By Alan Goddard
Asset managers are increasingly outsourcing reconciliation and exception management to third party providers as they recognize the operational, cost and strategic benefits.
Attitudes towards outsourcing data sensitive workflows like reconciliation have changed markedly at asset managers over the last few years. Historically, managers had been averse to outsourcing to third party providers for fear of losing control of certain aspects of their business, something which a number of industry surveys have corroborated until fairly recently.
Outsourcing to providers is a process which nowadays is far more flexible and tailored to the needs of the client. Perhaps most importantly, institutional investors recognize that outsourcing is an acceptable business practice, which offers a number of benefits to their managers and themselves. As such, the negative perceptions managers had traditionally shown towards outsourcing, particularly around reconciliations and exception management, have rapidly diminished.
Many managers now accept that tasks like reconciliation are oftentimes undertaken far more effectively by a third party provider like SS&C, which is sensitive to the business needs and requirements of its end clients. Service providers also regularly communicate with asset managers and this provides a reassurance to clients that they are retaining control over what they have outsourced.
There are multiple benefits to outsourcing operational tasks such as reconciliations and exception management. Asset managers must deal with a huge amount of data in today’s market environment, driven predominantly by increased trading activity, enhanced regulatory reporting (Form PF, Form CPO-PQR, Annex IV, derivative reporting under the European Market Infrastructure Regulation), investor disclosure requirements, greater demand for more frequent reconciliation, growing complexity of accounts, activities and investments, and pressure from investors to demonstrate that firms are adhering to operational best practices.
Many of these newfound obligations increase the likelihood of human error given the sheer volumes and complexities of the data involved, and outsourcing to an experienced service provider can help reduce the scope of mistakes creeping in. Service providers such as SS&C will systemically validate all of the data gathered from third parties and identify any gaps thereby helping to ensure streamlined and accurate reconciliations. Such automation is critical to reducing the risk of error.
Furthermore, an outsourced reconciliation and exception management offering can help managers reduce their cost overheads, at a time when asset raising and returns can be hard to come by. Cost increases driven by the growing operational demands of regulators and investors coupled with downward pressure on fees, also make outsourcing an attractive proposition for managers.
Given the increased complexity and frequency of reconciliations, outsourcing to SS&C can also save managers time that would have been spent on employee training, support, self-learning and troubleshooting. This enables managers to concentrate their efforts on core areas of their business such as delivering alpha for end investors and capital raising instead of devoting resources elsewhere.
Outsourcing practices are changing in financial services and with reconciliations. Many who have moved to an outsourcing model cite it as being central to their increased competitiveness. Therefore, in reality, the sooner firms begin to view the decision to outsource reconciliation as a question of competitive advantage strategically, the sooner they will be successful despite modern pressures.