Whatever else lay behind JPMorgan Chase’s decision to terminate its collaboration with Schroders over development of a new operating platform to support Schroders’ UK investment operations, it might have served to further endorse Brown Brothers Harriman’s (BBH) component-based sequential approach to fund administration outsourcing.
Andrew Tucker, chairman of BBH’s European subsidiaries and a global custody expert, believes the demise should be seen in the wider context.
“Outsourcing is an entirely legitimate occupation,” he says. People, however, have realised that it is a non-standardised service. For many asset managers the idea of outsourcing makes a lot of intuitive sense, given that they want to focus on their core competencies of portfolio management and distribution. But for many others the idea of “effectively handing the keys to their middle and back office kingdom over to a third-party” implies a loss of control and comes with many inherent risks, Mr Tucker argues.
Fund administration is a classic middle and back office function that has been outsourced for 25 years, but for asset managers there is no standardised service available from multiple vendors. And, people are realising that there is also “no grand design” whereby one assets manager’s systems architecture and operations platform will bear any resemblance to another’s.
Douglas ‘Digger’ Donahue, a BBH partner based in Boston who has worldwide responsibility for the firm’s investor services business, says: “Outsourcing is not a strategy, but should be seen as a tool to pursuing a strategy. Too often people get into the outsourcing mode, which can sometimes be more akin to M&A-type transactions.“
With total assets under custody of $1200bn (€977bn), BBH serves over 90 markets through a single global operating platform. The 40-partner privately held firm today employs over 2,900 people and operates from 16 offices worldwide.
Technology is considered the lynchpin of BBH’s outsourcing operation. The bank’s technology spend is put at 16 per cent to 20 per cent per annum of revenues, with around $450m in the last three years.
BBH’s research found that 40 per cent of problems experienced by asset managers revolved around data transfer and re-keying data of one variety or another - either internally or externally - from one system to another.
Arising from the research came Infomediary, a multi-counterparty hosted communications platform, providing investment managers with the opportunity to outsource their connectivity with the outside world and improve STP rates and connectivity with external institutions.
“The central idea is that we are in the ‘information mediary’ business,” says Mr Tucker. “As a global custodian we act as an intermediary between an asset manager and the market infrastructure. With Infomediary we act as their intermediary in the data transfer business. It also serves as the core application around which other components of our outsourcing proposition are built.
“We tackle specific issues - one by one - be they post trade matching, reconciliation, multi-bank corporate action processing, investment accounting, performance measurement and so on. All of these modules may or may not represent pockets of strength or weakness within the investment manager’s back and middle office,” he adds. Asset managers can then prioritise which of their ‘pain points’ they wish to address.
Data is taken in any electronic format, normalised, then translated and transmitted over the Swift network or via a proprietary connection. Mr Tucker claims that clients, who retain control over their communications through a web-based interface, realise savings from reduction in operations and infrastructure costs, along with decreased risk and proprietary interfaces.
Currently, 70 of BBH’s clients use Infomediary. Mr Donahue says that the rate of new client engagements is accelerating at an impressive rate. In the fund messaging arena and automation with transfer agents (TAs), the bank is working with more than 600 TAs in servicing funds as an asset class and helping to raise efficiencies, as well as helping one major financial institution deal with connectivity to around 120 custodians. The bank is also working with a leadership organisation to help develop an enterprise-wise global connectivity solution.
New solutions are periodically added to the Infomediary platform, in direct response to client demand. “There is no solution here at Brown Brothers that does not have a client that requires it. We don’t work in some back room cooking up ideas in a vacuum. We are driven by the intimacy of our client relationships,” Mr Donahue adds.
Within Infomediary there are a number of component tools including InfoMonitor, a web-based user interface that provides a window into the BBH Infomediary communications system, as well as BBH’s Multi-bank Message Entry product allowing users to input trade instruction, FX, money movement, corporate actions, and Message View & Repair.
While covering European operations out of New York since 1995, Mr Tucker acknowledges his move back to London in 2003 reflected “a shift in the centre of gravity” of the organisation as well as a realisation that to sustain growth and truly to develop the European operation, a gear change was needed. Laura Hoult, head of client solutions, also moved from Boston to London with the same title - for similar reasons.
“Our strategy in Europe is not dis-similar to that being pursued in the US. We are focused on the asset management and then the non-US bank (financial institutions) segments,“ Mr Tucker says.
Luxembourg, Dublin and to a lesser extent London are focused on the fund management segment, especially with the cross-border fund domiciles of Luxembourg and Dublin, while the bank segment is serviced out of Zurich and London.
A challenge for BBH is how to penetrate the onshore markets, with Germany and Italy meriting serious consideration. The firm is looking to formally partner with a local bank, effectively putting its technology and operating infrastructure inside another European bank’s shop. This could take the form of a strategic alliance on a co-branded or on a BBH-inside basis, allowing the bank in question to enhance its global custody/fund administration offering, and enabling it to compete for custody administration in their domestic market.
