[The explosion of technology advancements in the RIA and asset management middle office space are grabbing the attention of firms who are looking to differentiate their services and positioning themselves to meet the growing hyper-competition of the marketplace. To meet the market’s evolving needs, industry administrators and other tech providers need to make a substantial investment in providing the latest operational best practices, hiring seasoned professionals and continuously enhancing their firm’s technology stack and services, specifically for the middle office space. This is leading to a growing interest in outsourcing.
To better understand the modern-day dynamics of middle-office tech and outsourcing options, we recently sat down with Institute member Paul Wahmann, head of middle office services, for Ultimus Fund Solutions—one of the largest, independent fund administration services and middle-office solutions providers for RIAs in the country. We asked him to share with us his perspective on technology trends affecting RIAs and asset management firms and how outsourcing non-core company functions, like a firm’s middle-office, can be a very strategic and competitive decision.]
Bill Hortz: Can you help define and map out for us the “middle office” of a financial firm? Where exactly does it begin and end between the firm’s front and back office? What are the most important functions that reside there?
Paul Wahmann: Middle office can mean a lot of different things for different people. Specifically, to buy-side asset managers, it has always historically been thought of as the place to hold functions that do not have a logical fit anywhere else. The general view of the role of middle office is to support both the front-office investment team’s needs as well as the asks of critical internal stakeholders and clients of the investment manager’s firm.
Our view of “middle office” places the emphasis on delivering critical data resulting from these operating functions in a consistent and efficient manner. At its core, the majority of investment managers include within their middle office activities such as post execution trade settlement, investment book of record or IBOR, performance analytics, reconciliation, collateral management, and client reporting and invoicing. As investment managers grow, these functions usually start out by being supported via offline manually intensive processes which over time become unscalable and unsustainable. As a result, they may evaluate solutions that range from technology-based platforms they operate themselves to full outsourcing functions and or lift-outs to service providers. However, the wide range of options in the current marketplace can present difficult decisions for C-Suite leaders as the wrong solution or option could significantly impact their operating model in the future.
Hortz: With industry and technology changes happening so quickly, what are the current and growing needs of an effective middle office?
Wahmann: RIAs and asset managers must continuously adapt to market and regulatory driven changes which impact their operating model. Recently, the tightening of settlement timeframes with added regulatory financial penalties, the ever-growing addition of complex investment strategies and products, and compounded by the changed operating models we now live by in the post pandemic environment, have caused asset managers to increasingly focus on staying ahead of these challenges.
Most importantly, the need for real-time consistent data coming out of a high straight-through-processing (STP) environment has gained more strategic focus from asset managers’ leadership. Both full-service outsourcing providers, as well as recent additions from the Fintech community, are now providing numerous options to meet asset manager needs in varying degrees.
The ability to quickly consume, aggregate, and normalize multiple providers’ data is deemed critical to supporting these middle office functions. Modern technologies, such as data messaging via APIs, machine learning tools, and the ability to quickly execute the onboarding of these offerings, have dynamically shifted asset managers’ approach to their operating model. Asset managers now have a wide range of solution opportunities at their disposal, many of which can be tailored to specific operating model challenges and future strategy.
Hortz: What new firm capabilities and services are now possible by upgrading your middle office with new technology?
Wahmann: First of all, the implementation of a more efficient operating model will have a significant impact on a firm's use of human capital—which is even more important recently considering the resourcing challenges many of us have encountered coming out of the pandemic. The ability to offer enriched roles to staff can directly impact retaining headcount to keep up with a firm’s growing business strategy.
Specifically, ready access to timely and improved data quality and analytics resulting from these new technologies and models provide tangible enhancements to both internal stakeholders and added value to their clients. Opportunities to utilize data architects to promote value-added data usage versus pure data gathering and reconciliation is just one of many examples investment managers can now use to leverage their new middle office as a commercial strength supporting their investment products and sales.
In addition, the ability to utilize technology tools that offer white label data distribution capabilities to their underlying clients can present a strong competitive advantage against their peers. Investment managers need to think outside of the box to leverage these new tech platforms much more opportunistically versus just for closing a historical operating gap.