Having an efficient and optimized middle and back office is a priority for investment firms. In the current environment, staying agile and flexible is a must. Rising operational and technology costs are a big concern. In addition, the ability to scale in terms of the number of accounts and portfolios managed is a key objective. Having effective software with advanced technology is a primary factor for supporting this type of growth. The addition of regulatory complexities and market volatility round out the many challenges investment companies face. In addition to having effective middle and back-office investment software powered by the latest tech, there is another way to get around these obstacles — by adding middle and back-office managed services to accommodate growth.
Investment firms are finding that outsourcing middle and back office functions can help them achieve their objectives around efficiency and expanding AUM. For those considering outsourcing, there are some vital things to know before choosing an outsourcing partner. Learn more about what makes up these solutions and how to evaluate options effectively.
Middle Office vs. Back Office
First, it’s important to understand the technological differences between middle office vs. back office. The middle office is primarily where post-execution trade settlement activities occur, with data transfer to downstream providers including custodian banks, prime brokers, and regulatory reporting bodies, all with obligations in place from a compliance perspective.
The back office is what comes after the trades are settled. It’s the accounting, valuation, and reporting requirements that surround client portfolios. At a basic level, holdings need to match what custodian banks, prime brokers, and fund administrators are showing in their own statements. That means reconciling all of the data that goes into portfolio valuation including holdings, transactions, and especially cash transactions and corporate actions that may be handled in different ways between the parties.
From there, portfolio performance calculations are run to determine rates of return, attribution, and other key metrics that investors look at to evaluate firms. These calculations are used in client statements and marketing materials, which require accurate data.
What Are Middle and Back-Office Services?
Investment software that handles the above processes delivers the best results when there’s seamless integration between the front, middle, and back offices. Taken together, middle and back office solutions encompass a myriad of often manual processes and tasks for the typical investment firm. Adding to the complexity are the nuances involved in handling different asset classes and overall portfolio volume. The higher the volume in terms of the number of trades, transactions, and portfolios, the greater the work surrounding middle and back office activities. This is where additional resources can be extremely beneficial for handling manual workflows. and apply specialized expertise. This, combined with adding specialized experience are the reasons why investment, firms look to outsourcing services for middle and back office.
Below are popular middle and back-office managed services that firms can choose to outsource. Utilizing such services will help optimize investment operations
- Trade processing and settlements: Look for end-to-end solutions that process across asset classes and settlement periods. Managing sending/receiving trade allocations/corrections, cancellations, and managing trade breaks to support improvements in the trade settlement process.
- Reconciliation: Daily exception-based reconciliation of holdings and transactions with external custodians. Look for solutions that cover the widest range of custodians possible and that also offers a full services model with familiarity/expertise with recs.
- End-of-day Pricing services: Leverage data from leading providers to ensure the timely ability to value securities across asset classes from a portfolio accounting standpoint.
- Corporate actions: Let solution providers streamline the process by doing the research, verification, configuration, maintenance, and more. With this support, organizations can minimize manual data entry and other administrative work related to these tasks.
- Rate of return (ROR): Access ROR verification services that include monitoring, troubleshooting, and correcting inaccurate performance data based on pre-set screens of data that exceed tolerances.
- Compliance as a Service (CaaS): Get software, technology, and data support in one solution. The service includes a review of any new pending compliance rules, rule backtesting, and ongoing compliance rule updates. Firms using it can empower their compliance professionals to focus on high-level compliance activities, not software administration.
- Data and IT: Rely on data experts to manage all the information that drives the middle and back office. These activities involve optimizing data processing, maximizing system performance, and managing data storage.
- Implementation: Tap professionals with expert product knowledge to train and govern investment software initiatives, convert data required for these projects, write custom reports, and other needs.
There are many options for outsourcing various facets of the middle and back office. Firms also have a choice in configuring middle and back-office services with the best providers. An a la carte model means they only pay for what they need as defined within the SLA (Service Level Agreement) of a given managed outsourcing service.
It can be more beneficial for organizations to work with an outsourcing partner that already supplies their middle and back-office software solutions. This enables a more integrated and connected approach to middle and back-office operations along with expertise in underlying solutions used.
The Benefits of Outsourcing Middle and Back-Office Managed Outsourcing Solutions
The reasons for outsourcing all connect to the optimization of resources and operational efficiency. The benefits that make outsourcing so attractive align with overarching business objectives, namely, reducing costs and managing more growth with capped operating expenses.
Increase Operational Efficiency While Maintaining Control
External resources that remove day-to-day burdens are appealing, however, firms don’t want to lose control of operational processes and the quality control that they have around them. Finding the right balance starts with the right partner. Working with a company with proven subject matter expertise enables investment firms to focus on core growth priorities while industry and tech experts augment operational work for the business.
Reduce Costs and Reallocate Resources
All the management requirements of the middle and back office have a trend toward operational expenses growing. These costs may prevent further innovation or strategies due to the need to allocate resources to internal aspects of the business. By outsourcing, the savings are tangible in terms of time and money. Firms can then reallocate budgets towards initiatives that propel the firm forward.
Shift Administrative Responsibilities
In-house operations staff or other roles like IT don’t want to spend time being a full-time administrator of their investment software and platforms. It inevitably becomes overly burdensome and takes them away from other activities that are core to the firm. By outsourcing, operations expertise can be shifted to an “on-demand” model but with fixed costs. An effective managed services outsourcing provider can do the heavy lifting surrounding administrative activities, allowing operations and IT professionals to focus on strategic initiatives that are core to the business.
Elevate Business Process Controls
With an outsourcing solution that encompasses key operational elements in the middle and back office that can be seen as a risk to the business, having a strong control structure based on a third-party outsourcing provider expands what most organizations currently have in place. These controls are essential in such a current dynamic environment ruled by regulations meant to reduce operational risk.
Realize Better Data Management
Outsourcing and a partnership with investment technology experts bring better data management to the entire enterprise. All these services have data as their common denominator. Improving data management has a positive impact on front-office functions driving investment decision-making, portfolio modeling, and additional analytics with benefits to the firm outside of just the middle and back office.
Implement More Automation While Reducing Operational Risk
Middle and back-office automation is another tangible benefit gained from outsourcing. By using an integrated investment software platform and working with its own specialists to customize and configure workflows, firms can automate middle and back office activities like trade settlement and recon more completely and quickly than trying to go it alone.
Middle and Back-Office Services From INDATA
With a comprehensive list of capabilities and many benefits extended, organizations should investigate outsourcing. If roadblocks and hurdles are keeping businesses from fully leveraging the potential of outsourcing, learn how other clients are benefitting.
INDATA can help. Contact the team today to discuss services.
