Technology dogs providers

Wealth managers must take the lead in IT development and back-office processing in order to improve distribution to a new client base. Heather McKenzie reports.

Distributors of products are getting a raw deal. They are being let down by wealth managers who have entered the fray without a coherent product distribution policy and without investment in the necessary technology. Boston Consulting Group, which has downgraded its forecast for growth of the wealth management industry until 2006 from 9 per cent a year to less than 7 per cent, stresses the importance of effective IT expenditure.

According to the consultancy’s report, “Prospering in Uncertain Times,” falling profitability resulting from declining equity markets means that wealthy managers must conduct a root and branch shake-up of their business.

As well as addressing their costs, “leading competitors also need to attract and retain the most valuable customers and ensure the effectiveness of their sales forces. Innovative, competitive products, including alternative investments, are critical to maintaining and improving the yield on client assets.”

Key to these changes, says Boston Consulting, are economies of scale, particularly IT and back-office processing, while ensuring distribution systems still allow the personal touch.

With investors requesting less transactional relationships with wealth managers, brokerages and other intermediaries should migrate their mix of revenues from commissions to fees, says Boston Consulting.

In order to do this, they must offer a credible advice service and administrative platforms that give increasingly value-sensitive and educated clients returns that are sufficient to warrant fees of 100-250 basis points.

Outsourcing of these tricky functions has been perceived wisdom. But many attempts have ended in something of a dog’s dinner.

Some of the big ticket outsourcing deals of the late 1990s experienced integration problems. Global custodians are much more circumspect in their claims and no longer present outsourcing as a panacea for investment managers and their distributors.

The hub of the wealth management engine, linking investor, intermediary and fund house is the transfer agent, which holds the retail end investor in its register. The ease with which an investor can order units, pay for them, check their value and notify a fund of a change of address are all functions that have bearing on a wealth manager’s reputation for quality and which are in effect determined by the transfer agent.

But many providers of these key functions have disappeared from the market in the past decade because of the sheer scale of investment needed to keep up to date with the technology and services needed for the transfer agency and fund administration business.

“People have been dropping by the wayside because they cannot afford to spend money on the technology,” says Charlie Eppinger, chief executive of Dublin-based International Financial Data Services, the transfer agency joint venture company of State Street Bank and DST International.

“To build a creditable administration system will cost between Ł25m (E39m) and Ł40m, and that does not include the ongoing maintenance cost. When fund managers are looking to outsource, the places to which they can outsource are beginning to shrink.”

Nick Parkes, head of European fund services at the Bank of New York (BoNY) in London, says the growing move to third-party distribution means cost pressures increase and efficient transfer agency gains in significance. Added to this is the rising number of more complex, alternative investments as the world’s wealthy seek better returns.

European banks without fund management expertise will need to provide access to funds, while large branded fund managers want to reach the end-investor directly. “Consequently what we are witnessing is a creation of an open architecture model whereby promoters are offering competitive products through their own distribution channels,” says Mr Parkes.

This third-party distribution requires cost effective and efficient transfer agency, he continues. “Transfer agency is a very investment intensive business. Fund managers have a double whammy, pressure on costs and the need to increase spending on systems. If you’re distributing third party then the margins don’t exist to invest in transfer agency.”

When it comes to pan-European transfer agency, it just doesn’t exist in a reliable, robust format, says Mr Parkes. “You need a common platform to service the pan-European needs of some fund managers, which means grappling with different tax codes and regulations across the continent.”

Just within the Euro-zone there are 12 different tax and regulatory environments. Like the UK, many other European countries are in the midst of refining and retooling the rules and regulations regarding personal savings plans and thinking of different ways to encourage their public to save more money for their retirement.

The challenge for administrators to sustain investment managers with different views about onshore and offshore funds is to provide them with a pan-European approach.

‘Bridging the Funds Divide’, a joint report by the US’s Depository Trust & Clearing Corp. (DTCC) and Paris-based research group Promethee, asks why it shouldn’t be as simple to move from one fund management network in Europe to another, just as it is to roam between mobile phone networks worldwide.

Catherine Distler, co-author of the report, says the barriers to this goal are to be found in the distribution of funds throughout Europe, rather than in any legislative constraints.

“Historically, continental Europe has developed very differently from the US. Funds have been developed by existing institutions such as banks and insurance companies,” she says. “These channels to market are changing slowly and the fund supermarkets have contributed to this change.”

However, the high cost of training sales forces means they tend to be more focused on selling their own institution’s products, rather than those of a third party, she says. “The distribution segment is a big obstacle to a pan-European investment funds industry. There is a significant technical problem, as more than half of the interactions between distributors and fund managers are done by fax, requiring information to be re-keyed. This is very inefficient and leads to mistakes because there are no standard ways of presenting data.”

Unless these problems are overcome, says Ms Distler, it will be difficult for independent wealth managers to propose a European level solution to their retail investors. A common distribution platform, according to the DTCC and Promethee report, would not only remove the fax machine from the equation, but would also help independent wealth managers to seek cross-border business and compete on the basis of fund performance.

“It would thereby foster innovation regarding the types of funds available, the professional skills with which funds are managed and the levels of commission that the final customer really pays,” says the report.

The DTCC has proved such a platform is possible with its Fund/Serv centralised subscription, redemption, settlement and registration service (See box below).

Yet the report points out that the larger, powerful institutions have developed their own solutions which give them “an immediate incentive” not to take part in an industry-wide scheme that would deprive them of competitive advantage. In the same way, brands or preferential agreements with distributors deter established players from co-operating and reduce access to the best performing funds for investors.

Closed distribution networks still dominate Europe, says Ms Distler. “By and large, the situation is still one of ad hoc connections reflecting proprietary strategies and commercial agreements between or among distributors and manufacturers,” she says. “The industry thus relies heavily, and as a last resort, on the ingenuity of transfer agents, who somehow manage to handle multiple interfaces.”

The only true pan-European distribution comes from offshore Luxembourg funds pioneered by the likes of Fidelity, JPMorgan and Crédit Agricole.

Technology plays an important role in the distribution of funds, says Christopher Edge, head of corporate development in Europe for JPMorgan Investor Services. “Not only does the fund supermarket technology deliver clearing and settlement of wide variety of funds; it offers content, information and education to investors. Transparency has arrived.”

Mr Edge’s colleague, Mark Lund, chief executive of FundsHub, believes the emergence of fund supermarkets as a means of distribution is “inevitable”.

“Those serious about distributing funds to retail investors need to have this technology. It is important in meeting increasingly sophisticated customers’ demands for access to investment products anytime, anywhere.”

JPMorgan’s FundsHub was one of Europe’s first outsourced fund supermarket solutions, the result of a E20m joint venture between JPMorgan and California-based financial services solutions company Investia, from which the bank acquired a majority holding in FundsHub earlier this year.

FundsHub targets retail banks, building societies, savings product providers and brokers throughout Europe.

Financial services firms using FundsHub’s infrastructure can develop distribution of multi-manager investment products under their own brand more quickly and cost-effectively than by using their own inhouse resources, according to JPMorgan.

Key to FundsHub is the use of Investia’s Javelin straight-through processing mutual fund software, which is combined with JPMorgan’s treasury, custody and settlement services.

The platform offers front to back office processing, tying fund companies, distributors and retail investors together in a unified, Internet-linked supply chain. The high cost of building such platforms plays into the outsourcing model, says Mr Lund.

By offering ease of access to distributors using such a service, it seems that every dog may still have its day.