Asset Management
In the public’s eye, the world of finance, investments and asset management does evoke the term “outsourcing.” Yet asset managers of all denominations manage money. Does money management have any relation to “outsourcing”?
Several differences reveal how money management differs from business process management.
- As for performance measurement, money managers do not get penalized for taking risks, while outsourcing service providers are.
- As for the “statement of work” for money managers, they are instructed to take risks, not to follow a scripted business process. Upon closer examination, even venture capitalists, private equity fund managers and hedge funds follow scripted business processes of the investment strategies set forth in their private placement memoranda..
- As for the compensation structure, money managers can earn a “carried profits interest” plus a base compensation based on the asset size. Money managers get rewards for taking measured risks, and their compensation may be based on the wisdom of their risk-taking. This pricing can lead to unpredictable losses for the client, whose principal at risk could be lost in trading activities.
- As for the standard of care, money managers may be simple independent contractors. But their obligations may be based on statutory, common law, contractual and fiduciary principles. Outsourcing service providers generally are not treated as fiduciaries, but the contractual standards of operation may be even more stringent.
Given these significant differences, will asset management become more like operations outsourcing? As enterprise customers, investors and retirement plan administrators increasingly risk-based performance management principles, perhaps they will expect to do so. For the moment, the question is worth pondering.