Cost compression in the third-party management company (ManCo) sector has reached a breaking point. Executives from GemCap, Fitz Partners, FundRock and Carne Group have all warned that “unsustainable” pricing is putting regulatory oversight at risk — the very function ManCos were created to uphold.
But what if the same force that’s straining the industry — operational efficiency — could also be the solution? Artificial intelligence, properly implemented, may not just help ManCos survive the price squeeze; it could redefine what robust, cost-effective oversight actually looks like.
The Cost-Compliance Paradox
Third-party ManCos emerged as a pragmatic response to rising regulatory demands and the need for smaller asset managers to outsource governance. Yet, as competition intensified, margins eroded.
GemCap CEO Conor Hoey put it bluntly:
“The industry has eaten itself. It’s driven costs down to unsustainable levels… the danger is a lighter-touch oversight than one should really expect.”
The paradox is clear: every euro saved on compliance staff or manual monitoring increases the risk of missing regulatory breaches — or worse, reputational damage.
In a market where average fund size for third-party providers is roughly $211mn vs $584mn for internal ManCos (Monterey Insight), scale economies are limited. Cutting costs has reached its natural floor. The only lever left is intelligent automation.
AI as a Regulatory Co-Pilot
AI can do more than streamline operations — it can elevate oversight quality while reducing cost per check.
Consider three practical layers:
Continuous Compliance Monitoring AI systems can scan 100% of transactions, fund reports, and counterparty communications for anomalies, conflicts of interest, or breaches — replacing the “sample testing” mindset that dominates today. This enables regulators and boards to see real-time compliance heat maps rather than quarterly summaries. Dynamic Risk Assessment Generative AI models can interpret evolving regulation (ESMA, CBI, CSSF, FCA updates) and dynamically flag where a fund’s procedures diverge. Instead of relying on static policy manuals, ManCos could deploy adaptive rule engines that “learn” from past audits and regulatory feedback. Governance Intelligence Dashboards Dashboards aggregating both human and AI performance could track which oversight processes are automated, verified, or escalated — effectively creating a digital twin of governance. Alerts could be triggered not only by compliance breaches but by the absence of oversight events (e.g., missing board reviews, late reconciliations).
This approach transforms compliance from a sunk cost into a data product — measurable, auditable, and continuously improving.
Human Oversight, Augmented — Not Replaced
Critics often worry that AI could “desk-ill” compliance or reduce human accountability. But as Schroders’ Charlotte Wood recently argued in another context, leadership and motivation — not role type — determine adoption.
The same applies here. AI doesn’t replace fiduciary duty; it amplifies it. By automating repetitive control checks, risk managers can focus on interpretation, escalation, and regulatory dialogue — the tasks that require judgment and credibility.
In fact, AI might become a governance safeguard against the very “skimping” Hoey warned about: when leadership mandates that every fund, regardless of size, must meet the same digital oversight standard, regulatory equality finally becomes operationally possible.
The Path Forward: From Cost Cutting to Capability Building
Mark Stockley of Carne Group recently observed that pricing in the sector is starting to rebound as asset managers realise the need to reinvest in “the best people and technology.” That’s the inflection point.
Third-party ManCos that embrace AI early — not as a gimmick but as core infrastructure — will be able to:
Deliver higher assurance at lower marginal cost. Scale compliance capacity without headcount inflation. Differentiate through auditable transparency rather than promises of low fees.
In a market of shrinking margins and rising scrutiny, that’s not just a survival strategy — it’s a new model for regtech-enabled fiduciary excellence.
Bottom line:
AI won’t solve the economics of third-party ManCos overnight. But it can restore the link between affordability and accountability — ensuring that no fund, however small, is ever too cheap to govern properly.
