Will the Buy Side Offload their Back Offices to Custodians?

Buy-side firms are facing extreme pressure to change their systems or buy new ones to create a straight-through processing environment enabling them to transition to T+1 in 2004. Traditionally the buy side has been farther behind the sell side in automation and has to make major investments to make the change.

Simultaneously investment managers are receiving pressure as a result of globalization and consolidation, which have led to increased competition among buy-side investment firms to accumulate assets, achieve optimal returns, and expand their presence into new markets. As a result, according to Needham, Mass.-based TowerGroup the buy side should outsource administrative operations and focus resources on their core business of managing assets. "While the logic is inescapable, the costs and benefits of outsourcing are more complex than the simple notion of core competency," the Tower report notes.

Outsourcing has gained popularity as a marketing term to describe post-settlement activities like net asset value(NAV) calculations, fund accounting, transfer agency and performance measurement. The new story in outsourcing is that custodians are now seeking to move further upstream from settlements and are willing to pay dearly to acquire middle-office and back-office personnel from their buy-side clients. While questions remain regarding their relevant experience with respect to order management, pre-trade compliance and electronic trade confirmation, custodians have opportunities to add real value by standardizing aspects of trade communication between fund managers and their agent banks, the report concludes. For more information go to: www.towergroup.com.