Reasons for Outsourcing Investment Management Functions

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Alternative Investment Funds (AIF), UCITS, Collective Investment Schemes (CIS), Asset Managers, Registered Investment Advisors, Private Wealth Managers, Investment Firms, Trust Companies and Family Offices all have their own core-competencies centred around their clients and main markets that need to be performed in-house, which are the basis of the firm’s sustainable competitive advantage. However, good strategy is also knowing what not to do.

For the small to medium sized fund, or the new fund just starting up, it is important from a strategic point of view which investment management services to develop and which non-strategic functions to outsource for cost and efficiency reasons. It is important that the fund’s cost base is proportional to the size, complexity and nature of the fund as well as having a variable cost structure that is scalable as the fund grows and expands into new markets, asset classes and attracts more investors.

For the Asset or Private Wealth Manager who wants to manage a collective investment scheme on behalf of clients it may be a matter of concentrating on what they do best – asset selection, managing clients and gathering assets under management that are creating value and growing revenue – while outsourcing such functions as risk management, reporting and regulatory compliance, which, although important, add to a fund’s fixed costs.

Investment Firms may possess the necessary investment management skills such as portfolio and risk management in-house, but for regulatory reasons be prevented from managing collective investment schemes. It may be more cost effective for these investment firms to appoint an external investment manager (AIFM) to run those funds rather than to set-up a separate legal entity as an UCITS or AIF manager. The AIFM can then delegate portfolio or risk management back to the licensed, regulated or otherwise authorized investment firm.

Trust Companies and Family Offices may look outside for specialist discretionary portfolio management and investment advisory services to offer more breadth in terms of the markets, asset classes and investment styles that they can bring to their clients. Outsourcing that discretionary portfolio management and investment advice may not only be a more cost effective solution, but necessary if the firm lacks those skills and knowledge locally.

Smaller offices may also need access to advanced technology, software and IT-specialists that are expensive to buy or develop in-house, but that are available from a third party service provider as part of the package of investment management services that they can offer. In turn, automation of routine tasks can help prevent human errors and make fund administration and accounting more secure. This helps reduce the need to recruit, train and manage staff for non-strategic functions. It also helps minimize human resource issues as well as the risk that key employees leave taking proprietary knowledge or the firm’s clients with them.

Outsourcing can also enable firms to better manage their business expenses such as disaster recovery, document management and physical infrastructure costs. More importantly, by deciding which tasks are strategically important, and which tasks are not part of the firm’s core-competencies, key employees can then concentrate on increasing revenue by finding new clients, servicing the client’s needs better, achieving better client retention, and increasing the share of the client’s asset under management. While investment and fund managers can focus on performance.

KMG Capital Markets (KMG) can help new or existing UCITS/AIFs, as well as investment firms covered by MiFID, with their risk management, reporting and compliance functions. The UCITS/AIF can appoint KMG as its external UCITS/AIFM. A self-managed AIF can outsource their risk management to KMG. An investment firm wanting to manage collective investments can appoint KMG as its AIFM. Or an EU or non-EU asset manager can establish their own segregated sub-fund on the KMG SICAV SIF platform in Luxembourg. KMG can offer family offices, trust companies and private wealth mangers discretionary portfolio management as well as investment advisory services. Registered investment advisors can also market investment products to their clients as an agent of KMG.

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