With rising competition and industry costs, outsourcing is gradually becoming commonplace in the wealth management sector. In the UK, Societe Generale Securities Services has recently launched a front-to-back office wealth management service, which is attracting many businesses. Valentina Romeo gets details from the unit’s head of sales, Michael Le Garignon
To remain competitive, banks are increasingly looking to outsource operational functions, and leverage providers to reduce the costs of maintaining their back-office systems.
According to a 2014 survey from consulting firm Knadel, more than 40% of small to medium-sized firms are already outsourcing their back office operations.
A large number of firms are outsourcing a majority of functions to specialist providers such as custodian banks.
In September 2014, Societe Generale Securities Services (SGSS) launched an integrated Wealth and Investment Management outsourcing solution in the UK, aimed at mid-tier wealth and investment managers, private banks, direct dealing/broking firms and advisory firms.
"Societe Generale wanted to complement its existing UK business by extending its local services to include its core global services. To do this we needed a market anchor, and the entry point we identified was the wealth segment because of the cross over back to our core service offering," says Michael Le Garignon, head of Sales, Business Development & Relationship Management at SGSS in the UK.
Le Garignon started his 25-years-long career in financial services with Bank of New York, and joined SGSS from JP Morgan in May 2012.
"When I joined SGSS, it was to look at the business in the UK," says Le Garignon. At that time, compared to other UK based competitors, "SGSS didn’t really have strong brand awareness," he adds.
With no upgraded infrastructure in place, Le Garignon could build a bespoke service for the wealth management segment and create a modular solution for its prospective clients.
"[Currently] clients within the wealth segment are seeking segregated managed account solutions. However, what they are actually getting is a custody platform with a service that meets some, but not all, of their requirements, at a much higher price than they should actually be paying."
As of September 2014, SGSS was the 2nd largest global custodian firm in Europe with 3,810bn ($4,279bn) of assets under custody. The firm provides custody and trustee services for 3,500 funds and the valuation of 4,054 funds, representing assets under administration of 527bn.
Since the launch of the outsourcing service, SGSS has received extremely positive feedback and a number of RFP requests , having closed a number of transactions already, with clients lined up for migration till the end of 2015.
"We have made significant investment in the UK to grow the business, and have set quite aggressive deliverables over the next three years against the wealth segment, as we continue to integrate our core global services into the UK we will do so alongside our wealth solution building brand awareness and credibility" he says.
For its first deal in the UK, SGSS partnered with the investment company SCM that outsourced three direct-to-consumer online wealth management services – SCM Direct.com, MoneyShe.com and SCM 50.com.
SCM internalised all of its execution with Societe Generale including an end-investor web portal with performance measurement, portfolio composition and real time positions alongside middle- and back-office services.
Though the unit’s main focus is in the UK, Le Garignon says there have been talks with a number of managers about providing them with managed account solutions across other European locations.
However the intention is to grow the UK market and extend as demand dictates.
"[Currently] clients within the wealth segment are seeking segregated managed account solutions. However, what they are actually getting is a custody platform with a service that meets some, but not all, of their requirements, at a much higher price than they should actually be paying." Michael Le Garignon, head of Sales, Business Development & Relationship Management at SGSS UK.
Strategising on the future
A survey conducted by YouGov for BNP Paribas Securities Services (BPSS) found that 78% outsourcing is a strategic, long term move to focus on core activity, as opposed to only 4% that is focused on cost saving.
Le Garignon is convinced that outsourcing will increase over time. However, he says, despite firms acknowledging the benefits of outsourcing, only 40% are "actually doing it".
This is because some wealth management companies are still run with a partnership structure, and "you have to get all key stakeholders to agree to outsource". Also, many managers impact straight through processing in the way in which they manage model portfolios and their operations.
Another reason, Le Garignon adds, is related to the company’s size and scale. SGSS’s primary target is mid-tier firms (up to $4-5bn AuM). "We are still going after the big firms but we’ll acknowledge that they won’t give us total execution.
"They might give you components but that adds complexity, leaving probably more than 15% in manual operations," he says.
Since March 2014, SGSS has also made several staff acquisitions, adding a new head of securities and bank operations, head of depository, new UK country head, and a chief of strategic initiative implementation.
The commercial team, led by Le Garignon, comprises 14 people in London covering the sell side, buy side and emerging markets.
Le Garignon acknowledges that in the outsourcing process, complexity arrives while changing providers.
However there is increasing pressure to be MIFID and RDR compliant and the key to growth is having a scalable solution that allows managers to focus on growing their business and reducing costs.
Despite a price-compressed market, competitors still tend to focus on how they can win clients through introducing new product and solutions.
"What they don’t do often enough is look internally at what is behind the costs: manual systems, operational risks, and the fact that they are not agile enough. I think cost is relevant, but it needs to be explained properly," Le Garignon says.
Historically, vendors have been chosen for outsourcing projects. However, Le Garignon disagrees with this strategy.
"Vendors provide a component of the overall solution; they are a pipe. What they do is plug into firm’s front office platforms (OMS/EMS). However the managers are still left to deal with multiple middle and back-office suppliers. It’s a fractured operating model behind the front-office connectivity," he says.
Competition heating up
Similar to SGSS, in 2011, Citi launched Citi OpenWealth, offering trust accounting, reporting custody services, and a front-to-back office outsourcing solution.
BNP Paribas also has a vast middle and back-office outsourcing system, servicing a variety of providers.
Le Garignon believes that Societe Generale can deliver a "unique solution" to the UK market, capitalising on their investment banking capability.
"Societe Generale has the investment banking licences, custody licences and a global network. It makes SGSS a safer place for clients’ assets."
In practice, what it means is that competitors are not automating segregation or providing a white-labelled web front-end solution to the end investor, but doing ‘bits’ of the outsourcing process.
"We have reached a point now where, in the next three to five years, ‘bits’ are not going to be enough," says Le Garignon.