On Thursday, October 27, CFANY held its “Asset Management: Insourced vs. Outsourced” discussion. The panel featured Gino Reina, CFA, Bo Braswell, Larry White, John Garibaldi, CFA, Andrew Sanford and David Harris, and was moderated by Sanjay Arora, CFA. This event was presented by the Institutional Asset Management Thought Leadership Group whose mission is to bring together professionals engaged in management.
Leo Schmidt, CFA, opened the night by challenging audience members to keep an open mind during the discussion. While many attendees arrived with pre-established opinions on the matter, Mr. Schmidt argued that continuing to insource or outsource solely because that’s what a company has historically done isn’t good enough. Instead, each situation is unique, and the pros and cons deserve to be weighed accordingly, striving to find the best solution given the company and current set of circumstances presented.
Going into the night, the crowd was split in half on their opinion of insourcing and outsourcing asset management.
Andrew Sanford, the Senior Vice President and Portfolio Manager for Tax Exempt Fixed Income Investments at The Chubb Corporation took a jab at the question based on what he has seen at Chubb. In general, he said, outsourcing results in increased costs due to high management fees. From a cost perspective, larger companies like Chubb can greatly benefit from insourcing, but for others, investment in staff can be expensive and prove especially difficult.
The time commitment is just too much of a sacrifice for community banks, argued Bo Braswell, the Managing Director of Strategic Investment Management Services at Raymond James. There just aren’t enough hours in the day to proactively manage an investment portfolio while performing your primary duties at the necessary level.
John Garibaldi, the Managing Partner at Spruceview Capital Partners offered a much more strategic approach to the problem, boiling it down to five important questions:
Do investment results matter? Do you require in house expertise? Do you believe in active management? Is your size greater than $600 million? Can you staff up rationally? If you answered yes to all of these questions, then you should stick with an in-house approach.
Larry White, the Deputy Chair of the Economics Department at the Leonard N. Stern School of Business, took the audience back to the classroom. He joked that you will never find a one-handed economist. They always argue both sides and never come up with a definitive answer. The decision of whether to insource versus outsource asset management is no different. On the one hand, insourcing may offer superior control over quality, result in better coordination and make it less likely to wind up “ripped off.” On the other hand, companies insourcing demands a certain company scale. For example, how much sense would it make for a small company to produce its own paper clips? Alternatively, a company can reduce risks and focus more on its core competency by outsourcing. Ultimately, it is up to the company to decide what fits them best.
There are also a lot of regulations to consider in asset management, stated Gino Reina, a portfolio manager at SECOR Asset Management. Outsourcing spares companies the headache of worrying to meet these regulations, and the potential consequences of failing to do so. It adds a level of security to the mix.
It is prohibitively expensive to be a small asset management company, David Harris added. One is unable to reap the benefits from scale, and the result is fewer opportunity. By focusing on niche markets and becoming experts in a narrow field, a small company can find unique opportunities that others would overlook, becoming competitive in the process.
When the dust settled, most attendees were armed with a wealth of useful information to consider, but left knowing that the decision to insource versus outsource certainly depends on what best suits the company.