Operating models in asset management – ensuring future readiness

Figure 2: Traditional FO-MO-BO structure

According to the traditional operating model, the value chain of an asset manager is split into three independent organizational units with each one having its dedicated responsibility and cost center.

The FO is responsible for client-related tasks from acquisition, customer support up to product management and portfolio management. In this business unit, closeness to the client is required due to the continuous exchange with the client advisor, e.g. during the onboarding process, the portfolio review or with regard to investments.

The relationship manager is responsible for identifying the client’s needs, whereas the portfolio manager makes sure that these are reflected in the products.

The MO acts as support to the FO and takes over all non-client-related tasks. This set-up is considered to be efficient since portfolio managers in the FO have higher salaries than the MO staff, which explains why they should focus primarily on client acquisition, servicing and portfolio management rather than executing administrative and supportive tasks.

Historically, a MO was established due to a heterogeneous system landscape in the FO and BO. Indeed, portfolio management systems, where the front staff entered orders, were often very different from the systems used in the BO for reconciliation, accounting and reporting purposes. The raison d’être of the MO was to ensure the transfer of orders initiated by the FO to the BO by manually entering them into BO systems (this is today often resolved with APIs).

Previously, the MO handled the paper-based transfer of these orders to the BO. Nowadays, the MO not only acts as an intermediary for communication and order handling between front and back office, but also hosts technical functions that require specific expertise such as risk management. These functions are required for each asset class and therefore a common middle office is key to ensure the realization of cost synergies for similar processes.

In terms of market developments, major AM players are starting to consolidate functions related to their current key challenges, i.e. ESG and data management. Their high importance and multivariate impact along the value chain explain why they should be anchored in one single place.

Deep-dive: ESG

The consideration of ESG factors along the value chain is a complex and lengthy process that concerns almost all business units: from the integration of ESG into the company strategy to the adjustment of investment policies and risk measurement up to a refined customer and regulatory reporting. The impact is far-reaching and integration needs to be defined and monitored accordingly.

To ensure a clear positioning towards the market, the clients and the regulator, the entire ESG governance needs to be run from one single unit that acts as coordinator and makes sure that the company heads in the same direction. The independence of the three value chain clusters ensures that the MO coordinates the ESG implementation and governance independently for the entire company.

Finally, at the heart of a consistent ESG strategy lies data – needed e.g. to finance ESG investments or to monitor risk KPIs. In this respect, data management needs to be adjusted accordingly to integrate new ESG-specific data sources and KPIs.

Deep-dive: data management

Asset managers are more than ever relying on qualitative and real-time data to make optimal decisions, e.g. to evaluate and rebalance their portfolios. This is even more true when the data is less structured, which is the case for illiquid asset classes such as infrastructure or real estate.

Similar to ESG, data management needs to be anchored within the organization in the center of the value chain with close access to ESG, portfolio management and operations. The consolidated data management within the MO acts as coordinator and prevents that different, sometimes redundant data sources are used and analyzed differently in various business units. The independence of the MO is important to drive the right decisions and conduct a clear company strategy.

Lean operating model structure

Figure 3: Lean value chain, FO-BO structure

In terms of functions, the lean FO-BO structure does not differ from the traditional set-up. However, the rationale is changing. Functions that were, in a traditional model, executed by the MO are either located in the FO or BO; i.e. the FO also takes over supportive and administrative tasks. They are performed by portfolio and relationship managers or dispatched to their team assistants within the FO depending on the set-up.

The order and transaction management as well as investment support and risk management are service-oriented functions that require technical expertise which is normally not available in the FO. Their thematic fit to fund accounting and reporting suggest that they are consolidated within the BO to form one single business unit focusing on the rather “technical” part of the value chain. These functions illustrate well that both FO and BO follow a very different approach, the first being client-oriented, the second service-oriented. In practice, this hard boundary often results in some administrative and supportive activities that do not fit into one of these two organizational units. A clear process governance including the definition of ownership is key in a lean set-up to ensure a smooth border between FO and BO.

Frequently, a smooth front-to-back software allows staff to enter and execute orders directly in one single software. This straight-through processing significantly decreases license costs while resulting in a faster time-to-market and reducing operational risks as orders are entered manually only once. The closeness of relationship managers to portfolio managers and the trading desk may, depending on the set-up, optimize market time and increase client centricity.

In a lean structure, overarching functions such as the above-mentioned ESG or data management are often spread along the value chain. They are located in each relevant business unit (“in silos”) which of course promotes closeness and a lower time to market, but makes the coordination and harmonization of processes and procedures much more difficult.