Jerry Lees, chairman of Linear Investments, explains why outsourcing is the solution for your business.
While Mifid II was designed to offer greater protection and transparency for investors, it has created significant additional cost and operational burdens across an industry already struggling in tough economic conditions. Outsourcing operations and trading functions is already commonplace in the US and is now catching on faster in the UK and Europe as managers look closely at costs and margins.
In addition to this, the full detailed disclosure of all costs associated with running a fund is making distributors and customers alike look again at the costs being passed on to them. In order to remain competitive and reduce the costs passed on to the customer, funds now have to look seriously at the cost of execution and custody or risk losing both business and margins.
It is often said, the UK follows the US in terms of innovation of this type, and in this case it is very true. As I mentioned above outsourcing Execution/trading to specialist firms has been commonplace in the US for over 20 years and is growing consistently. In addition they are way ahead of the UK in outsourcing IT, Infrastructure, hosting and mid/back office. Why try to be an expert in many fields when you can specialise in your core business?
But our experience and reports form organisations such as AIMA (Alternative Investment Management Association) confirm that many organisations in the UK are moving to outsourcing and many more considering it very seriously. Aima, with increasing events and consultancy in this area, should know. This could be a problem for you if you fall behind the curve. If your competitors change their business model now and pass on the cost savings to their clients, you will be at a competitive or cost disadvantage and those costs will impact the fund performance. This triple impact could cause serious harm to your business. Under Mifid II, the regulatory burden is translated directly into a greater drain on resources if you’re not smart about how to tackle and manage it.
Can you afford to delay reviewing costs and process? You competitors are acting now?
Now is the time to act. By outsourcing as many operational functions as possible including trading, back and middle office and transaction and trade reporting, a manager can free up management time as well as tackling cost, not to mention the risk of misreporting. Tackling the requirements for increased transaction reporting alone can be overwhelming and, in most cases, cannot be passed on. It is therefore key that fund managers seek out an experienced specialist outsourcing partner such as Linear. Linear has been ahead of the Mifid II curve for some time now, providing a comprehensive solution to all areas: mid- and back-office operations, proof of execution value (TCA) IT infrastructure and tracking and recording transactions on behalf of clients. Client data, conversations and interviews, and administrative and management overheads in compliance and reporting have also be affected. GDPR constraints on client data management have created additional pressure to outsourcing process.
Uniquely, Linear package it all by offering a MiFID, GDPR & FCA compliant platform
Outsourcing has an impact on the efficiency of a business, as well as the bottom line. Working with an outsourcing partner provides access to a larger pool of skilled resources, improved transaction quality, plus product and service innovation. It allows the manager to focus on the core function of their own business and treat partners such as Linear as an extension to their in-house team for everything else.
For example, outsourcing the trading desk can have an immediate impact on bottom line cost and costs to the fund/client. Any significant fund will need two or three traders with associated costs: salaries, bonus, IT, office/desk space, a trading platform, information systems (2/3 Bloomberg’s for example), connectivity networking, a phone system, a transaction and trade reporting system and trade analysis. All that adds up to a significant cost that has to be absorbed by the business from its fee structure. In an outsourced environment these costs are absorbed in the cost base of the provider.
In turn a provider, such as Linear, is spreading its IT, execution and trading and reporting costs over multiple clients, creating efficiencies. This means the execution costs will not increase and may even be reduced due to the outsourced broker being able to achieve volume discounts and cost savings across higher volumes of trade.
Costs are reduced significantly for your clients through operational and process related benefits. If the outsourcing broker provides integrated execution delivery and custody, all of the costs normally passed on to the client are reduced. Delivery ticket costs are significantly reduced if not removed, integrated execution and custody is efficient and volume discounts apply. Everyone in the chain benefits, the only losers being the competitors who fail to realise the significant gains for them and their clients by adopting integrated outsourced solutions.
Information Technology is proving challenging under Mifid II and GDPR requirements have exacerbated this. Outsourcing IT requirements and using an outsourcing infrastructure leaves the fund manager confident they are working within Mifid II regulations, without the headache of sourcing and managing expensive relationships with multiple providers. This includes transaction reporting, best execution, call recording, market abuse oversight as well as complying with GDPR. Linear currently have 130 trading desks and a number of fund managers using their integrated services including outsourced desks.
Minimising the cost of trading is key for any fund manager and working with a partner providing advanced technology and skilled resources impacts both cost and performance to the client. Outsourcing works, with transparency and trust being a standard part of service delivery. For a business considering outsourcing, change must be owned at the top level. It is clear that more COO’s and CEO’s are understanding the benefits of outsourcing and moving swiftly to take advantage of those opportunities, thereby leaping ahead of competition in terms of competitive cost base, service, execution quality and Alpha.
It is our experience that the decision needs to be driven from the top of the organisation. It cannot be left to those directly involved in the areas that could potentially be outsourced – for obvious reasons. Successful organisations that have implemented significant change in their organisations to implement outsourced solutions have always had the process driven at CEO/Chairman, COO, CTO and CFO levels (management levels depending on the size of organisation). Without that drive, looking at both bottom line and performance impact for the sake of client retention and service, it will not happen. In fact, now we are experiencing a new generation of early stage funds who are going directly to the model – in the age of structures such as WeWORK in the marketplace businesses across the spectrum recognise the advantage of flexibility and variable cost base to manage the ups and downs of market conditions and performance.
If you would like to know more about Linear Investments, please visit www.linearinvestment.comor email firstname.lastname@example.org