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Outsourcing Evolves to Help Front Office Investment Decisions

Northern Trust Whole Office sees the next evolution of outsourcing as helping the front office make better investment decisions as it continues to help make the middle and back offices more efficient.

 Marc Mallett, Northern Trust

Marc Mallett, global head of Whole Office Strategy at Northern Trust, told Markets Media: “We see the front office as being the next evolution and we are certainly seeing that with our outsourced trading business.”

The firm aims to provide capabilities such as Essentia Analytics to provide solutions to portfolio managers, research analysts and chief investment officers. Essentia Analytics’ behavioral analytic solutions and consulting services were added to Northern Trust Whole Office, a strategy that facilitates client access to new technologies, services and solutions across the investment lifecycle, in September 2021.

Mallett continued that Northern Trust has been a world-class manager of data for decades as an asset servicing firm and has spent the last couple of years looking at ways to better help clients take advantage of their data.

“There is a lot of talk in the industry about alternative data sources and looking for an information edge,” he added. “The one data source that’s guaranteed to provide clients with an edge is their own data. That is the only data they have that nobody else has.”

For example, Essentia Analytics combines data analytics, client-driven “nudges” and specialist behavioral coaching to provide feedback on active investment decisions. It helps investment teams understand where and why they succeed and where their blind spots are , and delivers the framework to enable a cycle of continuous improvement.

Gary Paulin, head of global strategic solutions at Northern Trust, agreed that clients’ own unique data is the most valuable – such as the data that sits in spreadsheets or inside the head of a fund manager.

“How can you capture that data, put it into a system so that it can be seen and used by everyone and is more multi-dimensional ?” added Paulin. “We are trying to help fill the gap by providing solutions on a variable cost to enable firms to extract this rich value from their data.”

Northern Trust Whole Office also aims to help clients improve or become aware of behavioral biases by identifying patterns in data that has led to good or bad decisions in the past, and Paulin said this emotional aspect is very powerful. ‘The zeitgeist is all about evidence-based decision making,” he added.

In addition to continued fee and margin pressure, asset managers face the new challenges of volatility and uncertainty and therefore need to have the flexibility to manage their cost base.

Paulin said: “They are coming to me asking how they can become more capital light without compromising their value proposition which is making a number of firms question what it is they produce.”

He believes asset managers are decision-making machines, which ultimately produces alpha. Therefore, they will be moving towards a capital light model, where they focus on their intellectual property – the production of decisions – and outsource other services to large-scale providers. This provides margin resiliency in the face of asset volatility and change, and infinite scale through the use of cloud computing.

 Gary Paulin, Northern Trust

In addition, the increase in interest rates has made people question asset allocation and performance. Paulin said : “This is why I think positioning our alpha solutions makes a lot of sense.”

In a capital light model, asset managers are increasingly turning to outsourced trading and Mallett said Northern Trust’s capability, Integrated Trading Solutions, continues to experience strong demand across regions.

Mallett added: “The triple threat is better, faster and cheaper. There are very few things that hit all three of these and outsourced trading certainly does.”

Middle office

Northern Trust’s Whole Office strategy covers the whole investment lifecycle from the front to middle and back office. In November 2022 Northern Trust said it was using fintech Saphyre to automate the account opening process for investment manager clients of Northern Trust’s Investment Operations Outsourcing (IOO) business. Next year Northern Trust will schedule a planned rollout to all its Investment Operations clients.

Saphyre’s platform allows data to be entered once for simultaneous access by custodians, investment managers, asset owners and middle office teams supporting these accounts. The centralized data repository for all counterparties can reduce the potential for errors while shortening the lead time required to transition, open, and maintain accounts.

Mallett said Northern Trust started working with Saphyre about 18 to 24 months ago as the account opening process for asset managers is manual and labour intensive in order to integrate with custodians and other counterparties.

 Gabino Roche, Saphyre

Gabino Roche, chief executive and founder at Saphyre, compared the fintech to a Windows operating system for banks which allows them to launch multiple applications at the same time because they share the same common data sets.

For example, every bank has its own customer onboarding team, tax team, know-your-customer team, legal and compliance team.They all use the same data and documents and copy and paste them across different systems, which is then multiplied by the same processes at every investment manager and custodian.

Roche told Markets Media: “We have 107 patents and create memory around the data and documents so you don’t have to repeat this multiple times. At the moment it is being used in the context of pre-trade but the exciting part is proving this in post-trade.”

For example, Saphyre the relationship between a pension fund, a custodian account and the investment managers. If the pension fund updates a tax form, all the necessary counterparties receive the updated documents. Or if an asset manager opens a new custodian account, Saphyre  automatically and proactively creates the necessary FX accounts with brokers and can map them to electronic trading platforms.

“This is a revolutionary development for the industry,” said Roche. “Northern Trust is the first to seize this unprecedented opportunity in the middle-office function, with far reaching, positive impacts for post-trade. Investment managers using Saphyre’s solutions reduce emails and manual data entry by more than 75%, thanks to our patented technology that allows for greater accuracy.”

Partnerships

Mallett explained that the concept of Northern Trust’s Whole Office Strategy is to identify potential partners who can add capabilities that can differentiate the firm’s services and solve clients’ problems, such as with Saphyre.

“Part of my role is to spend time trying to identify fintechs that have a unique solution and bring us advanced capabilities,” he added. “In return we can bring our client franchise, network, distribution and act as anchor client to help them establish credibility.”

Northern Trust Whole office has orchestrated an ecosystem that has really strong coverage but one area that is still nascent is ESG data for private companies according to Mallett. “It’s a gap from an industry perspective and something that we are focused on going into next year,” he said.

Mallett continued that Northern Trust has had an exceptional year in its investment Data Science business in its first 12 months since launch. The business has been formed through partnerships with Equity Data Science, Essentia Analytics and Two Sigma.

“We have become relevant to investment professionals,” he added. “We have more work to do for sure but we have proven to ourselves that we have a right to play in that space and delivered value to our clients, who were just prospects a year ago.”