Evolving client base provides new challenges

The evolution of the independent financial adviser (IFA) community is creating profound change throughout the wealth management value chain, and its knock-on effects are being felt in even the largest of transfer agents. IFDS, a joint venture between State Street and technology vendor DST, has long been in the outsourcing business, effectively acting as the retail arm of fund groups, according to David Moffat, group executive for business development at the company. But the increased influence exerted by independent financial advisors and the use of fund platforms has forced a reaction from the firm’s traditional client base. The trend for IFAs to route their business through fund platforms would cut the data processing requirements for transfer agents, as trade instructions are sent in bulk, rather than individually. “That’s reduced a lot of the workload that would usually have come our way,” Mr Moffat says, but it has also started an evolution (or devolution) in the client base, which has created new data challenges. “Many of the investment houses that we have been supporting have been reappraising what their place in the marketplace will be,” he says. “Previously they would have put considerable effort into directly marketing their brand name and their proposition directly to members of the public. That’s almost entirely gone now, with one or two notable exceptions.” Apart from companies like New Star, who pay for billboards across the City of London, the saturation of adverts for fund managers around ISA (Individual Savings Account) season in the UK is a thing of the past, Mr Moffat notes. “The vast majority of fund managers see themselves almost retrenching to institutional asset managers, with those platforms the conduit to which they receive business.” Recurring commisions A further challenge is posed by the changing nature of the IFAs themselves, who are starting a shift towards recurring commissions or fees, rather than being remunerated simply through an initial commission. That trend, while it may be slower than the IFAs themselves would admit, is happening, helped along by the retail distribution review. This has driven IFAs to evolve to serve a different client base, moving from its entrenched position selling to aspirant, emerging wealth. “The bread and butter is not that business any more,” Mr Moffat says. “It’s now aimed at an older core who’ve already built up a fair degree of financial wealth.” A fee-based arrangement on total assets is more lucrative at the higher net worth end of the spectrum, so a movement up the value chain makes sense. That itself brings with it challenges for the transfer agent, says Mr Moffat “They’re looking for different types of products – they don’t want just a one-off, single market fund,” he says. And others are becoming more advanced in their use of risk management – when fees are based on recurring advice, IFAs can no longer ‘sell and forget,’ they have to keep track of a client’s risk level. “In terms of what they look for from us, they look for much more ready availability of the details of what the underlying investments are, what the risk levels are, because they’re doing ongoing reviews of investments to a much greater degree than they would have in the past,” says Mr Moffat. With this evolution has come technological advancement, and Mr Moffat says that IFDS’ systems now have to access with IFA systems, looking for a greater depth of data beyond valuation. “Quite often this is stuff that is actually, truth be told, been seen in the past as fund accounting, rather than transfer agency related,” he adds. “But increasingly the transfer agent has been expected to be the conduit of fund accounting and portfolio information, instead of just registration and holding information.” Cost and complexity Interoperability has, to some extent, been hindered by a lack of modern standards, which is adding cost and complexity to an evolving market. One example, Mr Moffat says, is EMX, the fund dealing messaging system that is close to being an industry standard. “EMX is not the most wonderful system in the world, it uses FIX, rather than ISO 2002, it’s extremely expensive for the fund management community - £5 (E6.7) a trade, and I don’t think that’s sustainable. We were very much hoping that the Euroclear acquisition of EMX would see some radical change.” That was two years ago, and there still have been no dramatic developments, he says. However, the penetration of EMX means that other potentially viable technologies, like Fundworks, which Mr Moffat says is a better designed system, risk being stifled. “We’d much rather, in all honesty, that there was one industry utility for messaging and order transmission, but we have to support both and we will support both.” Though, for all their importance in the market, the IFAs will have little or no advocacy when it comes to developing such standards, lacking as they do a substantial voice at the Investment Management Association, Mr Moffat adds.