Our Insights

The future lies in the middle

Imagining the ideal middle office

Managing costs is only one of the concerns weighing on asset managers. To remain profitable, competitive, and relevant, they are also focused on delivering returns and providing value for money, while concurrently pursuing new strategies. Options may include exchange-traded funds, branching into alternatives, or expanding the types of investment instruments to generate superior returns.

Key insights

  • By outsourcing middle office functions to experienced providers, asset managers can harness the benefits of the data in their middle office without having to make significant up-front investments in their own technology platforms
  • The ideal middle office solution is competitive on cost, scalable, modular, and at the cutting edge of technology, providing asset managers with real-time transparency into their investment data as well as control and oversight

In addition, asset managers are either rationalizing their underlying operating models or setting up new models to support new products. Can this be achieved with legacy platforms and tech stacks? A digitized middle office is emerging as a key opportunity to enable this type of business transformation, providing valuable new data, and insights.

“As they look to grow and expand their businesses, asset managers are starting to ask challenging questions: what are my core competencies and how can I differentiate myself from the competition to attract more fund flows?” explained Marian Azer, Global Head of Middle Office at RBC Investor & Treasury Services. “Outsourcing middle office functions can help on multiple fronts with solutions that drive cost efficiencies, provide scale, and help asset managers enhance their investment offerings.”

More data, better decisions

The middle office represents an untapped data source, as the intelligence gathered and reported through the middle office has the potential to change how asset managers manage their business, and determine their future strategies. “It can be mined for patterns and trends that can inform decisions and enhance the entire investment process,” said RBC Investor and Treasury Services’ Paul Stillabower, Managing Director, Head of Product & Profitability, Core Services.1

Yet legacy technology stacks are often no longer fit for purpose. They cannot necessarily be readily reconfigured to extract relevant data, or support newer asset classes and products. Many asset managers have aging legacy platforms that were never intended to provide a complete middle office service. As a result, they may be constrained, and unable to take advantage of the opportunities afforded by new technology, such as the rise of cloud-based solutions, data analytics, and visualization tools, and artificial intelligence.

The middle office has the
potential to change how
asset managers manage
their business and
determine their future
strategies.

That technology conundrum can stem from under-investment in middle office solutions, which have historically been the “poor cousin” to investment in front office technology, such as order management systems or traditional data warehousing. The hangover effect from mergers and acquisitions, which can leave too many disparate systems and operating models in their wake, has also had an influence. The industry’s frequent waves of consolidation mean asset managers are often faced with the problem of how to integrate two sets of front to back IT architectures, which can prove particularly thorny when it comes to the middle office, and be underestimated. Further complexities exist for firms that have diverse geographical footprints, investments across multiple strategies and asset classes, a mix of their own funds and separately managed mandates.

The middle office is the engine that drives an asset manager’s operations.

“Many asset managers are now coming to market looking for a solution and while cost is a primary driver, there are other priorities to consider,” said Ben Pumfrett, RBC I&TS' Director, Middle Office Product Management. “They may prefer to invest in their key differentiators, such as investment decisions and research, rather than the processing and operational components of their business,” explained Pumfrett.

The efficiencies that
result free up valuable
resources for asset
managers to invest
elsewhere in their
businesses

This is where outsourced middle office solutions add value–with capabilities that can support asset manager’s strategic goals, such as expanding to new asset classes, regions, and legal regimes in a way that is timely, cost - and compliance-effective and puts them at the cutting edge of the latest technology. “A middle office service provider gives asset managers the flexibility to further expand without having to build the new services themselves and make that up-front investment,” said Pumfrett. The efficiencies that result free up valuable resources for asset managers to invest elsewhere in their businesses.

Imagining the ideal middle office

The ideal middle office solution is cost competitive, scalable, at the cutting edge of technology, and relevant.

  • Innovative, accessible technology. Asset managers want transparency and visibility into the data that runs through the middle office. Meeting that objective often requires solutions that are automated, digital, and offer real-time insight into the data as it changes throughout the day.

    It may also include access to an open architecture with application programming interfaces (APIs) that allow asset managers to ‘plug in’ to the discrete data stacks and services they need. “The connectivity, quality, and integrity of the data provided through the middle office is key. It enables asset managers to leverage that data to both monitor their activity and gain valuable near real-time insights into their positions, exposures, and investment strategy,” said Azer.

  • Control and oversight. Asset managers cannot simply sign away oversight responsibilities to a third-party service provider. In many markets, for example, some regulations require asset managers to maintain control and oversight over the data flowing through the middle office. “You cannot just deliver data to asset managers and expect them to make sense of it. There is a critical value-add component,” said Pumfrett. “Providing data transparency through dashboards and other data and analytics tools is how real, relevant insights can be surfaced, while providing asset managers with ultimate control.”

  • Modular and flexible. Middle office outsourcing can be complicated. “Adopting a flexible, modular, phased approach allows asset managers to address burning issues and find solutions for what matters most today, without having to make a full strategic outsourcing decision,” said Azer. The first phase could see an asset manager engaging a service provider to help with discrete solutions such as trade management or collateral management, with new components added as needs arise.

 

The middle office is the engine that drives an asset manager’s operations. “It is the central record repository that pumps data through the system–much like a beating heart. It shows the asset manager's positions and exposures, including collateral and cash positions, and allows them to make informed real-time investment decisions,” said Azer. As asset managers contend with a wave of competition and cost pressures, middle office solutions that are modular, digital, transparent, and at the leading edge of technology are emerging as the key to staying ahead.

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Sources

  1. RBC Investor & Treasury Services (March 4, 2019) Who's minding the middle office?