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Middle Office: A hidden source of

competitive advantage2016 SEI Middle Office Survey of Investment Managers

seic.com/ims

Executive Summary

An Evolving Landscape

- What is the middle office?

- More change, growing complexity and higher costs

- Current business models

Staying Competitive

- Middle office as a strategic focus vs. cost center

- Scalability, agility, flexibility and predictive analytics

- Transparency

- Regulatory compliance: the biggest operational hurdle

- Risk management

- Technology vs. people vs. process

- Data management

The Future of the Middle Office

- Areas of near-term focus

- Key drivers for middle-office investments

- Planned investments in people, processes and technology

- The changing outsourcing landscape

Conclusion

About the Research

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2016 Middle Office Survey | 1

Executive SummaryInvestment management firms have traditionally equated competitiveness with the

performance of their portfolios. While this remains true to a degree, a rapidly changing

competitive landscape means evolution and adaption are increasingly critical components

of success. Acquiring new clients, gathering new assets, keeping investors and employees

satisfied, shoring up profit margins, and even investing successfully all depend more than

ever before on squeezing competitive advantage out of every part of the organization.

Even the firms that go to the trouble of formulating a corporate strategy don’t go far

enough. Sir Brian Pitman, former CEO of Lloyds TSB, has been quoted as saying, “There is

always a better strategy than the one you have; you just haven’t thought of it yet.”1 This is

particularly true in the asset management world where the value created in conventional

business models came from the front office.

A growing number of investment organizations, including managers of traditional as

well as alternative strategies, have come to realize that there’s value throughout their

firms, not solely on the portfolio management front. We explored this idea in detail

in our 2015 white paper “Evolving in the New Operational Frontier.” Our research

showed that an increasingly complex, expensive and risky operating environment

meant all functions and processes need to work together seamlessly if firms are to

be competitive. By looking beyond the status quo and transforming their middle

offices from support functions to strategic assets that are scalable, agile and

nimble, the most thoughtful firms will be best prepared to successfully adapt to

changing market dynamics.

An Evolving LandscapeWhat is the middle office?Any discussion of an investment organization's middle office needs to begin with an attempt

to define what the term actually means. The definition has always been somewhat nebulous, a

fact confirmed by interviews with senior executives. Middle-office functions vary from manager

to manager and firm to firm, depending on their business models as well as investment and

trading strategies.

Many people would probably agree that the middle office is responsible for the administrative

aspects of trades and transactions undertaken by the front office. This falls short of being a

complete description, however, since it does not distinguish between middle- and back-office

functions. A more precise definition would highlight the fact that, while back offices focus on

processing, the middle office is more likely to involve activities that require analysis and decision-

making. Examples here might include risk management, collateral management or compliance.

Because no two firms are likely to agree on an exact definition, survey participants were asked

which functions they considered to be part of their middle office (Figure 1).


FIGURE 1 Functions Viewed as Middle Office

Source: 2016 SEI Middle Office Survey.

Most respondents agree that trade capture and settlement are middle-office functions. Pre- and

post-trade compliance are also viewed by three-quarters of diversified managers as middle office,

although this falls to only 60% of alternative managers (defined here as those running hedge funds

or private equity funds). Differences between these two groups can be significant.2 More than half

of all diversified managers, for example, consider client reporting and billing to be middle-office

functions, compared to a much smaller number of alternative managers. Regulatory reporting and

performance attribution, on the other hand, are seen by two-thirds of alternative managers as

middle-office functions, while there was far less consensus among diversified managers

regarding these functions.

Trade capture, matching and a�rmation

Trade settlement

Pre- and post-trade compliance

Settlement or fail reporting

Collateral mgmt

FX execution

Trading

Data mgmt

Performance

Reporting

Accounting and administration

Other

Security master maintenance

Data mgmt/data governance

Performance mgmt

Performance attribution

Risk attribution

End-client reporting

Regulatory reporting

Risk profile reporting

Expense reporting

Corporate action and income processing

Investment accounting

Portfolio administration

Portfolio reconciliation

Reconciliation reporting

Client billing

Custodian/prime broker selection and mgmt

Technology provision

Expense mgmt

0% 20% 40% 60% 80% 100%

Diversified asset manager HF and/or PE manager

More change, growing complexity and higher costsAsset managers today operate in an entirely different business environment than the one that

existed prior to the financial crisis. Growth strategies have had to be balanced with cost control

measures. This conundrum has provoked many firms to re-examine their business strategies,

causing some to focus on new investment solutions, adopt new operational models, and/or

resort to new marketing and sales tactics. Research done for the white paper “Evolving in the

New Operational Frontier” found that asset managers now face nine serious challenges that are

causing many of them to take a renewed look at their operational capabilities in an attempt to

identify new sources of competitive advantage (Figure 2).

The current environment has pushed managers to enter into new markets, roll out new investment

vehicles, and launch new strategies in search of growth. Along with a shift in emphasis from

security selection to asset allocation, investments in new and innovative investment strategies

continue to grow. As alternative investments become mainstream, allocations have surged.

According to McKinsey, alternatives are expected to account for 15% of global assets under

management and 40% of the revenues in the global asset management industry by 2020, as

compared to 12% and around 30% currently.3

FIGURE 2 Nine Key Operational Challenges Facing Asset Managers

1 A more competitive business climate

2 Increasingly complex investment strategies

3 Proliferation of vehicles and distribution channels

4 Growing compliance burden

5 Less favorable economics

6 Amplified risks

7 Heightened investor demands

8 Leveraging big data

9 Managing technology

Since these instruments are more complex, asset managers require increasingly sophisticated middle

offices, featuring more effective business systems that can effectively support an evolving and

complex investment operational infrastructure. The majority of traditional asset managers’ investment

systems aren't equipped to handle the current surge in alternatives nor the intricacy of these

investments. Asset managers must re-evaluate their operations and systems to support complex asset

classes, new reporting requirements, and transparency to meet investor and regulatory expectations.

Managers specializing in alternative investments aren't immune. Their operational infrastructure

may already be optimized for these types of strategies and vehicles, but a growing compliance

burden, more vocal investors, and stiffer competition are all putting a different kind of pressure on

them to revisit their business models.


As a result, middle-office costs have risen across the industry. Since middle-office functions play

such a vital role in a firm’s overall operations, firms dedicate a considerable percentage of overall

operational expenses to their middle offices. More than one out of four firms now devotes 20%

or more of total operating expenses to middle-office functions (Figure 3). Another 37% of survey

respondents spend 11% to 19% of their total operating costs on middle-office expenses, although

diversified asset managers tend to spend slightly more than alternative managers.

FIGURE 3 Middle-office Expenses as a Percentage of Total Operating Costs


Current business modelsFaced with rising costs, greater complexity and increased risk, outsourcing some or all middle-

office functions has now become a legitimate option for many managers.

Many middle-office functions are still performed in-house, but more than three out of four firms

in the survey report that they now outsource some functions to external service providers.

Outsourcers can take over entire functions or be used in a hybrid role, where they share the

responsibility for certain functions with in-house teams. While 52% of firms surveyed wholly

outsource their investment accounting function, another 29% report using a hybrid model.

Many other functions are also commonly addressed with one of these two approaches

(Figure 4). Functions that today are most often tackled in-house also include FX, risk attribution,

and regulatory reporting and performance attribution.

“We would like to outsource performance, attribution and administration but we need to be careful about costs. We do outsource most regulatory compliance.”

— Chief Operating Officer, U.S. $430 billion asset manager

Diversified asset manager

Less than U.S. $5 billion

More than U.S. $50 billion

U.S. $5 billion to U.S. $50 billion

Hedge fund manager

49%

17%

10%

9%

4%1%

10%

Mutual fund/ETF manager

Both private equity and hedge fund

manager

Wealth manager

Private equity managerOthers

37%

32%

31%

TOTAL OPERATING COSTS

5% TO 10% 11% TO 19% ABOVE 20%LESS THAN 5%

11% 26% 37%

26%

Cost reduction may figure into decisions

to outsource, but it's rarely the only

factor considered. By outsourcing

middle-office functions to third-party

providers, a growing number of

investment managers are discovering

that a well-managed middle office can

add real value to their organization.

Rather than keeping all the complexity,

compliance and operational risks, and

fixed costs in-house, third-party service

providers can help firms respond

quickly to market, client and regulatory

demands. Outsourcers also offer access

to advanced, scalable technology

that permits more efficient data

management and dangles the prospect

of improved data-driven decisions

across the organization.

In the current environment, asset

managers are increasingly looking

for outsourcing flexibility that can be

tailored to their business requirements.

Some will continue to outsource on an à

la carte fashion with multiple providers.

Others will embrace a more wholesale

approach that treats outsourcers

as strategic partners and allows

them to focus solely on investment

management. In either case, the

industrywide drive to reduce costs, limit

risks, provide transparency, improve

security, and better employ data means

that more and more managers will

continue to outsource middle-office

functions.

FIGURE 4 Outsourcing Model by Function


“Capability, not cost, drives our middle-office outsourcing decisions.”— Chief Compliance Officer, U.S. $53 billion asset manager





Hedge fund manager

49%

17%

10%

9%

4%1%

10%



manager

Wealth manager


37%

32%

31%





Portfolio administration

Reconciliation reporting

Portfolio reconciliation

Client billing

Trade settlement


Settlement or fail reporting

Performance mgmt

Expense reporting



Expense mgmt

Mgmt reporting

Collateral mgmt

Pre- and post-trade guideline compliance

Performance attribution

Risk profile reporting


Risk attribution


FX execution

HYBRID MODEL FULLY OUTSOURCED

0%% of firms 20%20% 40%40% 60%60% 80% 100%


Staying CompetitiveMiddle office as a strategic focus vs. cost centerMiddle-office functions came under pressure as managers attempted to rein in costs in the wake of

the financial crisis.4 Research by PwC reveals that these efforts may have produced short-term cost

savings, but they also had a number of undesirable side effects including greater operational risk, less

scalability and decreased flexibility. Ironically, these cuts came at a time when many parts of the asset

management industry were once again exhibiting signs of vibrant growth. Many firms simply did not

consider their investment in middle-office operations as a strategic asset, hindering growth prospects.

Even as some firms were dealing with the consequences of their cost-cutting actions, others were

taking the opportunity to re-evaluate and redesign their middle-office processes. By thoughtfully

integrating their own organizational strengths with the capabilities and expertise of external

partners, these firms are transforming middle offices from simple cost centers to potent sources of

competitive advantage. But there is no shortage of remaining challenges.

It will probably come as no surprise that most asset managers in the survey cited regulatory

compliance as one of their biggest operational challenges (Figure 5). However, it's data

management that's most often seen as the single most important challenge, followed closely by

legacy IT systems and complex investments. The variety of challenges facing managers is striking.

The fact that areas such as business continuity and global operations also aren't cited more

frequently is probably because these matters have already been dealt with in many cases.

FIGURE 5 Middle-office Operational Challenges for the Asset Management Industry


Investment performance

Cost reduction

Operational complexity

Global operations

Complex investmentsData mgmt

Legacy IT

Client demands

Regulatory compliance

Business continuity

TOP 5 CHALLENGE BIGGEST CHALLENGE

0%

% of firms

20%20% 40%40% 60%60% 80%80% 100%100%

“We are always looking at improving client reporting. We are trying to be as flexible as possible to customize reports within reason.”

— Head of Operations, U.S. $4.5 trillion asset manager

As diverse as the challenges are, they also underscore the size of the opportunity. Middle-office

functions have the potential to contribute to the bottom line because of their direct link to the front office.

In an ideal scenario, the front office would be wholly focused on investment performance and asset

gathering. Yet missing data, reporting errors or inefficient processes are likely to do more than simply

distract front-office personnel. If not addressed by the middle-office team, problems like these can

reduce alpha, cause employee and client dissatisfaction and erode profit margins. In this way, middle-

office efficacy can contribute in very real ways to a firm’s success or failure in an increasingly competitive

marketplace. Many asset managers, for example, now consider collateral management services as a

function that can improve their returns and investment performance.

“Resources go to compliance but the middle office is doing the grunt work with fewer staff.”

— Senior Vice President, U.S. $97 billion asset manager

Scalability, agility, flexibility and predictive analyticsThe current competitive environment and global business operations have forced asset managers to

differentiate themselves by adopting innovative investment strategies. The complex nature of current

investment strategies and instruments are driving the need for robust systems and processes that

are sophisticated, product-agnostic, scalable, agile, secure and highly flexible to navigate evolving

industry dynamics.

Access to timely, accurate and high-quality data is critical to driving investment performance and

maintaining a competitive edge in this market. Unfortunately, the legacy systems at many investment

firms make anything more than short-term fixes nearly impossible, and ultimately add complexity,

cost and risk rather than reducing them. Analytical insights are few and far between when middle-

office personnel are focused on putting out fires.

Since the middle office is where most investment data is captured, stored, reconciled and dispatched

across the firm, forward-thinking asset managers are increasingly focusing on how to better manage

data. Asset management firms of all sizes are increasingly looking to leverage predictive analytics

to turn data into actionable insights. Applications have so far ranged from the integration of social

media statistics into investment decision-making to the shaping of distribution strategies.5 Risk

assessment and performance are additional areas that can clearly benefit from predictive analytics,

and we should expect to see more firms working to understand how it can be effectively applied to

these activities.6

Success today, and in the coming years, will largely depend on an asset manager’s ability to derive

cutting-edge insights and business value from their investment data. Investing in data analytics tools

and services is not only an effective way to manage risk and satisfy investors and regulators, but can

also ultimately boost operational efficiencies and create a competitive edge.





Hedge fund manager

49%

17%

10%

9%

4%1%

10%



manager

Wealth manager


37%

32%

31%





Hedge fund manager

49%

17%

10%

9%

4%1%

10%



manager

Wealth manager


37%

32%

31%


TransparencyAsset managers of all types have faced the call for more transparency from investors and regulators

in recent years. Regulatory changes have brought a significant increase in the levels of transparency

required. Furthermore, investors have independently demanded that their fund managers provide

better and timelier reports on their holdings and how they mitigate risk. Investors also want to make

sure that their managers are compliant with all applicable regulations, in addition to generating

attributable alpha or cost-effective beta. Moreover, investors value information at their fingertips,

preferably via intuitive and user-friendly reporting dashboards. Those dashboards enable them to

generate customized reports and manipulate data to generate personalized and aggregated views

of their portfolio.

Regulatory compliance: the biggest operational hurdleAs asset management firms expand their global footprint, their business operations are becoming

manifold and geographically diverse. At the same time, regulatory requirements continue to grow

significantly. These factors are creating a new set of risks that many firms find difficult to monitor and

manage. There are at least 20 major regulations currently being discussed or implemented around

the world that directly or indirectly affect the asset management industry. As a result, some managers

will once again be forced to make fundamental changes to their organizational and operational

structures in order to comply with these rules. Organizations that have partnered with outside firms

to manage compliance functions are likely to be in a superior position, as they'll be better positioned

to more quickly adapt seamlessly to new regulatory schemes in multiple jurisdictions.

Today, asset managers must comply with evolving and complex regulatory requirements on a

global scale. This has placed additional demands not only on compliance departments, but also

on investment operations teams. The entire investment operations — processes, controls and

infrastructure — are affected by the changing regulatory environment. Many firms are implementing

new compliance programs by restructuring existing processes, workflows, systems and data to

manage compliance for regulations, such as the Dodd–Frank Act, FATCA (Foreign Account Tax

Compliance Act), AIMFD (The Alternative Investment Fund Managers Directive), and others.

Keeping up with these regulatory pressures has resulted in higher compliance and operational costs,

with more than two-thirds of financial services firms predicting higher compliance budgets in 2015.7

Asset management firms spend significant amounts of resources to ensure compliance instead of

focusing on their core competencies and more strategic activities.

“More transparency and customized reporting is costly. However, we need to spend the money to provide our clients with detailed reports, although we are trying to standardize as much as possible.”

— Chief Compliance Officer, U.S. $53 billion asset manager





Hedge fund manager

49%

17%

10%

9%

4%1%

10%



manager

Wealth manager


37%

32%

31%

According to survey respondents, the top regulatory challenges faced by the asset management

industry are the Dodd–Frank Act, the ’33/’34/’40 Acts, ERISA (The Employee Retirement Income

Security Act), AML (Anti-Money Laundering), FATCA, and KYC (Know Your Customer). Although

the regulatory challenges of some reforms, such as Dodd–Frank and FATCA, are felt across the

industry, the specific top regulatory challenges affecting firms vary according to the nature of the

business and manager’s investment strategies (Figure 6). Most firms have indicated that they'll

increase the size of their compliance staff to cope with increasing regulator demands. Looking

forward, more are likely to also seek out external expertise to make their compliance programs

more flexible, efficient and global in nature.

“Keeping up with compliance is a constant. We are starting to see the European and U.S. regulations become more similar, but as a global player, we have to meet the most restrictive regulations and apply them across all markets.”

— Head of Operations, U.S. $319 billion asset manager

FIGURE 6 Top Regulatory Challenges by Type of Firm

Note: Percentage figures are for respondents citing each regulation as a major concern.Source: 2016 SEI Middle Office Survey.





Hedge fund manager

49%

17%

10%

9%

4%1%

10%



manager

Wealth manager


37%

32%

31%

Investmentperformance

Costreduction

Operationalcomplexity

Globaloperations

0%

20%

40%

60%

80%

100%

Complex investments

% of firms

Data mgmt

LegacyIT

Clientdemands

Regulatorycompliance

Businesscontinuity

TOP 5 CHALLENGE

GREATESTCHALLENGE

Mutual fund and ETF managers

Private equity and hedge fund managers

Dodd–Frank Act

83%’33/’34/’40

Acts83%

KYC50%

Form PF50%

Dodd–Frank Act33%AIFMD

33%

FATCA60%

Form PF60%

Dodd–Frank Act50%MiFID

40%KYC40%


% of firms

ERISA46%

Dodd–Frank Act40%

AML34%FATCA

30%KYC30%

Hedge fund managers


“In the past few years we have experienced more challenges with talent retention.”— Chief Financial Officer, U.S. $430 billion asset manager

Risk managementEfforts to control risk have played an important role in the growth of middle-office outsourcing, but

it would be a mistake to view outsourcing as a risk panacea. Of the asset managers interviewed,

some expressed concerns that shifting processes to a third party would not only result in a loss of

operational control, but could potentially expose their data to data privacy and security risks.

On the other hand, most managers believe that outsourcing middle-office functions provides the

firm with more transparency into data. With core data management functionality handled by an

external partner, in-house resources can be directed at reviewing and analyzing data. The more

mundane tasks of compiling and processing data are done elsewhere.

The conclusion is that there is no one-size-fits-all solution. Asset managers must regularly perform

their own risk-benefit analyses and decide which middle-office functions to keep in-house and

which functions to outsource to expert service providers that can add value.

Technology vs. people vs. processMiddle-office functions are being stressed in a number of ways. In addition to cost pressures,

regulatory demands, risk management requirements, and so on, middle offices across the industry

have to deal with growing transaction volumes and complexity.

Asset management firms have historically tried to alleviate these stresses by adding additional

staff. More bodies and expertise are still viable approaches, but firms are attempting to address

these challenges in a more sustainable and cost-effective way through investments in the

underlying processes and technology systems.

Investments in technology can help integrate middle-office reporting capabilities, leading to

timelier, less error-prone and less manually intensive processes. Technology-driven middle-office

offerings from third-party service providers have also matured.

The overall pace of investment in technology is higher compared to investments in people and

process (Figure 7). More than nine out of 10 (91%) survey respondents are expecting to spend

more on middle-office technology over the next 12 to 18 months. Alternative managers are more

likely to spend on re-engineering processes, often with an emphasis on automation. Less than half

of the firms in the survey say they plan to spend more on human resources over the short term.

In fact, more than one in five predicts cuts to middle-office personnel costs, hinting at increased

outsourcing activity.





Hedge fund manager

49%

17%

10%

9%

4%1%

10%



manager

Wealth manager


37%

32%

31%

FIGURE 7 Planned Increases to Middle-office Spending


Data managementFor any investment management firm, enterprise data is a strategic asset. Access and control are

critically important. With the availability of quality data, it allows managers to make smarter tactical

and strategic decisions, and enables the middle and back offices to better control risks and costs.

However, it's often commented that asset managers are lagging behind other industry sectors in

leveraging big data and analytics. According to a 2014 survey of broker-dealers, asset managers

and hedge funds conducted by Thomson Reuters, 41% of respondents lacked a big data solution.8

Since data management is at the core of an asset manager’s investment operations, firms need a

solid data management strategy that can not only support trading, but also improve compliance,

support business development, and drive down operational costs.

Smart data can also deliver a competitive edge by empowering asset managers to respond quickly

to new investment opportunities. In addition, data helps managers monitor counterparties, provide

regular and accurate reports to regulators and clients, and derive critical insights into investor

behavior. A robust data management framework can enable asset managers to pull the right

information quickly, easily and cheaply from the mammoth store of enterprisewide data, and use it

for strategic decision-making.

“Regulatory challenges are causing us to look at providers that are experts at Form PF and regulatory data gathering.”

— Head of Securities Operations, U.S. $319 billion asset manager





Hedge fund manager

49%

17%

10%

9%

4%1%

10%



manager

Wealth manager


37%

32%

31%

Diversified asset managers

PeopleProcessTechnology

HF and/or PE managers

80%

100%

80%92%

83%

68%

% of firms


As processing power continues to increase and machine learning becomes a reality, the very

nature of data management will change. Maintenance will be replaced with creativity, and data

fluency will become one of the most important skill sets available to managers. Whether they

source these skills internally or externally, asset managers that treat data management as an

opportunity, rather than a hurdle, are likely to be rewarded with much more productive and

efficient middle offices benefiting the entire organization.

The Future of the Middle Office Areas of near-term focusMiddle-office operations continue to become significantly

more complex and important due to heightened demands from

regulators and investors for increased transparency, accurate

data, better risk management, lower expenses, and due

diligence. More asset management firms are also starting to

recognize the strategic value of middle-office functions and their

ability to positively influence investment results and business

competitiveness. As a result, these asset managers are looking at

ways to enhance their current middle-office capabilities.

“Regulatory compliance” was most often cited by survey participants as an area of focus over

the coming 12 to 18 months (Figure 8). It was not, however, most often chosen as the “most

important” area of focus. That honor goes to “IT innovations” aimed at supporting products across

geographies and currencies. “Scalability” was seen as the “most important” focus area by the next

biggest group of firms, followed by “data management” initiatives.

Due to their diverse business models, diversified asset managers and hedge funds have different

priorities. Hedge fund managers focus more on ensuring regulatory compliance, not surprising

when one considers that compliance is a relatively young discipline in a sector that historically

enjoyed relatively light regulation. Diversified asset managers, on the other hand, are keener to

improve their IT systems, data management and scalability of their business operations.

FIGURE 8 Key Focus Area for the Next 12 to 18 Months


Top Focus Area

20%

Top 5 Focus Area

33%

59% 28%

57%

25%

23%

71%

59%

59%

75%

39%

8%

16%

61%

14%

13%

13%

10%

14%

Re

gula

tory

com

plia

nce

T

ight g

overn

ance

procedures

Relationships with counterparties Innovative IT & operational processes Scalability Data m

gmt/data governance

Overall cost saving Disaster recovery/redundancy Keeping up with client demands

E�cie

nt risk

mgmt

% of firms

80%

100%

60%

40%

0%


Key drivers for middle-office investmentsThe emphasis on scalability and multiple geographies makes perfect sense when considered in

light of the factors driving middle-office costs. More than half of the firms surveyed stated that new

products were likely to be the single biggest driver of new investments into their middle-office

functions over the coming 12 to 18 months. Evolving investor needs are driving fund managers

to introduce new investment vehicles and strategies to differentiate their offerings. These new

investment products are often complex and global in nature, therefore, contributing to the growing

need for middle-office excellence and investment in technology.

In addition, regulatory reforms play a vital role in how managers view their business operations.

Regulatory compliance is putting significant pressure on asset management firms to improve

their processes, governance, risk management practices and IT systems. Similarly, competitive

pressures on asset management firms are driving asset managers to enter into new and more

complex asset classes and geographies. When an asset manager introduces a new product,

new vehicle strategy or enters a new geography, its investment systems may not be flexible and

scalable enough to support the new business requirements. To be successful, firms must scale

up their IT systems to be more robust to support these growth objectives.

FIGURE 9 Key Drivers for Increasing Middle-office Investments


“We just hired a chief data officer to help us get to a single front engine data source that staff can access.”

— Senior Vice President, U.S. $97 billion asset manager





Hedge fund manager

49%

17%

10%

9%

4%1%

10%



manager

Wealth manager


37%

32%

31%

New investment products/instrumentsRegulatory complianceBusiness Development

Client servicesEnhance risk mgmt

0%10%20%30%40%50%60%70%80%90%100%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Most Important

Less Important

Somewhat Important

Most Important Less ImportantSomewhat Important

New investment products/instruments

Regulatory compliance

Business DevelopmentClient servicesEnhance risk mgmt

New investment products/instrumentsRegulatory complianceBusiness development

Client servicesEnhance risk mgmt

Planned investments in people, processes and technologyIn the past, middle office was often viewed as a cost center and not a revenue enhancing function.

As a result, the middle office often received less attention from investments in technology and

resources than other areas such as the front office. As the industry has evolved, more asset

managers are recognizing that an efficient middle office can streamline investment operations,

help meet the needs of clients and regulators, and potentially produce competitive advantages

that allow a firm to outperform its peers.

It has already been noted that asset managers are beginning to favor investments in technology

over investments in people, due in part to the growing acceptance of outsourced business models.

Smaller firms in particular are focused on technology investments and process improvement to

enhance their middle-office capabilities at the expense of further investments in human resources.

On average, diversified asset managers expect to increase their middle-office IT investments

by 12% over the next 12 to 18 months (Figure 10). Alternative managers face a different set

of challenges and tend to be less focused on technology. While middle-office IT spending is

set to grow an average of 3% among hedge fund and private equity managers, spending on

people is expected to accelerate by 13% over the near term. Meanwhile, investments in process

improvements will cause spending to surge by 18%.

FIGURE 10 More Spending on People, Processes and Technology


“We don’t have data stored the way we need, so reporting according to a concise regulatory timeline is a challenge.”

— Head of Operations, U.S. $319 billion asset manager





Hedge fund manager

49%

17%

10%

9%

4%1%

10%



manager

Wealth manager


37%

32%

31%

Diversified asset managers HF and/or PE managers

18%

3%

13%

3%

9%

12%

PeopleProcessTechnology

% of firms


The changing outsourcing landscapeThe confluence of many factors is driving the transformation of the middle office.9 Expanding product lineups

include more esoteric asset classes, complex investment strategies and geographic breadth. Fee pressure

is resulting from the continued growth of indexing, greater demands for transparency and more assertive

investors. An evolving regulatory environment is placing additional compliance demands on managers. And

the historic underinvestment in middle-office functions has left personnel shortages that indicate that the

emphasis has generally been on transactions rather than strategic decision support.

The newfound emphasis on operational efficiency should, therefore, come as no surprise. As a result,

outsourcing relationships have expanded beyond the back office and are becoming thoroughly ensconced

in many middle offices as well.

When asked which middle-office functions organizations might consider outsourcing over the next 12 to

18 months, 30% of diversified asset managers and 20% of PE and/or HF managers said that they would be

interested in outsourcing corporate actions and income processing functions (Figure 11). Data management

and governance was deemed far more likely to be outsourced by alternatives managers than diversified

managers, although trade capture, transaction settlement and regulatory reporting were the next three most

selected functions for both types of managers.

With the exception of custodian/prime broker selection and management, and expense management,

every function listed as an option was under consideration to be outsourced by at least some firms. Some

functions are already handled externally to a large degree, but this latest wave of outsourcing will mean that

virtually every aspect of middle-office operations will be outsourced by more than 50% of firms.

One additional factor that may accelerate the outsourcing of the middle office is the scheduled introduction

of T+2 settlements in the U.S. by third quarter 2017. Asset management firms will need to change operating

processes and workflows to accommodate a shortened (two-day) trade cycle, but many asset managers are

unlikely to meet this requirement with existing systems and staffing levels. Asset managers need to ensure

that appropriate modifications are made to post-trade processes and systems to comply with new regulatory

requirements. At least some will choose to outsource more of their middle-office functions, but those that

wait too long may find that that implementation pipelines have already been filled.

“It’s a challenge to simplify our operating models with our existing service providers.”

— Head of Securities Operations, U.S. $74 billion asset manager





Hedge fund manager

49%

17%

10%

9%

4%1%

10%



manager

Wealth manager


37%

32%

31%

FIGURE 11 Middle-office Functions Considered for Outsourcing in the Next 12 to 18 Months




Transaction settlement


Mgmt reporting

Pre and post-trade guideline compliance

Reconciliation

Risk reporting/attribution

Client billing



Collateral mgmt

FX execution


Expense mgmt/reporting



Settlement or reconciliation reporting

Performance mgmt/attribution


DIVERSIFIED ASSET MANAGERS PE AND/OR HF MANAGERS

0%% of firms 20%20% 40%40% 60%60%



Transaction settlement


Mgmt reporting

Pre and post-trade guideline compliance

Reconciliation

Risk reporting/attribution

Client billing



Collateral mgmt

FX execution


Expense mgmt/reporting



Settlement or reconciliation reporting

Performance mgmt/attribution


DIVERSIFIED ASSET MANAGERS PE AND/OR HF MANAGERS

0%% of firms 20%20% 40%40% 60%60%


ConclusionDespite not even sporting a consistent definition, the middle office has emerged as a critically

important operational component of investment firms ranging from traditional asset management

firms to those managing a diversified mix of traditional and alternative strategies. Even as

consensus builds that middle offices are largely untapped sources of value, they are also being

placed under considerable stress from a variety of sources, including heightened regulation,

growing investor demands, stronger competition, and rapidly growing complexity and globalization

of products and strategies.

Some firms are choosing to meet these challenges with additional headcount and tactical

upgrades to their processes and procedures. This approach may be quicker and less complex, but

the more strategically minded organizations may prefer to view this situation as an unparalleled

opportunity that could allow them to unlock valuable insights from their data, helping them acquire

new investors more efficiently, retain existing clients more effectively, and boost investment

performance along the way.

As a way to mitigate the higher costs and longer time frame of this latter approach, a growing

number of firms are turning to one or more outsourcing partners. This approach has the added

benefit of allowing firms to derive the maximum potential benefits while allowing employees to

remain focused on core activities. Whether done in-house or externally, middle-office functions

should all be working in concert to produce the desired results. Even if they can’t agree exactly on

what constitutes the middle office, most firms can probably agree that the following are important

objectives for any well-run middle office:

›› Simple, easy-to-use interface that facilitates interactions with all types of data

›› Strong reporting capabilities with the ability to customize quickly and economically

›› Fast response time unaffected by volume, both in terms of system performance and staff

›› Experience, insight and solutions for regulatory challenges and inquiries

›› Effective management of large-scale data, including data security, data mining and

disaster recovery

›› Predictive analytics that help anticipate clients’ needs, streamline the sales process and assist

in investment processes

›› Timely, comprehensive view of risk profile by product, firm and client

Asset managers who underinvest in their middle office or adopt a wait-and-see approach risk

far more than a regulatory breach. They are likely to miss a rare opportunity to truly differentiate

themselves from their competitors and capitalize on an exciting and rare opportunity to lay the

foundation for sustainable future growth.

“Middle office is where the value is.”— Head of Operations, U.S. $4.5 trillion asset manager





Hedge fund manager

49%

17%

10%

9%

4%1%

10%



manager

Wealth manager


37%

32%

31%

About the researchSEI collaborated with FSO Knowledge

Xchange (FSOkx) to conduct an industry

survey in October and November of

2015. The survey’s objective was to

produce insights that would help asset

management firms better understand

middle-office trends, challenges and

opportunities. The resulting report is

based on information gathered from

70 online responses as well as 10

additional interviews with senior

asset management executives.

›› 49% of survey respondents were

diversified asset managers, 17% were

hedge fund managers and 10% were

mutual fund/ETF managers. The

remainder comprised private equity

managers, wealth managers and firms

managing both private equity and

hedge funds.

›› 35% of the respondents were from

small firms with less than U.S. $5 billion

AUM. 34% were from mid-sized firms

between U.S. $5 billion to U.S. $50

billion AUM, and 31% were from large

firms with more than U.S. $50 billion

AUM.

›› Half of the survey respondents were

operations managers and chief

operating officers. The remaining

respondents were chief financial

officers, chief executive officers, chief

risk officers and portfolio managers.

FIGURE 13 Respondents by Line of Business

FIGURE 14 Respondents by Firm Size (AUM)

FIGURE 15 Respondents by Job Title

Note: “Others” include outsourcing manager, trader, chief compliance officer, analyst, chief accounting officer, director of investment, and managing director of finance.Source: 2016 SEI Middle Office Survey.





Hedge fund manager

49%

17%

10%

9%

4%1%

10%



manager

Wealth manager


37%

32%

31%





Hedge fund manager

49%

17%

10%

9%

4%1%

10%



manager

Wealth manager


37%

32%

31%

Operations manager

Chief operationso�cer

27%

23%11%

5%

3%3%3%

25%

Chief financial o�cer

Portfolio manager

Chief risk o�cer

CEO

Others

Chief technology o�cer/CIO


About SEISEI (NASDAQ:SEIC) is a leading global provider of investment processing, investment management

and investment operations solutions that help corporations, financial institutions, financial advisors

and ultra-high-net-worth families create and manage wealth. As of March 31, 2016, through its

subsidiaries and partnerships in which the company has a significant interest, SEI manages or

administers $684 billion in mutual fund and pooled or separately managed assets, including $265

billion in assets under management and $419 billion in client assets under administration. For more

information, visit seic.com.

About SEI’s Investment Manager Services DivisionInvestment Manager Services supplies investment organizations of all types with advanced

operating infrastructure they must have to evolve and compete in a landscape of escalating

business challenges. SEI’s award-winning global operating platform provides asset managers with

customized and integrated capabilities across a wide range of investment vehicles, strategies and

jurisdictions. Our services enable investment managers to gain scale and efficiency, keep pace

with marketplace demands, and run their businesses more strategically. SEI presently partners with

more than 300 traditional, alternative and sovereign wealth managers representing more than $15

trillion in assets, including 32 of the top 100 managers worldwide. For more information,

visit seic.com/ims

SEI Knowledge PartnershipThe SEI Knowledge Partnership is an ongoing source of action-oriented business intelligence

and guidance for SEI’s investment manager clients. It helps clients understand the issues that will

shape future business conditions, keep abreast of changing best practices and develop more

competitive business strategies. The SEI Knowledge Partnership is a service of the Investment

Manager Services division.

Connect with the SEI Knowledge Partnership

LinkedIn: SEI Investment Manager Services

Twitter: @SEI_KP

About FSO Knowledge Xchange and TurtleBay Advisory ServicesFSO Knowledge Xchange (FSOkx) is a TurtleBay Advisory Services (TBAS) company that provides

industry analysis and marketing solutions serving the global banking, insurance, and capital

markets industry. FSOkx provides a collaborative platform for the industry experts to come

together and share knowledge and best practices through various forums on topical themes.

TBAS is a management consulting firm that has a team of subject matter experts with deep

operations and technology, transformation, and marketing experience. TBAS supports its client’s

business and technology transformation challenges by leveraging their industry expertise,

innovative technology tools, proven methodologies and research capabilities to deliver

sustainable operations/IT process change, optimal operational risk control, transparency and

regulatory compliance.





Hedge fund manager

49%

17%

10%

9%

4%1%

10%



manager

Wealth manager


37%

32%

31%

Corporate Headquarters — United States

1 Freedom Valley DriveP.O. Box 1100

Oaks, PA 19456+1 610 676 1270

[email protected]/ims

United Kingdom1st Floor

Alphabeta14-18 Finsbury Square

London EC2A 1BR+44 (0)20 3810 7569

IrelandStyne House

Upper Hatch StreetDublin 2

Ireland+353 1 638 2400

The Investment Manager Services division is an internal business unit of SEI Investments Company. Information provided by SEI Global Services, Inc.

This information is provided for educational purposes only and is not intended to provide legal or investment advice. SEI does not claim responsibility for the accuracy or reliability of the data provided.

©2016 SEI 160870 (05/16)

Sources1 Harvard Business Review, “Leading for Value,” April 2003.

2 Diversified asset managers and managers of hedge funds and/or private equity funds (i.e., alternative managers) comprise the largest groups of survey respondents, representing 49% and 26% respectively.

3 McKinsey Company, “The Trillion-Dollar Convergence: Capturing the Next Wave of Growth in Alternative Investments,” August 2014.

4 WallStreet & Technology, “Rethinking the Asset Management Middle Office,” July 2, 2014.

5 Wealthmanagement.com, “How Asset Managers Are Incorporating Big Data,” August 12, 2015.

6 MAPR Blog, “Top 10 Big Data Trends in 2016 for Financial Services,” December 28, 2015.

7 Thomson Reuters, “6th Annual Cost of Compliance Survey.” May 13, 2015.

8 Thomson Reuters, “Big Data in Capital Markets: At the Start of the Journey” white paper, June 2014.

9 PwC, “Making the middle office top of mind,” February 2014.

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