Back office groups enter boom times…

Despite a brief hiatus, demand for back office services from financial services organisations looks set to boom. Samantha Walker discovers why.

Both Perpetual Funds Services and BT Portfolio Services will go into hibernation as this year draws to a close. And, they won't be courting new business until early next year.

They have the Y2K bug, as well as next year being a leap year, to thank for this.

You could also probably throw in uncertainties surrounding the implications of the Managed Investment Act and the effect GST will have on the market for good measure.

But they're not losing sleep over this at all.

On the contrary, those offering back office services are predicting huge growth in their businesses over the next couple of years.

Ron Scott, head of BT Portfolio Services, says he sees no reason why the group's current annual growth in business of more than 20 per cent will abate.

Likewise, Perpetual Fund Services group executive Graham Putt says his organisation will be able to absorb the flat period without any great pain.

"No prudent manager would change on December 31 or anywhere near it," Putt admits, "but this is going to be a big booming industry, especially for those supporting investment management companies."

Carole Drew, head of AMP Investment Administration, concurs. "I would expect new demand for back office services to slow down with Y2K, but there will be an overall tremendous growth in this area. I'd say it'll triple over the next three years for us," she says.

Back office service providers' duties range from accounting and reporting to custody, daily price and position evaluations and both wholesale and retail unit registry. Their customers include investment managers, superannuation funds and consulting groups.

The demand for these services is high.

It is understood that Perpetual Funds Services is about to sign up another major funds management group in the near future. It remains, however, tight-lipped about the details.

And, IPAC Securities is set to become BT's largest retail unit registry client next year, when it moves across with over $2 billion in funds under management,

AMP Investment Administration, once part of AMP Asset Management, is also on the lookout for clients in what it sees as a lucrative area.

Drew says BT and Perpetual both built up their experience in offering back office services by looking after their own organisations' funds management arms. This is something she believes AMP can also do.

"We've been providing back office support to AMP Asset Management and superannuation funds and we're seeing that we have the experience fund managers want," Drew says.

At the moment, AMP also services government institutions, such as Treasury Corp and WorkCover.

BT's clients in this area include consultants Frank Russell Company, superannuation group Connelly Temple, Credit Suisse and Vanguard.

Last April the group scored a coup, signing on the then Deutsche Morgan Grenfell group. Deutsche, which at the time had funds under management of $1.6 billion,

was the first of the major players in funds management to outsource its back office.

Within weeks of this announcement, Perpetual brought Rothschild Australia Asset Management on board. As part of the arrangement, Perpetual entered into an alliance with investment software group DST International.

DST International's director of sales Jonathan Hicks says Rothschild was utilising DST's back office software, which includes the AWD (automated work distributor) system, and wanted to remain with DST systems when it outsourced its back office to Perpetual.

Hicks says DST offers software systems to about 60 Australian clients from insurance companies, to trustees and fund managers, who are all retaining their back office processing. However, DST's arrangement with Perpetual gives the group exclusive use of its unit registry software, UTR.

Putt acknowledges that DST provides "enormous technical experience exclusively to Perpetual" which helps Perpetual service a growing list of clients, which includes Ausbil, Investors Mutual, Contango Asset Management and Perpetual Investments.

One of the reasons put forward for the increasing demand for back office services is that it has long been the bane of many funds management businesses. By outsourcing their back offices, fund managers free up time to concentrate on what they do best.

Putt says today, more than ever, funds management companies need to concentrate on their core skills in order to survive in an overcrowded market.

He expects consolidation to remain the order of the day in the financial services industry and attributes much of the demand for back office services to this trend, as well as fund managers' limited resources in the face of heightened competition.

"By outsourcing non-core functions like back office, investment managers don't have to get caught up in the mundane," he says.

BT's Scott agrees that there is an increasing trend for fund managers to stick to what they do best, whether it be product development, administration or distribution.

"There has definitely been a move towards specialisation by fund managers.

Today they are asking themselves things like "Am I a manufacturer?", "Am I a distributor?"," he says.

Scott says one of the main deterrents for fund managers to perform their back office functions in-house is cost. "I think it would be the absolute exception for new entrants to the market to provide their own back office," he says.

AMP's Drew says the newer, boutique fund managers often find the costs too high.

"It's an expensive environment to operate in and also an incredibly complex one.

In this country, there are five different settlement systems fund managers have to comply with," she says.

Putt sees the demand for retail unit registry as being particularly strong, and says this is "the area which causes the most grief" to fund managers.

Both Perpetual and BT provide a retail unit registry outsourcing service, but Drew says that AMP hopes to join them because of client demand.

Trends in the US suggest that back office service providers have a ready market available to exploit. "Certainly, if you look at the example in the US, outsourcing is far more prevalent, especially in registry. I can't see why Australia won't follow this trend," Scott says.