Fielding the Pitch: Thoughtfully Engaging Service Providers

This article first appeared in the October 16th edition of WealthManagement.com

For asset managers, the amount of choice when it comes to selecting a third-party service provider has become overwhelming.

More than 4,600 financial technology firms were founded between the years of 2008 and 2018, and some estimate that the total number of companies in the space stands above 5,000 today. All in all, almost 80 percent of financial institutions have entered into some sort of partnership with a technology-based service provider. For asset managers, these tech firms are offering support across the board -- investment accounting, compliance monitoring, performance measurement, operations, big data, and much more.

When selecting a partner, asset managers are cautioned to be rigorous in their due diligence and not be swayed by flashy sales pitches that disguise gaps in a provider’s capabilities. For instance, fintech companies founded and operated by technologists tend to have a lot of visual flash, but may require extensive custom development to address an investment manager’s specific investment process or client construct. Service outsourcers that started out as such and amassed technologies in support of their service offering may suffer the inefficiency effects of disintegrated systems. Fund administrators in this space may have deep knowledge of the investment process and adequate technology, but their motivation to win fund admin/custody/transfer agency business can distract from their service delivery.

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As the landscape of technology enabled service providers has expanded, asset managers need to ensure that the service providers they consider are well-matched to the manager’s motivations, requirements, and culture. The goal is to become more efficient operationally and not replace in-house functions with an even larger vendor oversight burden.

As a former consultant to asset managers seeking new solutions, I’ve experienced many technology and service providers’ pitches and have sat side-by-side with asset managers transitioning to new providers. The experience was eye-opening, and I share some of the revelations here:

When you hear “The system automatically ...” ask, “how exactly does that work?” Provide the vendor with real, day-in-life examples of your most challenging issues for the vendor to demonstrate their understanding and competence. Automation can serve as a powerful, time-saving addition to any technology service offering. But when executed improperly or without adequate oversight, automation can introduce costly errors and setbacks that cut into margins and irritate clients.

When you hear “We’re very experienced with ...” ask for references. Actions speak louder than words. Hearing firsthand from companies with needs similar to your own that have worked with a particular technology firm can provide valuable insights into the service provider’s functionality and flexibility. And probe the experience level of the vendor’s team. Are team members also former practitioners in your specific space? Unless the vendor’s team has quite literally walked in your shoes and risen to the challenges of your securities, flows, processes, and trade partners, they may be ill equipped to serve you; you don’t want to be on the ‘giving’ end of the training task.

When you hear “We’re an independent affiliate of ...” dig deeper into the DNA of the parent firm. Examine whether their core business aligns with your own or if it’s just tangentially related. Ask the vendor if the core management team of the affiliate still remains with the firm after their acquisition. While being affiliated with a larger corporation isn’t necessarily a red flag, it is worth looking into this relationship to ensure there is no conflict of interest that could influence the level of service provided or leave you dodging people continuously trying to upsell in areas that aren’t critical to your firm.

When you hear “We have unlimited capacity for …” say “thanks, anyway.” Everything has its limits. And when service providers are boasting about having unlimited capacity, what they usually mean is that they are willing to say whatever it takes to win you as a customer.

Technology service providers can arm asset managers with powerful tools that expand margins, raise productivity, and lift client satisfaction. However, finding a provider that can deliver all of this typically doesn’t happen quickly. Due diligence is required, and decision makers are strongly encouraged to speak out when red flags fly, in order to select the right partner to bolster their firm’s success.