Bill Hortz's picture

 "An advisory firm should consider, in this extremely competitive and changing environment, strategically focusing their efforts on where they can build more differentiation and create greater impact with clients." Mike Ciotola, Ultimus Fund Solutions

[The Institute for Innovation Development recently talked with Michael Ciotola, Head of Middle Office Services, for Ultimus Fund Solutions - one of the largest, independent mutual fund services and middle-office technology providers for RIAs in the country. We asked them to share with us their perspective on technology trends affecting money managers and the financial services industry. Specifically, how outsourcing non-core company functions, like an advisory firm’s middle-office, can be a very strategic and competitive decision.]


Hortz: Can you help define and map out for us the “middle office” of an advisor firm? Where exactly does it begin? What are some of the most important functions that reside there?

Ciotola: You can look at middle office services as everything that happens post trade execution. At Ultimus, our middle office services start when we receive trades and make sure they are settled and matched. Then, we do all the reconciliations to make sure the assets get where they were supposed to go, feed the firm’s Order Management System on a daily basis, maintain the advisor’s Daily Investment Book of Record (IBOR), and make sure the corporate actions are being booked appropriately. In addition, we provide client reporting including quarterly statements, daily performance reporting, and client invoicing. We also maintain the firm’s GIPS Composites and conduct attribution and risk reporting, among other services.

So, if the middle office functions are conducted internally by the advisory firm, that may involve the firm buying two or three systems, or buying a couple of systems and using Excel, and then obviously hiring people to do that work. That doesn't really add a whole lot to the value proposition of the firm; it's not core to what the firm does or their strategies. It's just operational work that historically was assumed the advisor had to do. But they now have options, such as a turnkey outsourcing solution.

Hortz: So outsourcing middle office functions is a relatively new option?

Ciotola: Studies from the Big Four accounting firms have reported that we are relatively early in the outsourcing of the middle office for advisory firms, with estimates of only 20-30% utilization rates versus a 70-80% rate in the mutual fund world. Ultimus sees this as a great opportunity to expand our services to our current mutual fund clients and to be one of the first firms to offer this strategic outsourcing option to other advisory firms.

Hortz: What have been the biggest challenges in outsourcing?

Ciotola: The first challenge is awareness and full understanding of the outsourcing option for middle office services, including the long educational process to get people comfortable with it. The second challenge is, once a firm has already built some of these operational functions internally, there's a hesitancy to change what they've done. They've hired people and they've acquired systems. To backtrack from that, creates some nervousness. They also may not want to lay people off, but they should be able to redirect them to higher value client engagement tasks.

Hortz: What are the most important reasons and benefits for outsourcing the middle office?

Ciotola: First, outsourcing allows firms to mitigate their operational risks by transferring responsibility to a third party for the functions. There's been a precarious situation of taking on a lot of operational risk that many firms don't really think about on a day-to-day basis because their current systems work. They're not really thinking about the downside risks. An advisor should also worry about scale, since most firms have limited resources and staffing to specifically support this area of the firm. By outsourcing they can bypass those risks, get rid of legacy systems, and avoid ongoing technology maintenance costs. Plus, staff will have more time to analyze data rather than just manufacturing or managing it.   

Second, when outsourcing to a partner like us, this allows firms to have a variable cost model vs. a fixed-cost model. An advisor could, for a very modest fee with an outsourcer, launch new products or services and allow the cost to grow as they grow, and as their business grows, versus having to take on the significant fixed cost internally, and then trying to grow enough to cover those fixed costs.

Third, the continuing evolution of regulatory requirements, whether it's around cyber security or certain reporting that they need to do, will require ongoing time, money, and effort to tweak operations and technology. With those types of capital expenditures/investments, you just don't know when those expenditures are going to be needed, and do you want to be responsible for doing that? If you have an outsourced provider, that's under their bailiwick and something that they can spread their costs across their entire client base.

Hortz: At what point of growth of an advisory firm should an advisor consider outsourcing their middle office?

Ciotola: All sizes make sense.  We service startup advisors and larger firms.  For startups, Ultimus offers lower cost options to enter this space than trying to build it internally.  It also makes sense for larger firms looking to save money by eliminating maintenance of legacy systems, avoid key man risk concerns, and deal with cyber security issues. 

Hortz: How practically do you go about transitioning your middle office to an outsourced solution? What are the steps you take and is it an all or nothing decision?

Ciotola: We are definitely open to, as an outsourcer, looking at engagements in an a la carte manner, and allowing firms to have discretion in what pieces they want to outsource. Our a la carte approach can allow firms to, at their own speed, morph into a more fully outsourced model over time.

As for the conversion process, we set up a conversion kick off meeting and then meet regularly in order to keep the advisor up to date on the status.  We develop a specific conversion plan for each client, which is then used as a tracking document and discussed at each meeting. 

Hortz: Can you please give us some brief case study examples that illustrate the range of ways outsourcing your middle-office can support different advisor firms’ needs or goals?

Ciotola: We had an international client that did sub-advisor work for a large advisor and decided to go out on their own.  They were looking at a cost-effective way to get off the ground quickly.  Having to install new systems and hire people was going to take time and cost a lot of money, which led to the need for a turnkey approach.  We were able to get them fully functional within 30 days.

Another client had outsourced to a big bank.  They were paying high fees for outsourcing their middle office services.  They had always outsourced so they felt comfortable having a third party perform these services.  Our fees were significantly lower performing the same tasks. 

These are two different clients that found value in outsourcing middle office services. 

Hortz: Based on your real-world perspective and investment of substantial time, money and effort on advisor technology needs, what is the best advice you can offer to advisors on how best to respond to this environment of accelerating business change they are now operating in?

Ciotola: An advisory firm should consider, in this extremely competitive and changing environment, strategically focusing their efforts on where they can build more differentiation and create greater impact with clients. They should step back and really study their firm, starting from the top and looking down for non-core activities to potentially outsource. The middle office is not really core to the larger strategic goals. If I were an advisor, it's not what I want to be doing. I would want to focus on my portfolios, or I would want to focus on my investors, rather than focusing on ongoing middle office issues. I think as a firm, your internal resources should be more focused on the things that are core to your business, like implementing a digital strategy and customer experience infrastructure.


The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their next-generation growth, differentiation and unique community engagement strategies. The institute was launched with the support and foresight of our founding sponsors - Pershing, Voya Financial, Ultimus Fund Solutions, Fidelity, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines). For more information click here.


Sign Up for Your Free Innovation Newsletter