms to derive the maximum potential benefits while allowing employees to
remain focused on core activities. Whether done in-house or externally, middle-office functions
should all be working in concert to produce the desired results. Even if they can’t agree exactly on
what constitutes the middle office, most firms can probably agree that the following are important
objectives for any well-run middle office:
›› Simple, easy-to-use interface that facilitates interactions with all types of data
›› Strong reporting capabilities with the ability to customize quickly and economically
›› Fast response time unaffected by volume, both in terms of system performance and staff
›› Experience, insight and solutions for regulatory challenges and inquiries
›› Effective management of large-scale data, including data security, data mining and
disaster recovery
›› Predictive analytics that help anticipate clients’ needs, streamline the sales process and assist
in investment processes
›› Timely, comprehensive view of risk profile by product, firm and client
Asset managers who underinvest in their middle office or adopt a wait-and-see approach risk
far more than a regulatory breach. They are likely to miss a rare opportunity to truly differentiate
themselves from their competitors and capitalize on an exciting and rare opportunity to lay the
foundation for sustainable future growth.
“Middle office is where the value is.”— Head of Operations, U.S. $4.5 trillion asset manager
Diversified asset manager
Less than U.S. $5 billion
More than U.S. $50 billion
U.S. $5 billion to U.S. $50 billion
Hedge fund manager
49%
17%
10%
9%
4%1%
10%
Mutual fund/ETF manager
Both private equity and hedge fund
manager
Wealth manager
Private equity managerOthers
37%
32%
31%
About the researchSEI collaborated with FSO Knowledge
Xchange (FSOkx) to conduct an industry
survey in October and November of
2015. The survey’s objective was to
produce insights that would help asset
management firms better understand
middle-office trends, challenges and
opportunities. The resulting report is
based on information gathered from
70 online responses as well as 10
additional interviews with senior
asset management executives.
›› 49% of survey respondents were
diversified asset managers, 17% were
hedge fund managers and 10% were
mutual fund/ETF managers. The
remainder comprised private equity
managers, wealth managers and firms
managing both private equity and
hedge funds.
›› 35% of the respondents were from
small firms with less than U.S. $5 billion
AUM. 34% were from mid-sized firms
between U.S. $5 billion to U.S. $50
billion AUM, and 31% were from large
firms with more than U.S. $50 billion
AUM.
›› Half of the survey respondents were
operations managers and chief
operating officers. The remaining
respondents were chief financial
officers, chief executive officers, chief
risk officers and portfolio managers.
FIGURE 13 Respondents by Line of Business
FIGURE 14 Respondents by Firm Size (AUM)
FIGURE 15 Respondents by Job Title
Note: “Others” include outsourcing manager, trader, chief compliance officer, analyst, chief accounting officer, director of investment, and managing director of finance.Source: 2016 SEI Middle Office Survey.
Diversified asset manager
Less than U.S. $5 billion
More than U.S. $50 billion
U.S. $5 billion to U.S. $50 billion
Hedge fund manager
49%
17%
10%
9%
4%1%
10%
Mutual fund/ETF manager
Both private equity and hedge fund
manager
Wealth manager
Private equity managerOthers
37%
32%
31%
Diversified asset manager
Less than U.S. $5 billion
More than U.S. $50 billion
U.S. $5 billion to U.S. $50 billion
Hedge fund manager
49%
17%
10%
9%
4%1%
10%
Mutual fund/ETF manager
Both private equity and hedge fund
manager
Wealth manager
Private equity managerOthers
37%
32%
31%
Operations manager
Chief operationso�cer
27%
23%11%
5%
3%3%3%
25%
Chief financial o�cer
Portfolio manager
Chief risk o�cer
CEO
Others
Chief technology o�cer/CIO
2016 Middle Office Survey | 21
About SEISEI (NASDAQ:SEIC) is a leading global provider of investment processing, investment management
and investment operations solutions that help corporations, financial institutions, financial advisors
and ultra-high-net-worth families create and manage wealth. As of March 31, 2016, through its
subsidiaries and partnerships in which the company has a significant interest, SEI manages or
administers $684 billion in mutual fund and pooled or separately managed assets, including $265
billion in assets under management and $419 billion in client assets under administration. For more
information, visit seic.com.
About SEI’s Investment Manager Services DivisionInvestment Manager Services supplies investment organizations of all types with advanced
operating infrastructure they must have to evolve and compete in a landscape of escalating
business challenges. SEI’s award-winning global operating platform provides asset managers with
customized and integrated capabilities across a wide range of investment vehicles, strategies and
jurisdictions. Our services enable investment managers to gain scale and efficiency, keep pace
with marketplace demands, and run their businesses more strategically. SEI presently partners with
more than 300 traditional, alternative and sovereign wealth managers representing more than $15
trillion in assets, including 32 of the top 100 managers worldwide. For more information,
visit seic.com/ims
SEI Knowledge PartnershipThe SEI Knowledge Partnership is an ongoing source of action-oriented business intelligence
and guidance for SEI’s investment manager clients. It helps clients understand the issues that will
shape future business conditions, keep abreast of changing best practices and develop more
competitive business strategies. The SEI Knowledge Partnership is a service of the Investment
Manager Services division.
Connect with the SEI Knowledge Partnership
LinkedIn: SEI Investment Manager Services
Twitter: @SEI_KP
About FSO Knowledge Xchange and TurtleBay Advisory ServicesFSO Knowledge Xchange (FSOkx) is a TurtleBay Advisory Services (TBAS) company that provides
industry analysis and marketing solutions serving the global banking, insurance, and capital
markets industry. FSOkx provides a collaborative platform for the industry experts to come
together and share knowledge and best practices through various forums on topical themes.
TBAS is a management consulting firm that has a team of subject matter experts with deep
operations and technology, transformation, and marketing experience. TBAS supports its client’s
business and technology transformation challenges by leveraging their industry expertise,
innovative technology tools, proven methodologies and research capabilities to deliver
sustainable operations/IT process change, optimal operational risk control, transparency and
regulatory compliance.
Diversified asset manager
Less than U.S. $5 billion
More than U.S. $50 billion
U.S. $5 billion to U.S. $50 billion
Hedge fund manager
49%
17%
10%
9%
4%1%
10%
Mutual fund/ETF manager
Both private equity and hedge fund
manager
Wealth manager
Private equity managerOthers
37%
32%
31%
Corporate Headquarters — United States
1 Freedom Valley DriveP.O. Box 1100
Oaks, PA 19456+1 610 676 1270
United Kingdom1st Floor
Alphabeta14-18 Finsbury Square
London EC2A 1BR+44 (0)20 3810 7569
IrelandStyne House
Upper Hatch StreetDublin 2
Ireland+353 1 638 2400
The Investment Manager Services division is an internal business unit of SEI Investments Company. Information provided by SEI Global Services, Inc.
This information is provided for educational purposes only and is not intended to provide legal or investment advice. SEI does not claim responsibility for the accuracy or reliability of the data provided.
©2016 SEI 160870 (05/16)
Sources1 Harvard Business Review, “Leading for Value,” April 2003.
2 Diversified asset managers and managers of hedge funds and/or private equity funds (i.e., alternative managers) comprise the largest groups of survey respondents, representing 49% and 26% respectively.
3 McKinsey Company, “The Trillion-Dollar Convergence: Capturing the Next Wave of Growth in Alternative Investments,” August 2014.
4 WallStreet & Technology, “Rethinking the Asset Management Middle Office,” July 2, 2014.
5 Wealthmanagement.com, “How Asset Managers Are Incorporating Big Data,” August 12, 2015.
6 MAPR Blog, “Top 10 Big Data Trends in 2016 for Financial Services,” December 28, 2015.
7 Thomson Reuters, “6th Annual Cost of Compliance Survey.” May 13, 2015.
8 Thomson Reuters, “Big Data in Capital Markets: At the Start of the Journey” white paper, June 2014.
9 PwC, “Making the middle office top of mind,” February 2014.