Clare Vincent-Silk, a consultant at Davies, has watched outsourced dealing mature over two decades. Following high-profile client wins by some of the providers, she says it is now becoming mainstream.
After almost 20 years of experience advising firms on outsourced dealing, I have had the privilege of seeing this service evolve from its infancy into an established offering.
Uptake was initially slow, as asset managers and the hedge fund community were initially cautious to put their confidence in a service that had a limited number of established and familiar service providers, lacked visible flagship clients, and could potentially disrupt their broker relationships.
However, adoption levels are finally picking up among large and small firms alike, with some of the biggest names in financial services getting in on the act.
What, then, has brought this change about? And what are the challenges that persist?
Good client wins
I have identified five reasons for the increasing adoption levels:
Cost pressures: Firms are battling to reduce their operating model costs as margins are squeezed, forcing them to search for greater efficiencies. Outsourced dealing enables them to remove the large fixed costs of an internal dealing team and the associated costs of technology, data, and elements of compliance and oversight.
Maturing marketplace: The securities servicing firms such as Northern Trust and State Street have established themselves in this space. These recognised and trusted brands have really helped to build confidence in the viability of this service. They have invested heavily in marketing, helping to educate and publicise their services.
Improved services: Many asset managers invest across a wide range of asset classes. Greater benefits are realised if they can outsource all execution. Providers have increased their capabilities to support a broader range of asset classes, increasing the appeal. Furthermore, these firms bring advanced dealing technology and access to a broader range of markets, which many in-house teams cannot match. They can also operate 24 hours a day, serving global regions no matter the time zone. With a greater geographical presence and larger dealing teams, their ability to source better liquidity at scale should enable them to achieve better client outcomes. This is not an all-or-nothing service; asset managers can pick and choose the execution they wish to outsource, giving great flexibility.
I have yet to speak to a firm at “C” level that has implemented outsourced dealing and hasn’t been happy with the decision made.
Pandemic-driven change: Fund managers have close working relationships with the dealing team, particularly in fixed income. Having the dealers physically located next to the fund managers is valued to facilitate conversations on e.g. liquidity and market activity; the dealers also provide a four-eyes check on orders generated, helping to avoid errors. The pandemic demonstrated that remote working is effective and that dealers do not need to sit in close proximity as confidence grows in the use of digital communication such as Teams.
Client examples: Firms are now publicising their outsourced dealing relationships. With recognised names such as Waverton and Goldman Sachs AM announcing agreements with Northern Trust and BNY, respectively, others can be more confident that they are not the first, or outliers in the use of such services.
What are the challenges faced?
Despite its growing popularity, the service models offered are not standardised; there is a fundamental split between the Reception and Transmission of Orders model (RTO, where orders are passed to the broker for execution directly with the asset manager) and the agency broker model (where the outsourced dealer is a counterparty to the trades).
Adoption tends to vary by geography and on the firm’s specific requirements, such as cost saving, appetite for risk, operating model simplification, and broker relationships. This can be confusing for potential buyers, especially with a large number of internal stakeholders with different perspectives.
Broker relationships remain a concern, particularly regarding their control over IPO allocations and access to market intelligence. Firms worry that relying on outsourced dealers might weaken their direct ties with the broker community, potentially affecting the quality and exclusivity of information and opportunities they receive.
However, with the increased adoption of outsourced dealing services, it is assumed that brokers are becoming more accepting of this model. Whilst this brings a squeeze on commissions, it helps to consolidate order flow.
Taking it to the next level
As firms recognise the benefits and the service provider market matures, outsourced dealing is now set to become mainstream.
To bring outsourced dealing to the next level, providers now need to mature their capabilities to support further asset classes such as OTCs. Wealth managers could also be better serviced.
I have yet to speak to a firm at “C” level that has implemented outsourced dealing and hasn’t been happy with the decision made. After years on the sidelines, outsourced dealing is finally coming of age.
*Clare Vincent-Silk is asset & wealth management partner for consulting at Davies.
