SEI's latest report, entitled Middle Office: A hidden source of competitive advantage, makes the case for why the middle-office has emerged as a "critically important" operation component for firms including wealth managers.

Middle office functions, with no uniform definition, are a “largely untapped source of value” among asset management firms, an SEI report says.

“Our research backs up our belief that the middle office has emerged as a critically important operational component of investment firms globally whether they manage long-only, alternative or hybrid strategies,” said Stephen Meyer, executive vice president at SEI and head of the firm's investment manager services division.

The findings are also applicable to the broader wealth management industry, the firm told Family Wealth Report.

“There is tremendous potential for faster, better, more transparent, and more insightful data integration, for example, that could yield a much better experience for wealth management clients,” said Ross Ellis, vice president and managing director of knowledge partnership and investment manager services.

“As a result, wealth management firms evaluating existing or prospective managers for their platform may want to consider the state of their middle office operations in order to see if they are likely to be a fit with client experience they want to offer.”

A quarter of the 80 asset managers polled by SEI devote 20 per cent or more of their total operating expenses to middle office functions; another 37 per cent spend between 11 and 19 per cent of their total operating costs on middle-office expenses (with diversified investment managers spending slightly more than strictly alternative managers); and around 91 per cent expect to spend more on middle-office technology over the next 12 to 18 months.

Several factors are putting the middle office in the limelight, the report said, including: expanding product lines; fee pressure from the continued growth of indexing, greater demands for transparency and more “assertive” investors; and a changing regulatory environment that is creating additional compliance demands.

“Challenges, including a more competitive business climate, heightened regulations, growing investor demands, stronger competition, and complexities associated with the globalization of products are prompting managers to re-evaluate their operational capabilities,” SEI said. “Many are entertaining outsourcing arrangements, and are adopting more sophisticated middle offices to support evolving and increasingly complex investment operations.”

“By investment, we mean not just middle office software and hardware, but well trained staff, front office tools,” said Ellis said. “Certain KPIs can be drawn up depending on the specifics of the firm making the investment.  Have errors decreased?  Has client satisfaction increased?  Have cross-or up-sell opportunities increased due to staff not bogged down on rote tasks?  Has the time to process X functions improved?”