Outsourcing in wealth management has been gaining strong momentum, according to a Celent study.

The international financial research and consulting firm found that cost cutting is the primary driver for the rise of outsourcing. Celent said outsourcing can cut costs by 20% to 30% over a three-to-five-year period. Outsourcing also offers “easy scalability,” Celent said, which has become more relevant as financial firms cut or close operations in some markets while expanding in others, all in a short period of time.
“Wirehouses and regional brokers are definitely outsourcing parts of their technology and operations,” Celent analyst Arin Ray said. “Firms are primarily engaging in such activities to get rid of non-core operations: mundane yet essential parts of the business that take up advisors' time.”

According to Ray, who wrote the report, outsourcing wealth management-related activities is most prevalent in the U.S., where firms have been more active in this area than counterparts in Europe or Asia. “Delving deeper,” he said, “adoption is greater among tier-one brokerages. Tier-two and Tier-three brokerages and independent broker-dealers are at early stages of wealth management outsourcing. Even though tier-two firms engaged in outsourcing fairly recently, they are catching up rapidly with tier-one firms.”

Ray added that second firms are looking at outsourcing any activity that is a non-core function and not a differentiator. Tier III firms generally outsource on an ad hoc basis to address short-term needs.

Although some wealth managers are still reluctant to outsource front office functionalities, this is changing as more firms consider outsourcing in that area. Ray provided this list of the functionalities likely to be outsourced:

  • Back office: Portfolio accounting and bookkeeping, reconciliation of cash and securities position processing of benefit payments, clearance and settlement of domestic and international securities transactions, document management, and corporate actions.
  • Middle office: Trade order management, performance data aggregation and cleansing, client reporting, client service platforms, client support and help desk, confirmations, and affirmations.
  • Front office: Trade capture systems, order management, client onboarding, mobility, portal upgrade/enhancement related to technology or functionality like enhanced user experience.

The idea behind all of this outsourcing is to free advisors as much as possible from other tasks so they can concentrate on their core role of advising clients. “This is only possible,” Ray said, “if advisors do not have to worry about carrying out many of the functionalities listed above. It is therefore likely that outsourcing will help advisors spend more time focusing on clients and offering superior services.”

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