While efficient, cost-effective and scalable middle office solutions are a strategic priority, there is neither a clear target operating model nor consensus on what a best-in-class model looks like. We explore the need for change, potential options and key decision points to help asset managers choose their right path.

“While there isn’t clear agreement on an ideal model, given the varying needs of different managers, there is broad consensus about the potential to meaningfully improve the bottom line by finding the right middle office solution for your investment needs.”

High costs, low margins demand a competitive edge

In a growing and increasingly complex market, asset managers are seeking to transform investment middle office operations to be more competitive.

Global assets under management are projected to hit $145 trillion in 2025, nearly doubling from $84.9 trillion in 20161. This includes asset allocations to private markets, which are projected to grow to $23.3 trillion by 20262, 1.7x their 2021 levels. It’s typically difficult to scale processes for these complex asset classes, ultimately burdening investment operations. In fact, 73% of asset managers point to increasing operational costs as a key driver behind finding efficient solutions that can scale.

Between rising costs, shrinking fees, industry-wide operating margin compression and resource constraints, asset managers are viewing middle office transformation as a key differentiator. But it comes with challenges.

73% of asset managers cite the increasing cost of operations as a reason to seek solutions that enable scale and efficiency3.

5 common challenges facing asset managers

There is no one-size-fits all approach to middle office transformation, since every organization has its own priorities and objectives. However, there are five common challenges for middle office operations that are driving the need for change.

  • Multiple aging systems: Typically poorly integrated, heavily customized and difficult to maintain or upgrade.
  • Webs of operational and data management processes: Built reactively to support new strategies, or compensate for system or integration shortcomings, and are largely manual and fragile.
  • Complex and diverse asset classes: Require a global support model, expert technology and operational flexibility.
  • Heightened regulatory environment: Necessitates ongoing adjustments to investment operations.
  • Demands on staff: To balance the need for change with daily operational support.

In combination, global operations support requirements and regional, functional and batch-based systems create a costly, inefficient model. Fragmentation results in investment data copies, reconciliations and inconsistencies, making it harder for investment teams to manage strategies, liquidity and risk.

How can middle office transform to meet these challenges?

For most asset managers, a high-performing middle office has systems that talk to each other and can easily access the right data at the right time. As an organization grows, its middle office model can scale through seamless integrations. To achieve this, asset managers will need to adopt:

Order Management Systems (OMS) play a significant role in successful investment middle office operations. OMS providers have expanded their capabilities to support more post-trade activities meaning the choice of front office technology can substantially affect middle office workflows and access to quality, timely investment data.

It’s important to consider the trade-offs between the two OMS strategies:

  • Multiple OMS platforms can give investment teams optionality and specialization but also drive middle office cost and complexity. This can lead to duplicative platforms and functions, creating disparate workflows and data sources.
  • Single OMS platform offers simplicity and connectivity. The key is to identify the platform that’s most able to support required asset classes, transactions and lifecycle events for current and future needs.

“When it comes to transforming middle office services, the right fit makes all the difference. End-to-end alignment across people, process and technology is often a key determinant of success,” said Scott Bevier, Global Head of Investment Operations Solutions and Co-Head of Americas Securities Services Sales.

The decision to use an in-house or outsourced service model takes many factors into account but either path remains complex to execute.

Insourcing gives the asset manager more control over efficiency levels and operational performance, but requires ongoing technology maintenance, client and partner integrations and adjustments as markets evolve. Despite setting up operations in high value, low-cost locations, many have discovered limited upside in the face of organizational complexity and management overhead. 

It's no wonder then, that outsourcing is becoming more attractive to investment firms. In 2022, nearly one-third of investment firms looked into outsourcing their middle office — up from 17% in 20174. When a service provider has the global scale to handle essential investment operations functions, the manager can focus on their own strategic priorities. The investment firms further benefit from managed technology, shared risk and the ability to shift to a variable cost business model. 

Since the outsourcing model has moved beyond the traditional copy and paste approach, asset managers are ultimately choosing between the types of platform solutions in the marketplace.

  • A software provider solution is an emerging option that leverages the OMS investment by using a platform vendor that offers technical resources and expertise in addition to their core software licensing.
  • The service provider solution is more mature and prevalent among institutions using multiple OMSs or preferring to diversify across providers. The asset manager accesses the providers’ infrastructure for the technology, market connectivity and operational expertise needed to support their business.

A growing case for the service provider solution

The pendulum appears to be swinging towards service provider platforms, in large part driven by their investment in cloud and managed data services.

Outsourcing no longer requires investment data records to be duplicated, mapped and constantly reconciled to keep processes operating in alignment. Cloud-based, shared data infrastructure enables a simpler operating model. The parties co-own and collaborate on a single source of truth – without needing a single operating platform for front, middle, and back-office processing.

Investment managers benefit from their provider’s ongoing investment, global scale, operational footprint, and connectivity with street-side counterparties. They also retain choice and optionality for their investment front office capabilities.

A service provider’s ability to be agnostic to a manager’s front office systems and flex technical and operational configurations to complement their retained capabilities unlocks maximum potential for the manager. With 73% of asset managers looking for scale and efficiency3, the service provider option is particularly appealing.

Naturally, the asset manager will want to look for the right ‘fit’ with their provider. While intangible, that end-to-end cultural and strategic alignment often determines success or failure.

A different type of service provider

J.P. Morgan’s Investment Middle Office Services combines a sophisticated and scalable operating model with an integrated data management solution – Fusion by J.P. Morgan. Fusion, is a cloud-native platform that enables the seamless normalization of data from multiple sources, while allowing managers to choose the right OMS configuration for their business.

Operationally, J.P. Morgan leverages proprietary trading systems covering an array of asset classes and provides access to a deep global talent pool, creating a truly distinct offering.

Our modular offering delivers front-to-back capabilities with the flexibility to opt in or out of services. Asset managers gain scalable, fit-for-purpose services with the option to access the firm’s broader capabilities and investments in technology, regulatory oversight, banking services and staff.

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