European regulations mean additional costs and pressure to outsource

Fund managers are there to manage funds, not run servers or decide whether to upgrade to Windows 8

February 19, 2014 4:12 IST | India Infoline News Service
The asset management value chain is long and complex. Few houses can afford or are able to do everything themselves. Regulation is pushing more groups to outsource key functions, but the direction is not all one way. Others are outsourcing to fund managers too. Discretionary portfolio managers will benefit as commission-based models crumble, according to the latest edition of The Cerulli Edge-Europe Edition.

"What is remarkable about our regulation survey findings is the consistency of what is being outsourced most for different bits of legislation," commented Angelos Gousios, a Cerulli senior analyst. "The AIFMD is very different to EMIR, FATCA (not even a European set of rules), or MiFID II, but updating technology and document production (those key information documents) are the functions most likely to be outsourced. Solvency II produces slightly different results, with the sheer volume of data needed to be sent to insurers skewing results."

All of this is common sense. Fund managers are there to manage funds, not run servers or decide whether to upgrade to Windows 8. Likewise, producing monthly fact sheets in multiple languages in a timely fashion is something that can and should be farmed out to a KIID (Key Investor Information Document) factory that can do it at a fraction of the cost of employing a European Commission-sized writing team in-house.

Outsourced fund selection is also growing. This is particularly true in the United Kingdom following implementation of the Retail Distribution Review (RDR).

"Even if MiFID II does not result in a commission ban, if the French get their way, other countries may still follow the United Kingdom with their own domestic rules," said Barbara Wall, Europe research director at Cerulli. "If so, asset managers spy a pan-European opportunity. Advisors will not want to select funds for clients, so they will outsource. In the United Kingdom discretionary managers are thriving by offering a host of graded portfolios for the job."

Model portfolios targeting the offshore crowd are relatively unsophisticated, and they are often sold wrapped in expensive, unnecessary insurance product blankets as selling rules (and standards) are weaker. But regulation and practice is pushing intermediaries toward servicing their client relationships, not just selling products. The unbundled fund and outsourced selection trend is spreading from Geneva to the Middle East.

While the large discretionary managers are a shoe-in for the job, there is room for smaller firms to muscle in. Many advisors would rather have a more personalized relationship with their chosen asset manager. To win subadvised business, managers need to be able to offer a range of solutions that is scalable and easily explained.

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