Breaking down barriers: delivering the benefits of front and middle office integration to asset managers

The benefits to asset managers of open, yet integrated front- to middle- and back-office connectivity that can deliver consistency and harmonisation between the different functional layers are significant.

Seamless front- to back-office operating environments have long been a focus for the investment management industry. The efficiencies that an integrated end-to-end transaction chain brings can help reduce costs and improve servicing capabilities for clients, producing major benefits for asset managers in an era of margin compression and search for yield.

Many would agree on the destination. The question is how to get there?

Blurring of the lines between front and middle offices

To meet the industry’s demands, and sharpen their own competitive edge, many front-office service providers are expanding their propositions. Some are integrating more middle- and back-office functionalities into their offerings through system development or acquisition. Others are partnering with existing service providers in those spaces to create more end-to-end capabilities.

Asset managers are equally keen to adopt a more integrated and efficient model – especially where they are wrestling with IT obsolescence in their legacy infrastructures, or must overhaul their environments following M&A activity.

Leveraging a front-office software provider’s expanded functionality proposal may make sense if it can enhance the manager’s overall operating model, and deliver some of the efficiencies firms are targeting. In the middle and back office, outsourcing provides the most effective solution for many asset managers, giving them operating expertise, accuracy, speed, service and scalability at a price they struggle to beat in-house.

The challenge is to tie these front- and middle/back-office strategies together in the most efficient and versatile way … one that meets firms’ current needs and positions them for the future.

Diverse visions of how best to integrate the front and middle office

One option for service providers is to create a unified front-to-middle asset servicing platform by buying or exclusively partnering with a front-office technology firm. Integrating in this way potentially allows for a single master file and simplified transaction chain, by reducing the opportunities for data breaks, and the need for multiple reconciliations between different systems and parts of the process.

But there are drawbacks. Each asset manager will have its preferred front-office strategy and providers to fit with its particular investment focus and organisational structure. And those preferences will change over time as solutions become obsolete, markets develop and business models evolve.

Rather than offer a single front-office setup to clients, and limit the options for ongoing adaptation and customisation, the alternative is to give firms choice – with a flexible middle-office service suite that can accommodate asset managers’ front-office preferences, enabling them to leverage the full benefits of their front-office solution, while still delivering the integrated efficiencies and middle-office functionality their business requires.

Front office agnosticism

 At BNP Paribas Securities Services, we have adopted an open architecture approach that allows us to serve, and optimise, asset managers’ differing models.

Using our extensive knowledge of the front-office software market, we have developed proven connectivity between our middle-office platform and the leading system providers. As clients’ operating models evolve, we will also continue to invest in new solutions that best support their changing needs. Through this open architecture environment, therefore, we can deliver the specific range of middle-office capabilities that clients want, while giving them the freedom to choose which of the diverse front-office options best suits their current and future requirements.

An open architecture approach also provides firms with greater future flexibility. With a modular operating model, asset managers are able to switch software providers, and add in or remove middle- and back-office service components as circumstances dictate. Transitioning from a legacy environment to a future (and continually evolving) target operating model becomes a more small-scale, manageable process, and as such is always easier to achieve.

Benefits of an open, yet integrated front- to middle-office model

The benefits to asset managers of open, yet integrated front- to middle- and back-office connectivity that can deliver consistency and harmonisation between the different functional layers are significant. Key among them are:

1. Complementary best-in-class capabilities

Asset managers can select the most appropriate front-office model for their investment style and the asset classes they manage, ensuring they won’t need to compromise their strategy.

Front-office excellence can then be tightly coupled with a premier middle- and back-office outsourcing provider with the functionality range and expertise to match the asset manager’s needs, delivering valuable processing efficiency.

2. Front-to-back data harmonisation

Data scope and quality, and the ability to query those information flows, has become fundamental to asset managers’ investment and customer servicing success. With the emphasis increasingly on accessibility, accuracy and integrity, data needs to be harmonised and homogenous, and its quality assured, across the value chain.

Technology advances that enable better management and integration of complex structured and unstructured data, plus maturing industry standards for formalising data governance, are key to producing tangible business value. Armed with high-quality data, asset managers will then be better equipped to identify revenue opportunities, meet investor demands for enhanced transparency, improve governance and risk management, and report to regulators in a more efficient manner.

Tight connectivity between the front-office system and middle-office platform will be crucial in ensuring data can be enriched and delivered where it is needed, while keeping it consistent across the enterprise. Leveraging API technologies and an end-to-end data management solution will play a key role in making this possible.

3. Golden source options

Traditionally, identifying and maintaining a single golden source was the only way to maintain data consistency. With a tightly-integrated front and middle office, backed by tools to monitor data flows, different golden sources become possible, depending on availability of data, the expertise needed for each domain and the best position in the ecosystem to deliver that data.

4. Operating model flexibility and enhanced risk management

A modular but integrated model gives asset managers valuable agility to adapt to change and opportunity, while reducing operational risk at different stages in the client relationship.

Implementing a full, front-to-back infrastructure is a complex and lengthy process, involving significant execution risk. Breaking the processing chain down into smaller components gives more flexibility, as well as reducing project complexity, speeding up implementation times for new capabilities and limiting potential failure points. The result is smoother and faster transitions as an asset manager’s needs evolve.

An experienced service provider with a sophisticated middle-office platform can manage the implementation process to ensure smooth roll out of the system interfaces and static data, along with connectivity to market data sources and with the client’s broker, custodian and administrator ecosystem to guard against data breaks.

Once the relationship is up and running, the emphasis is on monitoring each client’s business activity, to prevent and correct failures or process bottlenecks, optimise information flows and maximise efficiencies. At BNP Paribas Securities Services, we are leveraging AI and predictive analysis internally to better monitor business activity. Our clients can also use our analysis tool to monitor their own risks and determine the appropriate transaction management-related actions.

5. Future proofing

Asset managers’ businesses inevitably evolve over time, and their infrastructure will need to reflect and support that. Given the acceleration of digital transformation, it is critical that front- and middle-office providers continue to keep pace with the rapid developments taking place in the industry.

In our view, a modular solution approach – one that encompasses the full range of front-, middle- and back-office services that asset managers employ – will give firms the flexibility to change parts of their service network to reflect their developing business requirements, while ensuring they use providers that are continuously investing in new technologies.

Keeping options open

While responsibilities remain segregated, the technological frontiers between the front and middle office are progressively blurring. As front-office service demands and the supporting technologies evolve, middle-office capabilities must respond to ensure closer and more seamless integration between the two areas, to provide asset managers with better functionality, homogenised data flows and more efficient operating processes.

Two strategies for meeting asset management firms’ needs are coming to the fore: a single, amalgamated solution set; or an open architecture approach that gives clients modular, best-of-breed capabilities at each stage of the transaction chain, along with seamless integration, choice and future flexibility.

Having the capacity to integrate with clients’ different operating models, whatever front-office solution they choose, is, we believe, the most efficient and responsive way to meet the industry’s evolving requirements, support institutional investors and help firms achieve their strategic ambitions.