Supporting transformation in asset management

The asset management sector is rapidly changing under the influence of regulation, evolving end investors’ behaviours, new technology and the emergence of new business models. Arnaud Claudon, Head of Asset Managers at BNP Paribas Securities Services, looks at how the business is positioning itself to support the sector in this transforming landscape.

The decisions that asset management companies are making today will help to determine the shape of the industry in the future and are likely to have profound consequences in the years ahead. From our perspective, there are four key structural consequences: the continued growth in outsourcing of non-core processes; the search for greater end-to-end efficiencies; the consolidation among industry players; and the changing nature of the relationship between asset managers and their banking partners.

Continued growth in outsourcing of non-core processes

Asset managers are familiar with the concept of outsourcing because their entire business model consists in managing money on behalf of asset owners. They’ve long applied the industrial logic of outsourcing to themselves by sub-delegating the management of non-core investment strategies, or the operations of their back-office and increasingly middle-office functions. Middle-office functions are a fertile area given the complexity and cost of running post-trade and multi-asset investment operations.

Over the past few quarters, we’ve seen an acceleration of outsourcing decisions. Some large institutions that had kept as much as possible of their operations in-house have reached a tipping point and decided to switch to outsourcing. Activities such as collateral management, passive currency overlay, loan administration and private equity fund administration are now increasingly seen as viable and urgent areas to outsource.

BNP Paribas Securities Services has considerable experience in both back- and middle-office outsourcing and we continue to build up our presence in this area, with several major deals announced in 2018. In April, Janus Henderson Investors completed the lift out of its US middle- and back-office operations to us. In April 2017, Dutch asset manager ACTIAM appointed us to run its front, middle- and back-office asset management operations.

Other deals are also in the pipeline. We are currently working with a large pan-Asian institution to complete the outsourcing of their full middle-office operations across Asia- Pacific – a sign that institutions see real value in optimizing their post-trade operations, notably when facing complexity and a need for scalability.

Of course, outsourcing is often complex, particularly when dealing with multi-market, multi-asset operations. It is a disruptive process and doing it well takes time, but the debate these days is not so much whether to outsource non-core processes or not, but how to do it with as little disruption as possible. A critical factor is the readiness of the asset manager to outsource and whether it is clear about what it wants to retain, what it is ready to relinquish and whether it is ready to embrace the new operating model that will result from the outsourcing. In fact, in our experience, aligning the organisation so it is ready for outsourcing can be more time-consuming than the actual process of executing the outsourcing itself.

Even then, execution comes with a risk and to mitigate that risk – experience matters. Every situation is unique, but it is helpful to have successfully worked through complex cases in the past, as BNP Paribas Securities Services has done across Asia-Pacific, Europe and the US.

The underlying aim of all this outsourcing activity is to improve the efficiency of an organisation so it can focus on what it does best, which takes us to our second major trend.

Mitigating margin pressure with end-to-end efficiency

We are in an industry where margins are still sizable, but they are under pressure and shrinking fast. Removing unnecessary costs and frictions in the processes is one way of mitigating that pressure.

There is plenty of potential here, given that the process of managing funds and distributing investment products often has a lot of inefficiencies. Data is an area of concern, especially when you have lots of stakeholders maintaining different versions of records that ultimately need to be reconciled. Every time data sets are inconsistent and incomplete along a disjointed workflow, or records need to be duplicated and reconciled, frictional costs are incurred and add up to material amounts. In this context, the ‘holy grail’ can take the shape of single, integrated, enterprisewide front-to-back data models or shared ledgers of investor records, for instance. In practice, such solutions need to pass the reality test of data protection, local market practices and regulations, as well as co-existence with legacy systems.

However, there are new technologies that can reduce the amount of friction. Distributed ledger technology, such as blockchain, can ensure all parties view the same data, which means there is no need for a lengthy or complex reconciliation. There are also ways to generate efficiencies by improving the reconciliation process itself – applying artificial intelligence and machine learning can identify the root cause of discrepancies and sometimes even anticipate problems before they occur. A further way of addressing inefficiencies is to improve the way data is managed, so that the sophistication of data management processes is proportionate to the importance of data in the organisation.

We are investing heavily in this area, deploying digital workflows, artificial intelligence and programs that automate manual processes. We also deploy predictive algorithms to identify potential issues before they happen; for example, our Smart Chaser initiative, being rolled out, will identify the trades most likely to fail before they occur. We are also designing data aggregation, consolidation, orchestration and delivery solutions.

One has to be realistic about such technologies. We are not waiting for a single system that will provide a perfect solution to all the challenges, but we are proactively investing in technology to introduce better processes and to improve legacy processes and make them more efficient. At the end of the day, it is the asset managers’ end clients who will benefit from this because it reduces costs and increases value.

As all this indicates, the smart use of technology is key to making improvements in end-to-end efficiency. We also have to embed new skills and knowledge into our organization and we look to fintech firms and other external specialists to help us do that. Beyond the benefit of ensuring that our own processes are as efficient as they can be, we also share our experiences of digital transformation with our clients. There are often lessons we can learn from each other about how to use technology to work in more agile ways.

Wherever needed, we collaborate with industry associations, partners, competitors and regulators to agree common standards. In all these areas, every day, thanks to our scale and investments, we make progress to improve efficiency and restitute value to our clients and their end clients.

Securing the benefits and reducing the risk of industry consolidation

Efficiency gains and critical size are the key drivers behind another major trend in the industry: merger and acquisition activity. A key factor behind much of the ongoing consolidation activity is the desire for asset class diversification and fund range rationalisation. Merging two organisations is a way to close gaps in their respective product portfolios or geographic footprints relatively quickly.

These are often large, complex deals involving many different asset classes, multiple geographies and, of course, different corporate cultures. We have been at the heart of the recent wave of such deals, including the merger between Standard Life and Aberdeen Asset Management in 2017. We also helped Japan’s Nikko Asset Management when it acquired DBS Asset Management in Singapore and Tyndall Investments in Australia and New Zealand, assisting it with integrating them into its existing structure and enhancing its operating model accordingly. We have a long heritage in this area. Other deals we’ve been involved with in the past include acquisitions by Aberdeen Asset Management of parts of Deutsche Bank Asset Management in 2005 and Credit Suisse Asset Management in 2008, the integration of Gartmore into Henderson at the time, the acquisition of AXA Asia Pacific by AMP in Australia in 2011 or facilitating the merger between BNP Paribas Investment Partners and Fortis Investment Management in 2010. We delivered the share of the synergies that we had committed to, which allowed those deals to be extremely successful.

It is important that such deals fully deliver on their potential. They are complex choreographies that need to be executed well. It is important not to underestimate the scale of the task, as mistakes in understanding business requirements, target operating model design and overall execution can lead to differences in cost and the timeframe of executing a deal.

As a post-trade specialist, we know how to fit in with the deal timelines. We can contribute to the synergy estimate and suggest the most relevant operating models. And as these deals often involve an element of lift out of some back- and middle-office teams, we can help by delivering post-trade services to the newly enlarged institution.

We are also involved in industry consolidation in its own right, being one of the most active acquirers of depositary banks in Europe. A lot of banks have been looking to exit from fund depositary banking activities as the regulation and complexity in this area has increased, along with the costs. We have been acquiring a number of these businesses and integrating them very successfully into our own operations.

The importance of global institutional banking relationships

In tandem with the changes taking place within the industry, there are also changes happening in terms of approaches to banking services. Asset managers are increasingly moving from a pick and choose approach to a more holistic view of their banking relationships. It is no longer sufficient to be good at just one particular product or service. Large asset managers are choosing banking partners very carefully based on their ability to contribute materially to the sustainable success of their strategic goals, through good and bad times.

Instead of being able to focus on individual products, for banks these days it is also the ability to offer seamless integration across the entire range of services – including asset safety, intraday and overnight facilities, capital financing, acquisition financing and other products – that is deemed important. That doesn't mean the performance of each individual product doesn't matter – each service still has to be competitive – but it does mean clients recognize the value of a strong ecosystem of integrated services at a global scale.

As with all the changes happening in the industry these days, it is the ability to recognise important trends and adapt to the changing needs of clients which helps determine success.