Distributors singing the back-office blues
Growth of the European fund industry is being stifled by the labour-intensive communication system of too many hand-scribbled faxes and re-routed phone calls. Roxane McMeeken sees that automation and standardisation must happen soon.
“Co-operate or cop out” just about sums up the choice facing fund distributors in Europe today. The same choice faces other creatures of the so-called “back office” – global custodians, trade clearers/settlers and transfer agents. There is now a growing realisation that unless they work together towards a fully integrated processing system that combines order routing, settlement and custody on a single platform, the prospect of the European investment fund industry ever reaching its full potential is unlikely. Barbara Vuylsteke, director and head of product management for investment funds at Euroclear in Brussels, says that until now, Europe’s fund distribution channels have been almost pre-historic in nature. Banks traditionally had a monopoly on the business and critical information was frequently transferred by hand-scrawled faxes, adding to the image of an overburdened, labour-intensive industry. But with the recent proliferation of distribution channels, investment products and investor numbers, the old ways of working are no longer seen to be adequate. Banks are now offering funds run by other firms on top of their proprietary products. Deutsche Bank, for instance, has just signed a deal to distribute Invesco’s vehicles. Significant developments Meanwhile, independent financial advisers (IFAs), investment websites, insurance firms and pension companies are also getting in on the act. The arrival on the scene of fund supermarkets such as Co-Funds is perhaps the most significant recent development. Whether run independently or by a banking or fund management house, fund supermarkets offer private investors and IFAs the chance to deal in mutual funds online. They typically allow users to track, evaluate and compare funds, often through live links to the likes of S&P Micropal or Fonds Consult, and they even allow customers to invest in products at a discount rate. But, along with the rest of the industry, where fund supermarkets are falling down is in the back office. According to Ms Vuylsteke, the current process is lacklustre – “labour intensive and highly prone to errors”. In the current environment, she says, a fund supermarket might offer a range of funds handled by upwards of 25 different transfer agents – firms such as IFDS and Feta whose job is to maintain shareholders’ records, execute transactions requested by shareholders, distribute dividends and handle shareholder enquiries. The supermarkets, for their part, have to develop separate connections with each agent, making for in excess of 25 separate and distinct means of communication. Too many transfer agents The problem is that each agent uses proprietary technology, so most communications between distributors and transfer agents end up being handled by overburdened telephone and fax lines. With more than 1000 transfer agents servicing around 40,000 funds in Europe, it seems that there are simply too many transfer agents – or at least too many different ways of connecting. If automation and standardisation do not take place – and soon – the future of the European fund industry will be put in jeopardy. It will be virtually impossible to accommodate the projected growth in volumes, and investment will become an increasingly risky business as manual intervention causes errors and missed trade cut-off times. The problem is acute for private wealth managers. They often have to deal either through transfer agents or directly with the least sophisticated fund providers in terms of communications technology, such as one-man hedge fund operations. Ms Vuylsteke says private wealth managers “are definitely very keen to standardise the process, since they more than anyone have to deal with very high numbers of different agents”. Euroclear has developed what it believes is an industry solution in the form of its FundSettle platform. Through a single access point, FundSettle automates and standardises the dealing and settlement of funds, linking transfer agents, fund distributors and fund management companies in both domestic and offshore markets. FundSettle runs on industry-wide standard messaging formats developed by Swift, and users usually gain access by building it into their own technology. However, smaller operators that are unable to afford the investment may link to the system via Internet browser. Ms Vuylsteke says that their intention is to offer agents the possibility of connecting initially to FundSettle via the cheaper, browser route and then, once their volumes have risen sufficiently, they can justify investing in building the platform into their in-house systems. So far, some 50 transfer agents have signed up to FundSettle, including the Luxembourg-based Feta, Fastnet and Credit Suisse AM Fund Services, and the Dublin-based Bisys and Deutsche International.
Most active Funds in FundSettle 1 (3) - JP Morgan AM 2 (7) - Schroder IM 3 (2) - Fidelity Investments 4 (4) - Merrill Lynch 5 (1) - Morgan Stanley IM 6 (6) - ABN Amro AM 7 (5) - Goldman Sachs AM 8 (—) - Citigroup AM 9 (9) - Franklin Templeton IM 10 (12) - INVESCO 11 (—) - Pictet 12 (8) - Credit Suisse AM 13 (13) - Henderson GI 14 (16) - CDC IXIS AM 15 (19) - Vontobel AM 16 (10) - MFS 17 (15) - BNP Paribas AM 18 (18) - Robeco AM 19 (—) - Deutsche Bank AM 20 (17) - ACM
