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The 2020 Paradigm Shift

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Reprinted with permission from HFM Global.

There’s nothing like a crisis of unimaginable proportions to test firmly held beliefs and the most elaborately considered contingency plans.

As recently as six months ago, conventional wisdom held that younger people, whether single or married with children, were increasingly going to flock to large urban areas where the greater employment opportunities existed, where a greater variety of social and entertainment opportunities resided, and where all of the latest in service offerings were available via a simple click on an app. This cohort was never going to own a home, but rather rent so as to maximise flexibility and mobility. They were never going to own a car, either, but rather depend on ride-sharing services. The suburbs, where their parents lived, was not an option.

The global Covid-19 pandemic not only stopped this trend in its tracks, but, at least thus far, has caused a notable 180-degree change in direction. Those who could afford to, have escaped the large metropolitan areas, bought homes with more indoor space and backyards, as well as cars to get them around the suburbs. Others, perhaps not totally ready to make decisions with more permanent implications, have opted to rent apartments or homes outside of the cities, while many have simply moved back in with mom and dad. Some data suggests people are even finding their way to more rural areas. The common theme here is that the vulnerabilities of large metropolitan areas with very dense populations were laid bare by the virus, and that the hope for a return to the prior normal is rapidly evaporating. The social unrest documented in news programmes and on social media have only served to fuel this concern.

Service businesses outside of the major cities, particularly grocery stores, restaurants and other retailer formats, who had not adopted many of these new connectivity and delivery methods, adapted to the restrictions imposed by the lockdowns and implemented changes rapidly in order to survive. Instacart, Seamless, Grub Hub and all of the other delivery apps reached a meaningful presence outside of the metro markets; in short, just in time to serve the growing number of transplanted city people.

It’s clear that individuals who have jobs with companies that have not directly been impacted by the lockdowns have come to realise that they can perform their responsibilities remotely, and that the firms they work for have come to the same conclusion. The result has been that companies are not rushing to reopen offices in densely populated areas, and even where they are open, they’re not requiring personnel to return to the offices and even encouraging their employees to work remotely for an extended, perhaps indefinite, period of time.

Just as individuals and other businesses have adapted to the new normal, anyone operating an investment management or brokerage business has learned a great deal about improvisation this year. As regulated businesses, we’re responsible for developing, implementing and testing disaster recovery and business continuity plans. As part of this process, we maintain alternative sites that our personnel would be able to work from in the event that our principal office locations become inaccessible. It’s probably fair to assume, however, that none of us had ever contemplated that our entire organisations would be working from home, let alone for an extended period of time.

What our industry has collectively learned over the past six months is that the work-from-home solution, though far from ideal, has worked, and for the most part provided the industry with a viable business continuity effort. Communication technology was tested to its limits as firms had tens, hundreds and even thousands of people logging into servers remotely at the same time. But despite the massive spike in volatility and trading volumes across asset classes, the markets functioned, trades executed, cleared and settled.

The Outsourcing Variable

Technology obviously played a critical role in making the work-from-home experience possible, but we shouldn’t underestimate the key contribution that outsourcing in general made to the mostly successful experience investment managers had in maintaining their businesses through the height of the pandemic and since. With outsourced providers, be it COO/ CFO services, compliance solutions, middle and back-office services, information technology and cybersecurity solutions, or trading services, investment managers could rely on these third-party providers and each of their business continuity infrastructures, even if everyone in their own organisations couldn’t function at optimal capacity as personnel were dispersed.

As the Covid-19 days turned into weeks and the weeks turned into months, we increasingly heard from existing clients as well as newly acquired ones that the outsourced services and support they were able to rely on were paramount to the proper functioning of their organisations. Outsourced service providers passed a severe stress test and likely gained enormous credibility not only with investment managers, but perhaps as importantly, those allocating capital to them.

A Seamless Transition

We saw this first hand in our Outsourced Trading business as we were able to fully serve our existing clients seamlessly throughout the work-from-home experience. This was particularly critical through the heights in trading volumes and market volatility during the early days of the lockdown, when many clients had not yet fully established the full work-from-home protocols and capabilities for their entire teams. Where clients needed us to, we also provided them with additional operational support to ensure that their trades cleared and settled properly with their prime brokers and custodians, and that their order management systems were populated with their reconciled portfolios for the next day’s trading. We also saw an influx of inquiries from investment managers who had not already engaged our services to explore the solutions we could implement for them and have since added numerous new clients as a result. Our ability to assist clients also came in what many thought was the most unlikely area – capital introduction. While the markets were in full-on panic mode, our capital introduction team remained in very close contact with allocators and were able to identify several opportunities where these investors articulated an interest in making additional investments in anticipation of an eventual rebound.

Like other industries, investment management businesses now find themselves having to reassess their operating infrastructures as well as their business procedures. Though it’s still early in this process, some trends appear to be developing that may shed some light on where the industry might be a year or two down the road. It’s probably obvious that the most notable reassessment taking place is the resource allocation to physical office space, particularly as it relates to high-rent locations in city centres. The other is that outsourced service providers proved to be valuable partners during the recent upheaval in markets and society.

As investment managers turn their attention to future planning, it’s increasingly likely that they will be exploring opportunities to engage outsourced service providers. We’re seeing it almost every day, and from our communications with other service providers, they are as well. This is no longer just about costs, though many outsourced services certainly come at a price well below the expense investment managers would have to incur to replicate the capabilities internally. With the recent experience, outsourcing has increasingly become about reliability, and the performance by outsourced service providers is fuelling what appears to be an acceleration in the adoption of these solutions by investment managers.

As managers look to outsourced solutions, however, it will be paramount that they not only assess the overall capabilities of the providers, but also their ability to adapt and perform even under the most unforeseen circumstances. Essentially, they’ll need to make a judgement on whether a provider will be able to serve as a trusted and reliable partner. The key elements that served us and our clients well were our firm’s ability to pivot early and implement a sound work-from-home solution for all of employees globally, the heightened level of communication our team engaged in with our clients, our ability to identify additional client needs, and finally, our team’s ability to deliver solutions to those needs in a timely manner.

Whether this physical isolation ultimately results in detrimental impacts on the psyche of the individuals or the productivity of the companies they work, as many health care and human resources professionals fear, or not, won’t be known for some time. For the foreseeable future, however, it certainly appears that the technology and outsourced services available are providing investment management firms the option of having their employees working from home and that they are embracing this opportunity

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