Elevating Independent Asset Managers (IAM) Profitability with Smart Integration
Smart automation brings significant operational efficiency and cost benefits for the fast-growing IAM segment in Asia-Pacific. The ability to leapfrog the cost spike faced by an expanding asset management firm could lead to USD 2-3 million in annual cost savings, a profitability jump of up to 40 basis points for medium-sized IAMs and family offices.
Managing Operations of IAMs in Asia-Pacific
The Asian wealth management market is sprawling with the rise of IAMs. These newfound investment management firms are focused intensely on creating a customer experience to compete with private banks.
Within this category of asset managers are «Family Offices» where IAMs specialize in managing the wealth of one or more families. Family offices handle everything from education and tutoring of children to the full finances of families. IAMs have small teams to minimize their costs, and many outsource most of their non-differentiating or non-value adding functions.
However, especially with mid-sized multi-family offices and larger IAMs, the landscape of products is more complex, leading to multiple custodians and private banking relationships. Managing these relationships is taxing on the operations of a small organization. Because of this, mid-sized (USD 250 million – 1 billion) IAMs are the most expensive to operate. In Europe and North America, the IAM and family office markets are larger and more mature than in Asia. Better business infrastructure, for example IAM-specific desks inside banks, makes outsourcing a cost-effective and attractive strategy for players in more mature markets. Due to the nascent state of the Asia-Pacific market, this option is less attractive for local IAMs. This is reflected clearly in the significantly higher operating costs that APAC-based family offices face compared to their European and North American counterparts.
What Makes IAMs Unique?
The unique value proposition of IAMs is to provide the ultimate customer experience in wealth management. The independence of these firms from banks and issuers of financial instruments is key to their client-centric strategy, as the incentives of the asset manager are better aligned with those of the end client. Fee models of IAMs vary from a flat fee to more complex performance-based systems.
This means that IAMs gain no income from selling products and thus are focused on creating value for their clients directly. The provision of investment management, value-added services and the personal level of service is the main unique selling point of IAMs. Consequently, they tend to outsource a large part of their operations, leading to an evermore customer-centric business model.
Traditionally, Western wealthy families set up family offices to manage their wealth and its succession from generation to generation. In Asia, many of the region’s high net-worth individuals have risen to their wealth more recently and have so far stuck to the region’s private banks. Generally, the maturing of a region’s wealth has led to growth in the number of IAMs, and this trend seems to continue in Asia.
Opportunities in Efficiency: Smart Integration with Robotic Process Automation (RPA)
As the Asian IAM business infrastructure is less mature, the region’s IAMs have so far had limited options to outsource their operations. The regional differences are clear from the numbers available for family offices. Especially with more commoditized services such as IT, the proportion of family offices that partially or completely outsource the function is large, at approximately 76 percent, based on a 2018 UBS survey1. Based on the survey, the operating costs of an average family office in Asia measure 84 basis points of assets under management (AUM), whereas this figure stands at 74 percent and 67 percent for Europe and North America, respectively. We believe these figures are representative of the broader IAM market in Asia.
« The operating costs for what are defined as a medium-sized family office, at an AUM of USD 251m – 1bn, are significantly higher than for smaller offices, by approximately 20 basis points. »
In our view, this represents the uncomfortable state where an IAM faces the complexity of dealing with an increased number of clients but is not sufficiently large to invest in higher-end systems. Once a family office or an IAM grows beyond USD 1 billion, operating costs drop to around 40 basis points, as the more costly yet highly efficient systems become economically viable.
Additionally, most family offices tend to invest with a longer time horizon and trade less frequently. As such, traditional portfolio and order management solutions are not fit for purpose for these organizations. The high cost of full-fledged solution suites is prohibitive to small IAMs operating on thin margins. This has led to the development of highly specialized software tools, though so far mostly in Europe and North America. With less comprehensive offerings available in Asia, the region’s IAMs are forced to explore other options – among them is the use of RPA for various tasks. Investment in an internal automation-focused Center of Excellence (CoE) within the IT function of the business allows the area to create more value with the automation of repetitive processes.
Automation and integration can simplify the investment management tasks of portfolio managers and accountants. RPA can integrate with practically any existing solutions, making it non-intrusive, which eliminates any additional IT change-related costs as the system landscape does not need to be changed. The efficiency opportunity represents savings potential of around 50 percent of operating costs for mid-sized family offices, which results in effective cost reduction of USD 2-3 million per annum.
Case Example: Data Aggregation for Investment Management
IAMs generally work with numerous custodian banks, from 5 to 15 private banking relationships on average. This presents a data problem, as each bank generally has their own proprietary format and layout for reporting client assets and investment performance. Forming a holistic, cross-custodian view of assets and performance is no simple task, involving the collection, transformation and the processing of data, often taking hours for each client. The amount of manual effort required is one of the reasons many IAMs do not provide high frequency reporting but opt to provide their clients with a monthly overview instead.
Partnering with an investment reporting firm provides a solution for performance calculation but data aggregation must still be carried out. Data aggregation can be performed by a customized robot that can read the proprietary formats of different banks, and transform the input into a coherent and standardized output for further processing and easy calculation. This results in hours of manual data input and checking labor being eliminated, freeing up the portfolio managers’ time for higher value tasks. Most of the value of a more expensive system can be created with a much less expensive RPA solution. Though the entire end-to-end process is not automated, the most labor-intensive parts of the process can be.
«Most of the value of a more expensive system can be created with a much less expensive RPA solution.»
RPA Center of Excellence as the Way Forward
Asian family offices are in a prime position to leapfrog their North American and European counterparts by in-sourcing non-differentiating functions with RPA instead of outsourcing the tasks. A strong internal RPA Center of Excellence allows the organization to expand the scope of process automation dynamically, as well as conduct basic maintenance and upkeep of the more complex solutions set up by external experts.
Synpulse is an implementation partner of the leading RPA platforms worldwide. With hundreds of RPA projects behind us for the largest and most complex financial services firms, we are strongly positioned to help independent asset managers and family offices with the ramp-up of an internal Center of Excellence, as well as the full development and implementation of impactful RPA solutions.
This article is authored by Salomon Wettstein (Partner), Sin Ki Ip (Senior Consultant), Antti Viitala (Associate Consultant) and Timothy Cheung (Associate Consultant).
- Salomon Wettstein
- Utkarsh Sinha
1 UBS Global Family Office Report 2018, https://www.ubs.com/global/en/wealth-management/uhnw/global-family-office/global-family-office-report-2018.html