When it comes to standardisation and automation of fund transactions, one of the central discussion themes revolves around the communication problems between industry players, as emerged at the recent International Transfer Agency Summit (ITAS) held in Luxembourg.
On one hand, fund promoters complain about the general apathy that distributors show about the operational side of the business, focused as they are on distributing and making money, but having no interest in what is happening behind the scenes.
On the other hand, fund managers and transfer agents (TAs) can also find themselves at odds with each other. This is because “TAs are interested in operational efficiency and straight-through processing when dealing with the distributors, while fund managers are trying to enhance their value on the sell side to gather assets,” explains Paul O’Neil, head of European shareholder services at State Street. But they are both trying to serve the distributor, acknowledging the “distributor is king” in the growing fund industry.
Untapped power
“Distributors have a tremendous amount of power,” says Mr O’Neil. Away from the buzz of the conference, he explains that during his long career, all spent in the TA business, he has seen many times that in maturing markets distributors tend to drive the funds that sit on the shelves, rather than performing funds. This is because “Often the back office ends up telling the front office what to do. They won’t sell funds, even if they perform better, if they can’t do clearance, or can’t do settlement or they don’t have good accuracy rates.”
At the same time, fund promoters have become more and more demanding in their expectations to be serviced globally. They look for an integrated service standard across time zones, thus posing serious challenges to TAs. To complicate things, there are also cultural, currency, tax and multi-lingual issues as well as different reporting requirements.
“Clients want to be in every market, at all times of the day, doing everything as fast as possible,” explains Mr O’Neil. “This may be right from them to expect but we need to be there as partners.”
 | ‘Often the back office ends up telling the front office what to do. They won’t sell funds, even if they perform better, if they can’t do clearance, or can’t do settlement or they don’t have good accuracy rates’ - Paul O’Neil, State Street |
Regulatory issues can prove excessively complex when entering new markets. New challenges in the TA business are also represented by product complexity, with the emergence of new fund types such as property, private equity, alternative and money market and additional features such as multiple classes, hedge classes and performance fees at shareholder level. Consolidated reporting across domiciles is another service that requires industrial strength, says Mr O’Neil. “Clients may not only have different fund families in different domiciles, but want to consolidate those domiciles, that is particularly challenging.”
Christina Frees, head of European shareholder services at Goldman Sachs Asset Management (GSAM) talks of the firm’s commitment to work hand in hand with TAs. But the boundaries between services provided to the distributor by the fund promoter and by the transfer agent are still not clear, claim industry experts.
“As a fund promoter, you feel like you are in a middle land,” complains Ms Frees. “Distributors will make a request about processing, on an operational or marketing basis and you feel that, when you go to the TA, you have to bounce the distributor’s needs in addition to yours”. Although GSAM has established quite good partnerships with the TAs, says Ms Frees, distributors are still absent from the conversation. This is mainly because it is very difficult to find the right contact within the distributor organisation. Things, however, are gradually changing. “Five years ago, when we went out to distributors, we would typically start with the sales contact, who would have no interest or knowledge in the operation area,” says Ms Frees. “Or perhaps there was the technology person within the organisation who had the right to implement the process but no authority to make the decision to implement it.”
Today, as they are maturing, distributors are setting up operational and technology teams. Also, costs of manual processing are evident in the total expense ratios of fund managers and that is something distributors are sensitive to. “I think now distributors are concerned about TER costs,” says Mr Frees. “So, if we say you are paying or your shareholder is paying for inefficiencies in the market, it will start to come to their attention.”
Increased costs
Inefficiencies mean manual work, additional head count, as well as increased risk and potentially delays in delivery, explain fund providers. This all leads to increased cost, which, they say, is picked up by the fund and investors. Plans to distribute can also end up being more unsatisfied.
There seems to be consensus among industry players that distributors are ultimately those who drive standards and automation in the market place. In the United States, high level of efficiency in deal processing has been reached when a set of standards was created by securities dealers and presented to the fund promoters as the only way forward, explains Michael Boardman, director of retail operations at Blackrock Merrill Lynch investment managers.
 | ‘We currently have 150 fund management houses and last year we had 1.5m transactions. If we had to operate by fax, it would be a nightmare, as operational risk is so high’ - Mariano Rabadán, AllFunds Bank |
In this sense, the UK market missed an opportunity, when fund platforms started proliferating a few years ago. Retail money landing onto fund platforms, such as Cofunds and Fidelity’s Funds Network, currently represent 20 per cent of the UK total annual inflows. According to Cofunds’ estimates, this figure will increase to 60 per cent by 2010. With such power in their hands, fund platforms could have established strict rules, says Mr Boardman. “I would have loved it if platforms had got together and insisted on the fund managers that this is the way we are going to deal with. They did not do that, but each came to us individually, and we all had to set up different sets of standards with each platform.” But having to support multiple channels “triplicate costs.”
Spaniard Mariano Rabadán, chief operating officer at Allfunds Bank, the fund platform with e37bn of assets under intermediation, explains that in order to be able to operate more efficiently and avoid sending confirmation faxes, they had to create one standard, Allfunds link. “ We currently have 150 fund management houses and last year we had 1.5m transactions. If we had to operate by fax, it would be a nightmare, as operational risk is so high.” Mr Rabadán is keen to clarify that Allfunds’ core activity is of course distributing funds, which are mainly international, and providing investment consulting. Connectivity itself is not the most important added value. Still, it is key.
Allfunds also carries out a number of administration activities to support the distributor side, such as calculating rebates, reporting to the tax department or the regulator, functions that Spanish asset management houses are legally bound to do. However, as foreign fund promoters have no obligation to the official authority, all those liabilities must be covered directly by the distributor.
This is also why distributors prefer to buy funds from Allfunds, explains Mr Rabadán. “If we did not cover those activities it would be very difficult for us to promote the sale of third-party [non-Spanish] funds,” he says adding that the functions carried out by TAs, based in off-shore centres are totally complementary to this type of platforms. “TAs cover the point of view of the asset management house and we cover the local administrative problems and the official reporting.”
