The 4 stages of the investment management industry

The investment management industry is constantly evolving to adapt to the changing needs of investors, new regulation and technological innovation.

4 Stages of the Investment Management IndustryAt the recent “NICSA in the Middle” Conference, focusing on middle office issues, Dick Taggart, Senior Vice President, Investment Management, at State Street reviewed the evolution of the structure of the industry, which he describes as having 4 stages:

Stage 1: Vertically Integrated Asset Managers In the beginning, asset managers were self-contained entities, handling everything from making investment decisions to portfolio recordkeeping to the distribution of products to investors.

Stage 2: Emergence of Service Providers As the world became more complex – particularly from a regulatory perspective – investment managers began to outsource technical functions third parties. Through specialized expertise and economies of scale, these outside service providers helped asset managers lower costs and increase compliance.

However, the outsourcing was limited to functions like fund accounting – which were 2 steps removed from the investment process.

Stage 3: Emergence of Service Providers for Middle Office Services More recently, asset managers have been more willing to use service providers for functions that are part of the middle office – such as reconciliations, maintenance of reference data, collateral management and client reporting. In the past, these tasks were seen as difficult to outsource, since they were so tightly interwoven with the portfolio management process.

But here, too, increased regulation has made specialized expertise essential for reducing compliance risk, while encouraging the standardization that makes economies of scale possible.

Stage 4: Investment Advice Specialization And what’s to stop the outsourcing trend from continuing? There’s every reason to believe that investment managers will continue to focus in on their core expertise – investment advice – and outsource all other functions, including trade execution and distribution.

Within this increasingly specialized industry, here are a few other trends to watch for:

  • Institutional investors managing more of their own assets
  • Asset managers offering more investment advice on an unbundled basis
  • More standardization – of things like trade messages, data elements, portfolio recordkeeping
  • Outsourcing of data management

What do you see as the next steps in the evolution of the investment industry?



NICSA: 8400 Westpark Drive, 2nd Floor McLean, VA 22102 • Tel: 508.485.1500 • Fax: 508.485.1560