In search of the ultimate solution
The search for quality administrative solutions (systems and providers) continues across Europe. Whether it is for domestic and offshore mutual fund transfer agency services, or for the growing need to provide defined contribution recordkeeping capabilities, the fact is that there are few options. Moreover, what makes the issue even more daunting is that it applies to domestic markets and not just the newer, and growing, cross-border market.
Within each country in Europe, mutual fund providers have had to access transfer agency services from two sources because of the lack of integrated onshore and offshore administrative platforms. The challenges of integrating data to provide clients and intermediaries with consolidated information are significant and costly. In addition, investment providers now have the added challenge of addressing the need to provide defined contribution (DC) recordkeeping. The resulting effect is that an investment provider could have to access the necessary administrative capabilities from three different systems, if not three different outsourced providers.
This article will attempt to provide a ‘blueprint’ for one way of developing an administrative solution providing mutual fund and DC services across Europe. That being said, the assumption of a pan-European regulatory environment will not be made, as it is not likely that such a scheme will truly equalise the taxation, product and reporting requirements for all countries. To that end, administrative systems and providers will have to comply with the requirements of operating within the local/domestic regulations.
Given such constraints, and with the benefit of being able to design an ideal means of supporting these businesses, the following wish list should provide a model for the development of a pan-European system and infrastructure:
q There has been, and continues to be, a strategic shift in emphasis from a product to a client ownership focus among asset managers. In other words, many see the value and long-term benefits of owning and having access to actual client/member data. What this means for many providers is that they are increasingly interested in performing (or having rights to) the actual administration of these products.
In effect, asset managers are seeking alternatives to the traditional choice of either ‘insourcing’ or ‘outsourcing’ the administrative functions. One means of achieving this objective is to have a number of asset managers join forces to develop the technology required to provide the core administration of these products.
Consortiums have not always proved to be successful, but in this instance, the combination of cost sharing and leveraging know-how and expertise should outweigh any perceived competitive advantage gained by trying to ‘go-it-alone’. Moreover, it can be argued that the competitive advantage is not in the core administrative system and recordkeeping but in the client servicing and front-end applications.
q The products supported by the system and infrastructure would need to represent a combination of the market segments previously outlined. In other words, in order to gain the full benefit and realise the economies of scale required to drive down unit costs, the system would need to support both domestic mutual funds and DC businesses.
It is commonly accepted that the growth of DC in Europe will be slow and fragmented across a number of countries. The consequences for administrators is that it will be some time before they are able to recoup the large investment required to develop and run these systems. The most efficient means to drive down these costs would be to somehow leverage the growth and demand for mutual fund transfer agencies.
A number of studies have been conducted to assess the commonalities of administering mutual funds and DC products, and the conclusions are promising that such a combined systems can in fact be developed.
q From a systems architectural perspective, the system will need to be flexible to account for the various tax, product, regulatory and reporting rules in each country. As no such system currently exists, the challenge is to design the necessary architecture which does not ‘hard code’ those functions and processes which need to be different in each market. Needless to say, the system will need to be multi-currency and multi-language, but the key is to determine those elements that are generic across all markets and to then build around this ‘core’ accounting facility, the ability to structure and comply with local requirements.
q The concept of a ‘hub-and-spoke’ approach is not uncommon or unfamiliar to many industries. It is, as yet, unapplied as it relates to the administration of investments and pensions in Europe. Within the framework of this approach, the back-office functions would be performed at a single, central location. The benefits of structuring the back-office in this manner serve to maximise economies of scale and to allow for an efficient means of maintaining and updating the system.
The users of the system are able to either access the system through a ‘service bureau’ approach (performing the actual administration themselves) or opt to outsource the entire back-office.
Given the diversity and complexity of the local tax, regulatory, product and reporting requirements for both mutual funds and DC suggests a centralised point of control. One of the key measures of the flexibility of any such system is the speed and accuracy with which it can be enhanced for new markets. This is best achieved through a centralised structure.
The client-facing aspects of administering both mutual fund and DC products should be performed locally. Access to the central database of client/member records allow local client servicing people to maintain call centres, perform reporting functions, and facilitate the paying-in/out of contributions and redemptions. Moreover, access to the central database enables internet- based applications to be developed thus maximising efficiencies of processing both locally and centrally.
q Finally, the developing concept of a bundled arrangement offering access to multiple investment managers is entering into new and un-chartered territory. Whether it is a mutual fund supermarket or a DC provider offering a multi-manager fund option, the challenges of aggregating, routing and reconciling trade orders across multiple managers are new and mostly unknown. One simply has to look at the US to see the growth of the NSCC (?) and trust companies acting as transaction processing intermediaries between the administrators and fund managers of these arrangements.
To this end, the additional capabilities of intermediating the flow of client/member/fund transactions and monies between and across fund management organisations would be an extremely valuable function. In other words, the suggested system and infrastructure augmented by the ability to also perform order aggregation and routing would result in an extremely compelling service proposition.
The objective of this article was to identify some of the capabilities and functionality required of a system/organisation to perform mutual fund and defined contribution administration across Europe. By no means does this represent the only method to accomplish the objectives that many fund management organisations have of supporting their growing European businesses. It is one, however, which if available, would address the many issues facing those organisations seeking to capitalise on and compete in the opportunities presented in Europe.
David Calfo is a director of Provizion, a London-based consultancy