Access to a broader range of skills and improved connectivity have been highlighted by asset managers as some of the key pros they look to gain when outsourcing their dealing desks, according to research by consultancy Investit.
The research, conducted as part of a White Paper produced in association with BNP Paribas Securities Services, highlights a number of potential advantages to outsourcing, arguing that firms without the scale to utilise an internal outsourcing model should now consider doing so externally. Benefits highlighted include access to a highly skilled dealing operation, the possibility of lower costs, 24-hour dealing, connectivity to a wider range of markets and venues, and the provision of strong infrastructure and systems.
In addition to these proposed advantages, Investit spoke to 31 investment managers controlling assets ranging from around £10bn to £1.5trn. In their opinion, the main benefits to be attained by outsourcing internal dealing were: lower costs including personnel, data and technology costs; scale benefits giving access to robust technologies and specialist teams, extended dealing hours and increased proximity to markets; and reduced operational risk and cost of errors.
Richard Phillipson, principal and director of institutional consulting at Investit commented, “Managers increasingly see outsourcing their dealing function as an economically attractive approach to achieving best execution. They see that the advantages could outweigh perceived negatives, such as losing some in-house expertise. UK based managers are open to experimenting by outsourcing Asian dealing for example. This is a marked change.”
The White Paper concludes that, “as buy-side dealing changes, there will be more difference between excellent dealing desks and the rest. When fund managers compare the cost of dealing in-house with outsourcing they must also consider the increasing costs they might incur in the near future.”
The paper says the main drivers towards outsourcing will be the development of an understanding amongst firms about the cost of dealing now, a realisation that they are falling behind in being able to demonstrate best execution, and firms being faced with the cost and inconvenience of a major IT upgrade. It estimates that there are over 40 UK medium and smaller investment firms that would benefit from considering the possibility of outsourcing, and approximately twelve such firms that will take the decision to outsource components of their dealing divisions over the next couple of years.
Philippe Boulenguiez, head of Dealing Services at BNP Paribas Securities Services, commented: “Asset managers are at a cross roads. They are looking for revenue streams in new asset classes and geographies, while having to demonstrate best execution and cope with market fragmentation. All these factors are putting pressure on dealing desks, which need ever more specialist expertise. Asset managers are increasingly coming to the conclusion that it might be far more efficient – both in terms of liquidity and cost - to use an outsourced dealing service instead of setting up multiple dealing desks, some of which might end up being under used.”