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Business Process Outsourcing in Wealth Management

Top trends impacting broker dealers’ decisions to outsource back and middle office operations, and key benefits and considerations of partnering with third party vendors

In recent years, the Wealth and Asset Management industry has seen a shift towards outsourcing back and middle office operations at large broker-dealers as firms recognize the value in third-party vendors and the competitive advantage they may gain over low-cost fintech firms by moving operations externally. Historically, firms collaborated with vendors and external partners for security-related functions such as sub-accounting trade processing or IT services. More recently, as the industry continues to evolve, third-party vendors have begun to provide firms the opportunity to outsource parts of their investment platform functionality such as account and cash management, client billing, trade matching, and confirmation. Efficiency and economics used to be the key factors broker-dealers cited in moving to outsourcing. However, due to the changing landscape of the wealth management industry, a number of trends, which we will explore in this article, have become just as prevalent when deciding to outsource.

Fee Compression Pressure and FinTech Competition

As a result of fee compression resulting in shrinking margins, firms are experiencing pressure to reduce costs and increase management fees. However, due to an increase in compliance and regulatory burdens and rising technology costs, operating costs as firms continue to grow. With the pressure to maintain revenue, broker-dealers have begun to turn to outsourcing back office functions in an effort to reduce costs. Furthermore, the SEC, DOL, FINRA, and other government agencies continuously propose and pass new regulations that require firms to increase fee transparency and act in the best interest of clients. With the emergence of low-cost fintech firms that allow clients to open self-directed brokerage accounts and place commission-free trades, broker-dealers must be able to compete and justify their higher fees by offering a better client-advisor experience and full-service model. Outsourcing allows companies to offer a full-service model to their clients at a lower operational cost and continue to be able to rationalize higher client fees.

Rapid Changes in the Regulatory Environment

With regulatory requirements rapidly changing and firms continuing to expand product lines, firms that outsource are able to focus on their core business without sacrificing responsiveness or efficiency.  As many broker-dealers assess and begin to transition away from LIBOR towards other rates such as SOFR, firms that have outsourced wealth management platforms can depend on their vendor partners to update their platforms to compare against a new rate. By doing so, this mitigates the costs that firms will incur that the LIBOR transition will bring.

Outsourcing investment platforms may also grant firms the opportunity to focus more on training their advisors to optimize their ability to engage in “exemptions” that were previously considered “prohibited transactions” and rely on their vendors to make the necessary changes to investment platforms. Changes in regulations, for example with the new proposed DOL rule that is comparable to the SEC’s Regulation Best Interest, would require firms to spend resources on updating investment platforms and educating and training the field. The new proposed DOL fiduciary rule gives advisors new opportunities to service retirement accounts, which can potentially increase a firm’s revenue with a larger inflow of 12b-1 fees, trailing commissions, sales loads, etc. if the field is properly trained and investment platforms are able to ensure advisors are compliant with the proposed five-part test.

Firms that outsource should also consider FINRA Rule 3190, which states that broker-dealers themselves are ultimately responsible for compliance with securities laws and other regulations and will be held responsible for the failures of any vendors. Under this rule, firms are required to have supervisory procedures including due diligence measures to make sure its partnership with vendors is reasonably designed to be in compliance with all regulations. It is vital that firms that consider partnering with vendors have a transparent and trusting relationship, as third-party failures can result in regulatory fines and operational losses that the financial firm cannot control.

Ability to Offer a Personalized Full-Service Experience

With the emergence of more low-cost fintech firms, many broker-dealers find it increasingly difficult to justify their client fees. Millennial and Generation Z investors typically prefer a technology-driven interface, peer-to-peer interaction, transparent investment platforms, and ESG investment strategies. Nevertheless, by offering a full-service advisory model, large broker-dealers can provide personalized advice to meet evolving client needs and compete with fintech firms. Clients want a more personalized experience, with continuous financial planning support and guidance. By continuing to provide a full-service model, firms can free up advisors’ valuable time, allowing them more time to check in and develop personal relationships with their clients. Firms that choose to outsource parts of their full-service model can focus on their core business and rely on their vendors to continue to enhance platforms and advisory tools for increased efficiency and accuracy.

However, should firms choose to outsource, they may lose the ability to control their trading platform; for example, customizing trading platforms for state-specific rules that allow leniency where possible to enhance company revenue. If outsourced, trading rules followed may be generic across companies with a “one solution fits all” approach, meaning that companies may lose their competitive edge against competitors. If one vendor is partnering with many asset managers, then they will all have similar trading platforms, which may result in the loss of potential new clients as there is no distinction to choose one firm over another. To remain desirable to clients, firms will need to customize their platforms, which may cost more than originally anticipated. As firms request more customizations, the cost to partner with the vendor also increases. In the end, it may be more cost-efficient to keep the platform in-house.

Operational Risk Related to Trading Platforms

To reduce overall operational risk, firms may choose to outsource parts of, or their entire wealth management solution, to account for employee, especially SME, turnover. The resources and time spent on knowledge transfers to develop SMEs when firms inevitably enhance existing platforms or add Greenfield builds can be an expensive investment for firms. Outsourcing investment platforms to external third-party vendors reduces the risk associated with internal firm employee turnover if the investment platforms are hosted, maintained and upgraded externally. This will allow broker-dealers the ability to concentrate on the core of their business: their advisors, products offered to clients, and the advisor-client relationship. Allocating time and energy to these workflows will help facilitate firm growth and competitiveness.

Although outsourcing can reduce the operational risk of employee turnover, firms should consider the immediate impact on company culture. Employees may fear that their jobs are in jeopardy, which can create a very hostile and individualistic environment to work in. This can result in employees being more concerned about their own successes, rather than the success of their entire team or company. In addition, if employees feel as though their jobs are in jeopardy, the company may experience higher turnover than expected. This can damage a company’s reputation and turn away excellent candidates.

Need for Data Symmetry and Streamlined Communication

Data Symmetry

With the advancements in modern technology today, trading and client information change much more rapidly than it did 10 years ago. Given this, data symmetry has become a vital part of a firm, and without it, companies can jeopardize reputational risk if incorrect data leads to missed trading opportunities. The ability to have reliable real-time client position data across the firm and at funds gives broker-dealers the ability to deliver a seamless experience and trustworthy investment advice to their clients. Relying on a mix of in-house legacy services, vendors and sub-accounting firms can increase the risk of data inaccuracies, which can lead to misinformed recommendations and need for trade remediation. Outsourcing key functions such as an investment book of record, custodian reconciliation, and cash management can reduce the risk associated with human error and multiple data sources. While there are many benefits, wealth management firms should also take into consideration the potential increase of cyber security threats and attacks when using external vendors.

As the world becomes more digitally focused, the possibility for data breaching also increases. 48% of data breaches are due to malicious or criminal attacks, 25% are caused by system glitches and a whopping 27% are caused by human error (“Top 5 Cybersecurity Risk Factors for Wealth Management Firms”, 2020). Asset Managers should remain vigilant when partnering with vendors to ensure they have aggressive cyber security systems. The consequences and repercussions of successful cyber-attacks in the wealth management industry might be highest, in comparison to any other industry. Partnering with the right vendor to consolidate data is pivotal for asset managers to offer better informed investment recommendations and accurate information to clients.

Streamlined Communication

With today’s technology combined with current regulations, there is an increased need for streamlining communication across the investment lifecycle, from the asset manager to the client. If multiple vendors or parties are involved in delivering information, the chances of inaccuracies can increase. Partnering with vendors and sub-accounting firms can align communication between clients, advisors, and funds by allowing an external service to handle all communication for the entirety of the trading cycle; from onboarding new funds and sending out prospectuses to client trade confirms. By allowing a third-party vendor or sub-accounting firm to handle changes in service agreements and prospectus changes, wealth management firms are able to focus on their primary business of offering advice.



An increase in outsourcing within the Wealth Management Industry can be attributed to the following factors:

  1. Pressure to reduce operating costs due to margin and fee compression
  2. A continuously evolving regulatory environment 
  3. Ability to continue to offer a full-service model to better compete with low cost fintech firms
  4. An increased need to reduce operational risk and increased scale flexibility 
  5. Need for data symmetry and more streamlined communication to increase efficiency and transparency with clients

BPO Considerations

Due to the changing landscape of the wealth management industry, many firms have considered outsourcing middle and back office functions to control expenses without sacrificing client relationships and the ability to respond to future demands. Outsourcing can increase the probability of delivering the best client experience possible, as it allows advisors to focus their attention on the firm’s core business services. 

Outsourcing is not a risk-free proposition, however, if implemented correctly those risks can be mitigated allowing the broker-dealer to reap the benefits that outsourcing brings.


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