Open your mind

What do the next five years hold for Europe’s wealth management

industry? Will open architecture take root? And will back office

systems shape up to support it?

With Sibos, the world’s top securities servicing event, coming up this month in Singapore, PWM

has canvassed the views of top back-office providers, technology

vendors and central securities depositories. Their skills, expertise

and technological systems are the key to broadening the fund menus

displayed on the shelves of distributors. Because back-office

specialists service the entire European industry, they are best placed

to monitor trends instead of providing isolated snap-shots.

According to the experts, wealthy and affluent investors, benefiting

from a higher standard of education, will in future no longer settle

for old faithful, in-house funds. They want access to the best of breed

that the universe has to offer – and they are well aware that this

might not be what their private bank or wealth manager is recommending.

Open architecture is here to stay and it will continue to fuel the

fashion for outsourcing.

Back-office changes

But our experts believe that there need to be big changes in the

back office in order to support open architecture models of delivery to

final clients. Web technology, underused in Europe, is seen as key to

efficient product delivery, allowing the establishment of greater

numbers of fund supermarkets.

Our panel also believes US-style managed and “wrap” accounts, allowing

custody and reporting to be centralised for each client, will become

established in Europe. This will allow aggregation of data, with banks

displaying in-house reports together with information from third party

providers on the same portal.

Services for clients

Clients will also demand measures of their portfolio risk, in an easily digestible format.

These areas of client servicing, together with advice which clients can

trust, will become just as important to investors as the percentage

return clocked up by their portfolios.

Technology allowing connectivity of distributors to multiple funds,

already available to clients in the institutional world, can be easily

adapted to the retail and private banking sectors, making the

collection of trailer fees from a variety of fund providers a much more

straightforward process.

These technological improvements will also smooth the way for supply of

derivatives and other sophisticated products for high-end retail

investors.

Consolidation is expected in three areas. In distribution, the biggest

banks and insurance companies can invest in technology, allowing the

best means of data presentation. Smaller banks may be left behind.

In investment production, larger players, who can outsource everything

apart from fund management, will win, as will the boutiques able to

offer individual service.

In the back office, a single settlement system for Europe is seen by

many as a prerequisite to the wide establishment of efficient open

architecture.

This will bring us closer to the European dream of the cream of

competing products, together with impartial advice and clear portfolio

reporting, delivered straight to individual investors in their

preferred format.

Over these five pages we present the views of our panel of eight top experts in the service provision industry.

Personal relationships are key

Anne P. Tangen, executive vice-president, State Street Corporation and division head of Wealth Manager Services:

Distributors of third party funds will face the issue of who has the most

efficiency, who can assemble the products and who can advise on them.

People are naturally sceptical of the advice they get, so it will

revolve around personal relationships.

The Internet is one area we haven’t seen take off in Europe’s

investment industry. There is much more adoption of it in the US. I am

not sure what is preventing the spread in the rest of the world, but I

do think self service will catch on in one form or another. There is a

strong need for even more education of investors. Do they know what

they are buying? At the moment they seem only to see the potential

return. They don’t really see the risk.

Our customers – the institutions – see open architecture as a way to

present themselves in an objective, independent way. We think they will

continue to do so, but they need to figure out how to implement open

architecture efficiently. Custodians will play an ongoing roll helping

them. They can centralise the custody of assets, which makes it much

easier for investment managers practising open architecture to present

accounts to clients. It is difficult for investment managers to deal

with multiple custodians, however.

US style managed accounts are one way of centralising custody that I

think will become more prevalent in Europe, as well as mutual fund

supermarkets and, at least in the UK, unitised products.

As for the creation of a single system of settlement for third party

products in Europe, we have seen things try to come together and fail.

I am not sure if we have the political will to try and make it happen.

Progress is being hindered by competitive issues and cost issues.

‘Our customers see open architecture as a way to present themselves in an objective, independent way’

Anne P. Tangen, State Street

Outsourcing enters phase two

Jeff Tessler, executive vice-president and general manager, Europe, The Bank of New York:

The next area of opportunity for the financial industry is

undoubtedly wealth management. It’s a difficult area to define. The

peripheries encompass private banks, commercial banks, stock brokers

and fund managers. There are considerable opportunities for all these

organisations to develop their capabilities. The provision of third

party funds will be critical to the wealth management industry.

Equally critical is the development of a single settlement system for

Europe. I believe it will happen, and so does Euroclear. We believe in

whatever makes things more efficient and if a single platform can be

developed, then we are in favour of it. We are 100 per cent behind

whatever brings more efficiency to the market.

The next five years will see the start of phase two of the outsourcing

trend. We will continue to see private banks and fund managers focusing

on their core competencies in order to create value for shareholders.

They will be outsourcing partially and completely to securities

services providers. Indeed, there have been a number of deals within

the past month, such as Standard Life’s decision to outsource to

Citibank. ING has also recently outsourced its equity clearance

business to The Bank of New York.

We are entering a second phase because a greater volume of deals is

taking place. Now that a number of deals are up and running, people are

aware of their commercial viability.

Asset managers recognise the value of focusing on their core

competencies, moving to fixed cost structures and removing technology

spend.

Tessler: in favour of efficiency

Heavier pressure on technology

Ben Williams-Thomas, marketing and communications vice-president,

Ebusiness solutions at JPMorgan, and David Moffat, marketing director,

JPMorgan FundsHub:

Asset managers will be looking to aggregate data wherever possible. For

example, they would look to aggregate and display their own in-house

data alongside their third party providers, such as custodians and

brokers, through a common portal. Increasingly, providers are

incorporating more sophisticated workflow tools to facilitate workflow

management and task allocation. In addition, asset managers are

expecting increased automation and association of data to their

specific holdings to make for a more sophisticated and ‘relevant’

overall user experience.

Broader product offerings from custodians will take the pressure off

asset managers to fund their own IT development programmes or the

requirement to buy ‘off the shelf’ software packages – specifically in

the area of third party performance measurement and pre and post trade

compliance. Custodians will continue to extend their traditional

‘custody’ focussed product sets (reporting and instruction tools) to

offer value added products and services.

There will be ongoing interest within the investment management

community to outsource all or just part of an operations function to a

custodian. Regulatory and business changes are placing pressure on

in-house technology especially if that technology is dated and not

scalable.

The postponement of T+1 has forced the issue of straight-through

processing (STP) back down the agenda for most of our investment

management clients. Specific business processes have been identified as

being manually intensive, inefficient and therefore the root cause of

poor STP. These are corporate action processing, exception management,

the allocations process and reference data. If each or all of these

processes were to be tackled by investment managers, they would reap

significant rewards in terms of improved STP rates.

Moves to STP in the funds industry require a sufficiently broad

consensus for change across a wide range of industry participants, such

as distributors, fund managers, TA systems developers, third party

administrators.

‘Increasingly, providers are incorporating more sophisticated

workflow tools to facilitate workflow management and task allocation’

Ben Williams-Thomas, JPMorgan

Keen competition

Ken Hartlage, senior vice-president for Private Account Services, Brown Brothers Harriman:

We see private banks striving to achieve greater front/back office

integration via outsourcing, as well as enhancing the client

experience. Private banks will now compete more on performance – not

just portfolio return, but client servicing as well. To achieve this,

private banks need sophisticated tools, which concurrently drive down

IT and operating expenses and improve their ability to service their

client.

Open architecture is an effective means for private wealth managers to

broaden their product offering, to differentiate their service and, as

a result, to protect existing assets and acquire new business. Open

architecture also offers an opportunity for private wealth managers to

adapt quickly and efficiently to market changes and investor behaviour.

Currently, however, the European market lacks consistent, comprehensive

messaging standards for distributor and transfer agency communications,

as well as a single clearing body along the lines of the NSCC in the US.

Consequently, it is challenging for a financial institution to

establish and manage connectivity to multiple funds for trading,

settlement, reconciliation and trailer fee collection and distribution.

However, BBH offers efficient, effective means for researching, trading

and settling funds through a “multi-bank” platform that provides a

single window for fund distribution.

Hartlage: banks focus on performance

Automation is essential

Pierre Slechten, managing director, head of investment fund product management, Euroclear:

Straight-through processing is an absolute must, and a prerequisite

for all institutions to embrace real and scalable open architecture for

three reasons. First, cost. Conversely to bonds and equities, the

ticket size of a fund transaction is very small. The cost of the

transaction must therefore be reduced.

Secondly, risk. Mutual funds are targeted to a large extent at retail

investors and for proper accounting and record keeping of such large

volumes of customers it is essential to have an automated solution.

Otherwise you face huge operational issues in terms of reconciliation

and so on.

Thirdly, level of service quality. New fund supermarkets are being

built on platforms with a high level of automation and wealth managers

have to compete.

As a result, there will be more outsourcing of transfer agency to third

party suppliers. At the same time there will be a reduction of the

transfer agents in the market and increasing use of solutions such as

Euroclear’s platform FundSettle, which provides a single automated

entry point.

This saves transfer agents and fund managers having to sign hundreds of

separate connection agreements with each other. Also, FundSettle and

the like have the economies of scale to justify expenditure on the

systems.

In five years we believe there will still be more than one hub in Europe, but there will be standardisation between the hubs.

Slechten: three reasons to consider

Size will be critical to success

David White, marketing director of Fidelity’s Mutual Funds Technology:

Looking at the future prospects for European asset managers, if you

split them into large, medium and small, I believe that most of the

success will be found at both extremes of the spectrum.

The larger players will have the scale and reach to succeed. On the

other hand, the specialist niche players will continue to succeed by

offering bespoke and tailored services to their clients. They will

typically outsource almost everything other than the hands-on fund

management and the sales and marketing functions, allowing them to

control their costs, and the ability to focus on their core

propositions. For those in the middle I believe they will either evolve

into the corporate giants, whose brands earn the required recognition,

be taken over, or downsize to be a leaner and more specialist provider.

What is clear is that consolidation will continue to take place.

One of the key areas of investment over the next five years will be in

the area of globalisation. The ability to move processes offshore to

other countries, the increased use of sophisticated straight-through

processing; Internet and workflow will allow companies to manage a

truly global organisation. Companies must be more “business driven” as

opposed to “system driven”. Technology will prove to be an important

part of this shift if companies are to be effective in this area.

‘What is clear is that consolidation will continue to take place’

David White, MFT

Long way to go

Päivi Karesjoki, director asset management segment, Trema:

Open architecture has taken root in Europe but there is still a lot

of work to be done. Asset managers are aiming at full automation and

now the technology is starting to get to the place where the

applications can talk to one another.

But I think the issue is not just the technology – another pressing

issue in the market is that of reference data and the need to agree on

certain naming conventions and standards. Messaging standards are

becoming more common – FIX, XML etc – but that is not enough. Clients

need the same reference data so that the instruments in one system have

the same code as in another system.

A further issue is that clients are becoming much more demanding.

Market conditions are forcing them to become more knowledgeable about

products. Today, clients are looking much more at the figures, so there

is a growing demand for these figures. Those organisations that are

able to provide them in the format required are more likely to succeed

in the future. There is also an issue of brand name, in which the

larger organisations will always be stronger. On the distribution side,

web-based technology will play a very important role.

Karesjoki: clients need more

Call for consistency

Tim Rudlin, director and officer, business strategy, DST International:

Investors are becoming more sophisticated, with a better

understanding of risk and asset allocation. Wrap type technology is

coming to Europe from the US and Australia. Multi-manager and fund

supermarkets are becoming more accepted.

As the share of the market for these types of products grows,

efficiencies in execution will demand a more consistent approach to

open architecture. Without this, the industry will not be able to cope

with demand.

It is technically quite feasible to achieve the correct systems for

banks and other third party distributors to select and deliver third

party funds efficiently.

The standards exist, and institutional models using other instruments

show that multiple fund providers can be handled by technology.

Custodians, agents and back offices will indeed be able to introduce

these systems, if they have the will to do it. Fund selection is seen

as a threat by some in the industry.

Creating a single system for processing products is not the only answer

to the current problems with settlement and transaction processing of

all third party funds in Europe. Agreeing on a common set of standards

for communicating between systems would work as well.

Rudlin: standards are welcome