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Blog > How to Develop Your Investment Management Firm’s Operational Model

How to Develop Your Investment Management Firm’s Operational Model

Pros and cons of outsourced and hybrid working models
Wooden blocks are stacked to show options for hybrid workplace, teamwork, outsourcing and in-house options.

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Investment management firms are increasingly looking to change or completely restructure their operational models, with many outsourcing some or all of their business functions to third-party vendors. In fact, according to AssetMark’s most recent Impact of Outsourcing Study, 98% of firms claim outsourcing allows them “to deliver better investment solutions,” 95% of firms claim outsourcing has improved their work-life balance, and 91% of outsourcing firms have “achieved accelerated growth in total assets.”  

Firms that outsource operational functions have a range of factors to consider, including advancements in technology, challenging regulatory requirements, and cost inefficiencies. With the recent market volatility and public health crisis, firms that want to remain competitive are establishing and implementing operational models that recruit and retain top talent while remaining agile with marketplace changes.  

Whether you’ve already begun making operational changes in your firm or are ready to get started, here’s the information you’ll need to begin your decision-making process. 

Why Firms Are Making the Switch from Insourcing to Outsourcing

Many investment management firms are expanding their operational models beyond insourcing, the practice of assigning specific tasks, functions, or projects to internal employees or departments within a company, to embrace outsourcing and hybrid models — a shift that’s helping reduce costs and enhance operational efficiency.  

For instance, according to AssetMark, 59% of financial advisors outsource their legal and compliance work, and 55% of advisors outsource their technology. This shift is likely driven by the various challenges associated with insourcing, such as: 

  • Cost pressures: Insourcing can cause increased operational expenses as firms are responsible for infrastructure, technology, and staffing costs. Additionally, ongoing expenses, such as employee training, benefits, and overheads, can strain budgets. 
  • Reliability and talent in the current workforce: Insourcing may make it more difficult to recruit and retain skilled professionals. Turnover, inconsistent employee performance, and skill gaps within the team can negatively impact the quality and efficiency of operations. 
  • Limited access to specialized expertise: Insourcing can restrict a firm’s access to specific expertise, which may only be available through external providers. This limitation can prevent the firm from benefiting from the latest advancements in technology or industry best practices that a specialized outsourcing partner could offer. 

Given these challenges, investment management firms are increasingly evaluating their options to insource or outsource. 

3 Types of Outsourced Models

Let’s take a look at the three main types of outsourced models: full outsourcing, selective outsourcing, and hybrid outsourcing.  

  • Fully outsourced model: Investment management firms that use a fully outsourced model leave all operational responsibilities in the hands of third-party providers. These third-party providers manage all firm functions from trade execution to back-office administration.  
  • Selective outsourced model: Investment management firms that use a selective outsourcing model outsource specific operations or processes, such as information technology or data management, to third-party vendors. 
  • Hybrid outsourced model: Investment management firms that operate via a hybrid outsourcing model use a combination of in-house and outsourced resources to manage their operations. A firm may, for example, hire some members of its investment team locally and some members of the team overseas.  

What Are the Benefits of Outsourcing?

While outsourcing can offer many benefits, it’s also important for investment management firms to carefully balance these benefits against the potential risks. To minimize these risks, establish clear processes and protocols for working with third-party providers and regularly review and audit these processes to ensure they remain effective and compliant with applicable regulatory guidelines. 

Fully Outsourced Model

  • Cost savings: By fully outsourcing the operations of your firm, you can lower your overall operational expenses by cutting down on costs such as technology, infrastructure, and human resources. 
  • Scalability: By working with third-party providers, your firm can more easily scale services and functions so you can quickly and easily adapt to changes in demand, workforce issues, or market conditions. 
  • Expertise: Working with third-party providers also gives your firm access to specialized knowledge, such as advanced data analytics or compliance expertise, that may not be available in-house.  

Selective Outsourced Model

  • Cost savings: As with a fully outsourced model, your firm can use selective outsourcing to reduce overall operational costs by eliminating some of your in-house roles or functions.  
  • Flexibility: A selective outsourcing model gives your firm increased flexibility by allowing you to choose which non-core roles and functions you want to outsource and which you want to keep in-house.  
  • Access to specialized expertise: As with full outsourcing, selective outsourcing gives your firm access to specialized expertise in areas such as risk management or compliance, while still allowing it to maintain control in-house over other aspects of operations. In a selective outsourcing model, you outsource non-core functions while insourcing core functions. 

Hybrid Outsourced Model

  • Flexibility: A hybrid outsourcing model gives your firm the greatest degree of flexibility possible by allowing you to choose which non-core and core functions you want to keep in-house, and which functions you want to outsource to third-party providers. 
  • Control: By maintaining some functions in-house, such as data analytics or risk management, your firm can maintain greater control over critical aspects of its operations.  
  • Cost savings: Depending on the specific functions your firm chooses to outsource, a hybrid outsourcing model can reduce overall operational costs. 

How to Make Outsourcing Work for Your Firm

While outsourcing offers numerous benefits, some investment management firms may hesitate to adopt this model due to concerns about deviating from their traditional approach.  

But having an “if it ain’t broke, don’t fix it” mentality can result in missed opportunities for cost savings, time efficiencies, and access to specialized expertise.  

So, how can firms successfully leverage the outsourcing model and address potential limitations? It starts by developing an intentional plan that outlines several key components: 

  • Communication: Establish clear lines of communication with the outsourced service provider early on, identifying central points of contact for both parties to ensure coordinated and efficient communication. 
  • Coordination: Define expectations for how your internal stakeholders or clients typically receive information, so there are no disruptions to the level of service or expected deliverables. 
  • Leveraging provider expertise: Utilize the tools and expertise of your outsourced service provider to improve costly or less efficient areas of your business. 
  • Contingency planning: Discuss contingency plans with your provider to address any possible interruptions in service and ensure a seamless transition in case of unforeseen circumstances. 

By implementing these strategies, investment management firms can overcome their initial concerns and capitalize on the many advantages outsourcing has to offer.  

The Bottom Line

While the volatility of the current market and the pandemic has changed how many investment management firms do business, making changes to your current operational model — or changing that model entirely — can drive your firm to success. Additionally, outsourcing some of your business functions can not only help optimize your firm’s performance, but it can also give you access to top performers from around the world across all aspects of key business functions.  

If you need support identifying third-party providers or determining which operational model is most suitable for your firm, connect with an Arootah business advisor. Our advisors can help you in that decision-making process and find preferred vendors to optimize your operations. Book a no-obligation strategy call to get started today.

Disclaimer: This article is for general informational purposes only and does not constitute legal, investment, financial, accounting, or tax advice, or establish an attorney-client relationship. Arootah does not warrant or guarantee the accuracy, reliability, completeness, or suitability of its content for a particular purpose. Please do not act or refrain from acting based on anything you read in our newsletter, blog, or anywhere else on our website.

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