Interview: SEI - A Ringside Seat On The Outsourcing Trend In Wealth Management

Tom Burroughes

25 May 2012

There is a lot of talk in the wealth management industry of changing business models but few firms around today are in a better position to see this trend first-hand than US-headquartered investment and consulting group SEI.

Squeezed by regulatory costs, rising client demands and uncertain markets, wealth advisors must work out whether they can operate more profitably if they spin out mid- and back-office functions rather than try and perform this work in-house.

SEI’s Global Wealth Services division, formed in 2004-05, is all about making such outsourcing happen as smoothly as possible, Ryan Hicke, head of GWS at the firm, told this publication in a recent interview.

“A lot of this business has picked up in momentum in the past two years. Eighteen months ago, we started to get more focused on certain segments of the market with our platform. It is ideal for large professional wealth managers with certain characteristics to be able to use our services. We have a distinct focus on the private client space,” Hicke said.

The first client came onto the platform in 2007; since then this unit has added a total of 17 clients.

“We are seeing a great deal of appetite by those firms looking at outsourcing,” he said.

To demonstrate the point, SEI yesterday announced that Northern Bank, part of Denmark's Danske, has gone live with the company’s Global Wealth Services platform. SEI will provide Northern Bank with investment processing, order management, and client servicing solutions.

A trend

The drive to outsource functions to enable business growth in a more focused way has been going on for some time, but is gaining momentum. Individuals from across the industry have spoken about business models are up in the air (for an example of such views, click here).

Most UK independent financial advisors, for example, outsource some of their client portfolios directly to a third-party manager, despite the fact that most are concerned about the threat this may pose to their core client relationship, according to figures last year from Investec Wealth & Investment. It found that 60 per cent of advisors now outsource, and that on average these IFAs outsource 27 per cent of their portfolios to between two and three discretionary fund managers and two platforms. And this sort of figure is set to increase further as we near the implementation of the regulator’s Retail Distribution Review at the start of 2013: 58 per cent of advisors said they plan to up the number of portfolios they outsource ahead of the deadline.

Margins across wealth management have been squeezed: according to a report last year by Scorpio Partnership, the consultancy firm, the average cost/income ratio for firms had risen to almost 80 per cent, a near record. No wonder firms are looking to outsource. It is not just SEI that is tapping into this: businesses such as Mercer, for example, are pushing into this space on the wealth management side. (To see a recent interview with Mercer, with a focus on its Asia business as an example, click here).

Part of the trend towards outsourcing is that firms must be smarter on how they grow sustainably, Hicke continued. “For organisations looking ahead, say, for three or five years, they are thinking more intelligently about the kind of growth they want to achieve….“The sort of questions they need to be asked, is, 'How can we handle that growth?'”

“We can bring to firms a toolkit to help them manage their portfolios more effectively. In reality, what we really should be delivering to firms is greater capacity for firms to think about their investment ideas or for their relationship managers to have more time with the client. We aim to deliver firms a greater degree of capacity for them to think about new or different investment ideas for their clients or possibly more time for the relationship managers to spend with the clients. Inside of GWS we offer a set of services, or a toolkit, to help them more effectively manage client portfolios,” he said.

Facing reality

But one barrier will be that firms can be reluctant to “let go” and outsource.

“Our biggest competitor is 'in-sourcing', or inertia,” Hicke said.

“We want to understand what the firm is doing today and delve into the real details of how they are delivering it using technology and operations,” he said.

“The key for us is getting our clients to think about their target operating model and then overlay that with the reality of what it would take for them to achieve it. All firms, irrespective of size, have a finite pool of capital (money, people and time) and we want to work with them to help them achieve their growth goals by deploying that capital more intelligently,” he said.

“The challenge is many firms, who run their technology and operations in-house, articulate a vision of top line growth but don’t fully appreciate the middle- and back-office growth they will experience if they are successful,” he said.

“If a firm wants to do something highly bespoke for every single client that comes in the door, they probably are not the best fit for our current solution.

“I would say we believe can have a few core impacts on our clients’ businesses: Make the current operation more efficient, provide services to accelerate the realisation of future strategic goals and deliver our services with a transparent and predictable commercial model that allows them to more effectively plan,” Hicke continued.

Regulatory change

“The volume of regulatory change is going to be very difficult for mid-size and small firms to consume all by themselves. I think the margins are relatively healthy in a lot of these businesses,” he said.

He has plenty of data to back up such a statement. In February this year, ComPeer, the research firm, found that some wealth management firms are spending up to half of their net profits on complying with a rising burden of regulation.

“Pressures will continue,” Hicke said. He spoke of the errors of firms “reinventing the wheel for every new client who comes through the door”. It is not necessary for firms to promise to cover everything a client wants, nor to turn down the benefits of mass-produced solutions to certain problems.