This is a case study by an investments firm about how it says an outsourcing agreement has galvanized its business and sharply improved its efficiency.

There have been plenty of outsourcing developments in the North America financial services industry, including wealth management. Practitioners will be well aware – or they should be – that many corporate deals don't always live up to the hype. Firms can be reluctant to give up control and in this era of cyber-crime worries, there may be reason for worry. In reading about successes, failures and the associated lessons, case studies from those involved at the sharp end can be more powerful than an abstract treatise. With this in mind, Kristen Bayazitoglu, chief operating officer of Asset Management at Salient Partners, which is based in Houston, TX, New York and San Francisco, discusses a recent episode. The firm has $14 billion in assets under management and employs about 200 people.

Salient offers strategies that span master limited partnerships, real estate, public and private equity, fixed income, credit and managed futures. The views of the author aren’t not necessarily shared by the editors of this news service; the editors are pleased to share contributions and invite readers to respond. Email tom.burroughes@wealthbriefing.com

When I started at Salient in the early 2000s, it was unheard of to devote significant resources to outsourced investment operations. Although investment management firms watched for developments to the outsourcing model, many firms remained insular and kept operations activities closely guarded in-house. I’m certain that some chief operating officers and executive teams lost sleep at night over concerns that their technology and processes were inadequate, but the norm was a “Wild West” mentality in which firms create their own operational systems without a vision of business and industry evolution.

The rise in popularity of separately managed accounts added another layer of complexity beyond what is required for retail mutual funds or large institutional accounts. For years, it’s been clear that the industry is primed for a disruptive, scalable solution. Today, many investment management firms still carry operations in-house and use piecemeal systems to increase functionality as business grows. More frequently for others, including Salient, integrating outsourced options offer distinct advantages to expand product offerings and create process efficiencies.

The challenge: operational inconsistency
I don’t think anyone would disagree with the notion that growth is a good thing. But, increasing an existing presence or expanding into new channels can present challenges for investment management firms. When I took over the operations function at Salient in 2011, we offered one SMA strategy to our asset management clients. Each new account meant that we had multiple systems to update - accounting, billing, transactions - and new custodians to onboard, all while maintaining existing day-to-day business. We had steady demand for the product which taxed our resources, but we kept pace.

In 2015, when Salient acquired Forward Management, an investment management firm with multiple strategies offered in separately managed account (SMA) format, we had to contend with both a larger volume of SMAs, and conflicting and disjointed operations systems. To accommodate new operational processes, we assigned additional project management responsibilities ad hoc to associates, regardless of their day-to-day duties. Over time, this morphed into a substantial misallocation of resources, and we needed to rectify this — and fast.

Prior to the acquisition, Forward underwent an operations overhaul and brought on Archer as a co-sourcing partner.

We considered outsourcing options, but expanding the co-sourcing partnership appealed to me for several reasons:

1. The term “outsourcing” is scary. Employees question their job security and ensuing psychological road blocks can cripple the transition;

2. The reality is that an investment firm could never fully outsource operations. In-house employees will always need to serve in a command-and-control function, and they know their business and clients best; and 

3. The idea of co-sourcing all of our systems with one firm streamlined onboarding and maintenance. Co-sourcing meant that we could support an expanded SMA offering and grow our institutional business.

The decision to further our partnership with Archer was the easy part, but the conversion process is almost always tricky. Early on, it’s critical to set expectations because seldom is the case that meaningful changes to processes and technology is smooth or simple. We appreciated the preparation that Archer took to outline a roadmap and address our questions and concerns. While we carefully worked through the conversion stage, our anticipation grew at every turn as we unlocked capabilities of our new solution.

The solution
The right design for Salient’s operations function is for an outside firm to take the lead, while internally we provide oversight and review. Thanks to Archer’s cloud-based operations platform that seamlessly synchronizes operations, our co-sourced solution allows a number of offices to work in lockstep. It features a secure intellectual property protection and is compatible with our IT environment. The platform is well-equipped for multi-faceted growth: it handles multiple asset classes and reconciles valuations from different custodians to precisely identify the performance of a particular strategy. Beyond that, the platform adheres to GIPS-compliant performance calculations. We noticed an immediate difference once the platform went live in April.

Before the launch, we were forced to download all of the data necessary to reconcile positions in the early hours of the day before the market opened and trading began. Our in-house operations team doesn’t have to do that anymore - it’s all done automatically. As a result, the Archer system provides us the assurance that we have an up-to-date resource, and the scalability to facilitate new client onboarding and management. The transformation from those Wild West-era home-grown systems to one of standard conventions has been remarkable. Plus, with the Archer solution in place, we’re grateful to catch a few extra z’s each night.