Rising to the challenge of automated transactions

“To not use external fund providers is akin to not having a mobile phone,” a wealth management expert quipped at a recent PWM conference. Certainly the majority of European private banks and wealth managers are embracing open fund architecture in various guises. But when it comes to the technology they are using to connect to the external funds they are beginning to offer, many are using the equivalent of the giant 1980s’ “brick phone”.

Rather than sending practically infallible electronic messages via systems such as Swift, private banks are resorting to phones, faxes, email and even so-called snail mail.

Slow lane

A typical example is Pictet, the Geneva-based Swiss private bank. Pictet is a leader in open architecture, offering its clients an impressive 6000 external funds, which are manufactured by investment houses throughout the world. Yet Jean-Jacques Vaucher, head of correspondent banking network management at Pictet, confesses that over 50 per cent of external transactions are conducted manually.

“We are not happy with this”, he says with undisguised frustration. “More and more of our clients want to invest in external funds, so we are sending a higher number of orders to third-party fund managers.

“The process is so manual that we are spending a huge amount of time dealing with these fund managers. There is also a lot of risk involved if processes are handled manually.”

Pictet sends orders to buy shares in funds either directly to the fund managers or via two fund trading platforms: that of its transfer agent Citco, based in Cork, Ireland, and Fundsettle, the independent platform owned by Euroclear in Brussels.

The direct method is an imprecise science. If the bank’s systems match those of the fund manager the transaction can be fully automated. More often human intervention is necessary, along with its increased potential for error.

The platforms offer a higher chance of a fully automated link-up between bank and fund manager. But although Pictet became a member of Fundsettle two years ago, it is only possible to connect to fund managers through the platform if they too are members. So the bank only sends 15 per cent of its orders through the Belgian platform.

A further 25 to 30 per cent of orders are routed through Citco, which Pictet has used for three years.

“Our perfect choice is to use Swift messaging to send orders and we try to use Fundsettle as much as possible, because it’s independent, but when this is not possible we tend to use the fax,” says Mr Vaucher.

Convolution

If a bank offers its clients external hedge funds, things get even more complicated. Christophe Izzo, head of investment funds administration at Pictet, says: “Hedge funds are particularly manual, heavy work. To buy shares you have to sign a contract on paper with the hedge fund, send a subscription order by fax and then confirm it by letter.

“You have to send the money upfront, which is done by Swift transfer to a bank address but then you need to confirm it’s been received by the fund manager and that they are going to invest it in due time.”

This can take anything from three weeks to three months, and throughout the process you have to keep checking everything is on track by making phone calls and sending emails and faxes. “Only after all that time do you find out the net asset value of your investment and exactly what you hold.

“Imagine if the hedge fund manager is a crook and he takes the money and runs off to South America. It takes a long time to find out what has happened to your money.”

Standardisation

Pictet faces the further problem of reporting to its customers on their hedge fund investments because each hedge fund calculates net asset value prices (NAVs) in its own way, so there are no easy, standardised methods of collecting and collating hedge fund data.

Mr Vaucher says that “if the industry was to think about developing a universal tool to place trades on a single platform, it would be a lot easier. If only we could place an order for units of a fund in the same way a buying shares on the New York Stock Exchange. There, we place the order by Swift, they confirm we have bought x number of shares and we have to pay the money.”

But Mr Vaucher is optimistic that things will get better. He believes that in five years investing in a conventional fund will be as straightforward as investing in shares.

He says: “Hedge funds will be more complicated, but at some point something will go wrong and regulators will respond by imposing rules to standardise the way they operate.

BNP Paribas is among the securities services providers that claim that private banks can have the easy approach to buying funds right now. All they have to do is outsource the back office.

Mauro Dognini, head of product development for transfer agency, BNP Paribas Securities Services, says: “When these guys start to subscribe to cross-border funds and third-party funds they normally encounter big problems because these funds are processed by transfer agents without too much automation and the products are not standardised in terms of their commission and subscription procedures.

“The banks’ experience is in securities, so they try to adapt these systems to deal with funds. We are seeing that as soon as they are using 10-15 fund promoters they outsource the back office.”

Outsourcing undoubtedly takes the problem of linking to external fund managers off the hands of the private bank or wealth manager. “Through our FDS [fund distribution support] product the client has internet access to us, we take care of their orders and dispatch them to all the fund managers”, explains Mr Dognini.

“Then we give the client unique confirmation, which summarises all their positions. We contact the fund managers every day in electronic form in order to give the client the opportunity to reconcile on a daily basis.”

Manual labour

This clearly reduces much of the private bank’s workload, but it would also be comforting for the client to know that once in BNP Paribas’ hands, the process was fully automated. Unfortunately manual activities still dog the process.

This is apparently no fault of the securities services providers. Instead it is the consequence of lack of standardisation across the industry.

Mr Dognini says: “On our side we are doing things on an industrial basis. We have systems specifically created for managing funds, we keep in place each fund’s information, such as cut-off times for investing, in a single system.

“Of the orders we receive from our clients, 80 to 90 per cent are automated. In our system all processes are automated. But then after that it depends on the fund manager and transfer agent.”

BNP Paribas’s FDS platform is live in France, Italy, Luxembourg and Spain. In the UK FDS is to be rolled out to private banks shortly.

Hugh Griffiths, assistant director to specialist investment management consulting firm, Citisoft, believes the growth of open architecture itself will push the industry forward: “As more wealth managers move to open architecture, the pressure to keep costs competitive will drive more demand for systems.”