In this comprehensive guide, we’ll:
While the middle office outsourcing market is relevant for different financial institutions, we focus on investment managers in this article.
Limina provides an Investment Management System, that covers middle office functionality. We offer some outsourcing services, directly or via partners. You can read more about those services here: https://www.limina.com/data-management-as-a-service
To make it as fast and easy as possible for you to figure out whether to consider Limina as a solution, we have created two articles for you:
Middle office outsourcing involves delegating the operational tasks that sit between the front and back office to a third-party provider. Such a provider can be either:
Operations within asset management have become increasingly complex over the past decade. More tasks to be done, less tolerance for error and smaller teams due to cost pressure. In the video linked at the beginning of this section, Kristoffer Fürst (CEO Limina) sits down with Carl-Fredrik Svensson to discuss how to manage middle office processes for modern asset managers. We also cover what to measure as success indicators, and why.
Middle office functions that outsourcing providers offer varying services, of which the most common are:
| Service | Scope |
| Reconciliation | Reconcile cash, transactions, positions, market value and P&L. This is usually a reconciliation between the IBOR/ABOR and custody/admin |
| Manage Non-Trading Portfolio Activities | Set up accruals, book payables/receivables, and book subscriptions/redemptions |
| Corporate Actions Processing | Timely processing of stock splits, dividends, mergers, tender offers, and other corporate events to maintain accurate security master data |
| Process Confirmations and Manage Affirmations | Comparing trades with confirmation data intraday. Ensure data is sent downstream to the custodian for trade settlement |
| Break Resolution | Resolve any breaks found in the affirmation process or reconciliation. The scope of this service is usually limited by what an asset manager is comfortable to outsource. Often, it’s most practical for the service provider to consult with portfolio managers about breaks before taking action |
It’s worth noting that there are many ways to streamline the above processes. With the right post-trade management software, underpinned by an Investment Book of Record (IBOR), you can greatly increase efficiency. That can be a complement or alternative to outsourcing.
The main benefit to outsourcing middle office functions is that it allows your team to focus on what makes you different: investment decisions and sales.
In addition, here are two more reasons to consider an outsourcing partner:
Outsourcing scales up and down with your business. You pay for the services you need, when you need them, and how much you need. If you’re launching a new fund, you don’t need to worry about hiring staff.
Outsourcing is usually more cost-effective than an in-house team if you’re a smaller asset manager with just a handful of funds or less. If you have an in-house team, you need to hire for redundancy that you might just need a few days per year. With a middle office outsourcing service provider, you benefit from a larger team’s redundancy planning.
With a firm specialised in outsourced middle office services, you benefit from their knowledge across numerous clients. They can invest in specialised middle office solutions, and run duality checks on all processes. If the provider is above a certain size, they’ll have a dedicated risk management function.
Some will claim you gain operational efficiency by outsourcing investment operations, which we disagree with. Operational efficiency is only relevant to what you keep as internal processes, which are not made more efficient by outsourcing. In fact, we’ve seen some examples of the opposite.
There are also potential drawbacks to consider with outsourced investment operations, such as:
When selecting a partner, first map your current processes and pain points. Also, list what is working well today (this is critically important!). Then discuss with the outsourcing provider how they would deliver what you have in place, and what you’d like to improve upon. Finally, ensure any provider you consider has a proven track record in your asset classes. Ideally, choose a global middle office outsourcing provider to ensure wide-ranging support in the future, regardless of where you are today.
It’s essential to consider the medium through which the service will be delivered. There are a couple of options:
The latter is usually preferred if straight-through processing is an important consideration for you. Efficiency and automation are always more straightforward if external technology isn’t involved.
Over the past few years, it’s been evident that investment managers are outsourcing more functions globally. That includes the middle office, but also trading. Many thought leaders, such as Dan Houlihan, are convinced the future is a world where investment managers focus on two things: investment decisions and distribution.