Why asset managers turn to asset servicers

Key Takeaways

• Asset managers are outsourcing to reduce pressure on internal resources.
• Asset servicers are innovating as regulatory demands push costs hires.
• Technology will drive change but asset servicers still have work to do.

Asset managers are facing increasing complexity as clients and regulators call for enhanced reporting, monitoring, transparency, and audit trails. To remain competitive, they must also invest in advanced tools, despite mounting cost pressures.

As a result, many are outsourcing front-, middle-, and back-office management to asset servicers, reducing the burden on internal resources, while ensuring operational efficiency.

The size of the section of the outsourcing market is huge. The 2023 Deloitte Asset Servicers Survey had responses from 15 firms with combined assets under administration of more than USD 176 trillion.

What is Asset Servicing?

Asset servicing encompasses a range of functions, including investment portfolio management, fund accounting, asset custody, and compliance monitoring. These services are widely availed by institutional clients, family offices, funds, and asset managers. Leading asset servicers and custodians include BNP, BNY Mellon, Citi, DTCC, State Street and Credit Suisse, to name a few.

GoldenSource says the trend of outsourcing middle-office operations to asset servicers began after the 2000 dot-com crash and gained momentum following the 2008 financial crisis. In the wake of the COVID-19 pandemic, some asset managers started outsourcing their front-office functions too, such as portfolio management and trading.

An EY report says that the relationship between asset managers and asset servicers continues to strengthen due to the following factors:

• Increased demand for outsourced services: As asset managers become more sophisticated, asset servicers are stepping up with innovative, cost-saving solutions. Expanding beyond their traditional core functions, these servicers now offer enhanced middle-office support, post-trade compliance, regulatory reporting, and comprehensive data services.
• Data integration: As demand for timely, consistent, and accurate data grows, most asset servicers now view ‘client data delivery’ as a core service. About 80% of respondents to the EY survey said that they are “building solutions that leverage an integrated technology architecture to deliver aggregated, normalized data to clients”.
• Globalization: Asset managers are expanding into the Asia-Pacific (APAC) region and other emerging markets, reducing dependence on their home markets. This shift is creating opportunities for asset servicing to evolve from standalone solutions toward a more integrated service model.
• Regulation: New regulatory demands are driving up costs and operational burdens for asset managers, especially in APAC and Europe. In response, asset servicers are developing innovative products such as sophisticated reporting and workflow solutions to navigate the diverse regulatory regimes.
• Innovation: Over 75% asset servicers told EY that they view improved middle-office services as a differentiating factor for topline growth. Hence, they are heavily investing in creating advanced client portals to improve workflow and investor reporting to provide more transparency through operational dashboards and self-service tools.

How can technology drive changes in asset servicing ?

A Deloitte survey says advanced technologies like Robotic process automation (bots), blockchain technology, and cognitive systems will drive dramatic change in the sector in another five years.

By integrating bots, which can complete time-consuming routing tasks in minutes, with cognitive technology and robo-advisors, businesses can automate perceptual and judgment-based processes, enhancing efficiency, customer satisfaction, and revenue growth. Meanwhile, applying blockchain to asset servicing would lead to a complete transformation of the value chain.

On Distributed Ledger Technology (DLT), which also includes blockchain, Posttrade 360 mentions that it can significantly reduce settlement risks, but it is not a complete solution. For example, trying to replace Central Securities Depositories (CSDs), which ensure smooth settlement and collateral management, entirely with blockchain technology can create inefficiencies

Decline in automation: A grave concern

One big concern in the asset servicing industry is the drop in automation. A recent survey by ISSA, The Value Exchange, and DTCC, asset servicing automation in 2024, points out that there is a 30% decline in automation in developed markets, which is hard explain given the new opportunities created by advanced technologies.

One respondent points out that the drop in STP (straight through processing) rates is partly due to internal control processes, “which intentionally cause corporate action messages to fail STP to allow for accuracy checks”. Another participant says there are disagreements over what qualifies as STP, “with some arguing that any human intervention disqualifies a process as STP whilst others argue that it is more nuanced.”

It is an even bigger challenge for the end user. As events reach investors, manual handling becomes inevitable due to multiple custodians, inconsistent formats, and manual instructions, making STP nearly impossible.

Regulation is not going away

Euroclear points out that “the impact of upcoming regulation on asset servicing will be substantial.”

There is immense pressure to achieve shorter settlement cycles, with T+1 already implemented in India, the US, and Canada, and expected to be adopted in EU markets within the next two to three years. However, the current industry operating model is not suited for this shortened settlement cycle.  Asset servicers therefore will have to automate their core operations, corporate action processing and cross-border ETF, so that T+1 can be handled effectively.

The EY report reveals that many asset management firms view regulatory impact as the biggest risk to the asset servicing industry. Despite clearer regulatory expectations, they remain concerned about future developments. Some asset servicers also fear that their own growth could attract heightened scrutiny from regulators.

Despite concerns, the relationship between asset managers and asset servicers is expected to keep evolving in the coming years. As SGSS highlights, a well-rounded service provider is a critical partner in the fund industry today. “With more asset managers looking to rationalize costs and simplify operations, by streamlining the number of third-party relationships and counterparties they maintain, ‘one-stop’ service providers stand to be among the biggest beneficiaries,.”

From trading desks to chief investment officer roles, outsourcing is firmly part of an asset management firm’s options when it comes to maximizing efficiencies and allowing staff to focus on the work that requires their expertise. The internal processes that are in-house must be integrated, front to back, with mundane tasks automated. This will give staff the time and space to better develop personal relationships with clients and to strategize effectively.