The role of technology in the investor services industry in general has drastically changed during the past few years. Technology, which had traditionally enabled firms to react to historic dislocations and marketplace change, is now more than ever the catalyst for change.
Technology, which traditionally supported the implementation of business initiatives, now guides the business strategy and where technology was used to reduce cost, find opportunities, and manage risk, it now drives the choice of business partners.
In securities services as in other industries, much of the internet’s ability to transform businesses and markets comes from the power that it gives to the customer – power to compare products and prices quickly and comprehensively, to configure products and services to their liking, and to shop whenever they please – in short power derived from increased information provision.
What implications does this have for the investor services industry? Have our business fundamentals changed and how has our business been revolutionised by the internet? One cannot consider these issues without also reference to the industry drivers affecting the industry: the convergence of secular trends is intensifying the pressure for providers such as ourselves to deliver information in a timely, usable manner, in short real time information.
With the markets experiencing significant growth in volume along with higher velocity of transactions time has become the significant constraint in getting a days work done. This time factor is causing market participants to re-engineer their technology and to recognize the importance of real-time information and the ability to act on it. For real time information to become a reality market participants must engineer their technology against the following benchmarks:
q It must be ‘straight-through’, bringing the benefits of supply chain integration to the transaction life cycle.
q It needs to be scalable – that is, engineered for spikes in volume to keep up with the expansion and volatility of financial markets.
q Most importantly, it must be internet-enabled for client access at all times.
The internet is the fastest- growing medium for client/custodian communication and both internet and intranets offer substantial flexibility. For example, usage of our internet services is projected to triple in the next two years. The majority of custodians use the internet to provide portfolio information, holdings, corporate actions and trade-related information, delivered in real time, and any that have not will find themselves at a competitive disadvantage.
One of the main advantages of using the internet is that a client does not need to store a database on its network. This ultimately eliminates the need for housekeeping, on-site updates and support, creating both time and cost savings to both client and custodian. This design means that the vast majority of the functionality is held at the server end of the bank so most upgrades can be made without needing to gain access to the client’s premises.

We must aspire to seamless communication between all parties involved in the investment cycle as clients are increasingly seeking data consolidation from multiple custodians. This type of service is increasingly pertinent to European pension funds as the desire for consolidated reporting services increases as a result of the increasing trend of their employment of multi-manager strategies to enhance returns.
Web-based systems architecture and data warehousing facilities have therefore become the norm, and this is an area where we have has been investing heavily. To deliver these an investor services provider needs powerful core technology working on a common platform. Ours comprise our global accounting engine, offering real-time multi-currency features, our master securities database, with comprehensive global coverage (high data quality is essential to achieving STP), our client data warehousing, which consolidates the customer information (positions and transactions) and works 24 by seven globally, the basis of our information provision, and powerful messaging capabilities to interact with the client.
After this core engine is in place, the internet comes into its own as the information capture, reporting and general communication tool. But where it truly differs from any previous delivery mechanism is its ability to report in the bespoke format required. The things that make the internet so attractive for this are the user-friendliness, inter-activity and customisation allowing for quick information turnaround times and slicing and dicing the information in any way the customer wants.
Our browser-based communications platform, provides direct access to the bank’s system. Through a highly secure distribution network, this creates a single gateway into the bank across business and product lines, thereby enhancing STP. The use of off-the-shelf browser software eliminates the need for clients to learn proprietary communication protocols. Clients can access this through the internet, a private communications network or via a dedicated leased line communication.
We enable clients to instruct any investor services provider and their broker via the web and provide the ability to route and manage associated FX instructions for cross-border trades through our propriety service suite. We also provide an ability to use automated cash management services, via the web. In short, our platform, via the internet provides a single portal to access in real time our complete range of information.
Another factor in the way the internet is affecting the investor services industry is in the way it allows for new forms of distribution of investments in turn leading to new sectors to service. Consequently this facilitates the emergence of new types of clients, investor profiles and account structures, eg the rise of the affluent investor. This is also causing many intermediaries to lose their place in the food chain as the investors can find new providers and services with just a click.
With this disintermediation process the investor services provider, which has traditionally serviced the investment company and/or the institutional investor, is now well positioned with all of its new technology to link the new types of investors with the investment companies. Once the core platform is in operation it is easy to build new connections or value-added services to service new segments or expand product capability. As in so many other industries therefore, the success of the internet in the investor services world has been as a new distribution and communication tool, not as a new revolutionary product as such. It is much more difficult for any of the other market participants to expand into the investor service providers’ domain.
The one other area where the internet is likely to act as a catalyst is in the realm of outsourcing. With recent high deals being announced recently following the watershed global outsourcing arrangement, namely that of JPIM to ourselves (now live), this topic is again the top item of a lot of operations managers’ agendas.
The appetite for outsourcing has grown and is growing for several reasons: the high levels of technical spending associated with continual developments in the infrastructure Y2K, progress towards a single European Automated Clearing House, a move to shorter settlement cycles worldwide, and the increased urgency placed on achieving wider straight through processing. In addition, end-users are demanding higher standards and higher quality; they want information quicker and they want it better. The underlying fundamentals are today more compelling than ever and the internet is likely to accelerate this trend.
Increasingly clients are identifying their core competencies and are pushing more and more of the non-core functions to the custodians. We are also witnessing an increasing interest in the full outsourcing scenario, where we take on virtually all of the customer’s activities after the investment decision has been made and executed in the market. This allows fund manager to really concentrate on its core activities of managing the portfolios, while all of the administration and delivery functions have been outsourced.
One area that is often forgotten with regards to outsourcing is the requirement to ensure consistent messaging standards and the creation of host to host links. This requires some degree of investment on behalf of the client in terms of time and technology and some feel in the industry has led to the small to medium-sized sectors holding back plans to outsource.
Again the internet can facilitate this and was one of a factor in our recent decision to join with Accenture, Microsoft, Compaq and others to create Encompys, an internet portal offering a comprehensive outsourcing solution for the fund management community. This creates a gateqay to outsource to our middle and back office systems. The goal of Encompys is to offer asset managers via the web an efficient, affordable and risk averse alternative to building their own T+1-compliant systems or integrating separate components from various service providers.
But with all the hype about technology, e-commerce and the internet it is easy to forget that the single most important aspect for the investor services provider is the relationship with the client. Relationship management is all about people. When the transaction doesn’t go straight through and there are questions in need of answers, if the person picking up the phone doesn’t understand the client’s account or know who the customer is, what the requirements are, the service provider has failed – that is another business fundamental the internet does not change.
Jeffrey Tessler is executive vice president and general manager, Europe, at the Bank of New York in London. This article is based on a speech to a recent conference in Amsterdam

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