The Cinderella of fund management finds her feet
Over the past five years the growing globalisation of securities markets, increasing sophistication of investment instruments and higher business volumes have created a continuing need for automated solutions. Those groups undertaking their work in-house are, to a certain extent, able to dictate their own pace of development but for those companies involved in third-party fund administration the changes have created a significant shift in both internal and external perception. Fund administration, once the Cinderella of the fund management industry, has come into its own. No longer just an adjunct to custody or banking services, it is now a competitive, and changing, industry in its own right.
So, if an institution or fund promoter is entering the European fund market for the first time, or an existing participant is undertaking a market review, what should they be looking for in an administrator?
Participants in the third-party arena can be divided into four distinct groups: local heavyweight banks, certain large European banks, the US banks and the mid-size specialist operators. Some new entrants have arrived on the scene but the commonly held view is that we will see market consolidation over the next few years.
With competition hotting up not just on a local front but also between centres – Luxembourg versus Dublin for example – there is an increasing need for participants to differentiate themselves from the rest of the pack. The basic core functions of fund accounting and NAV production have become increasingly commoditised, and differentiation is now strongly a matter of service quality, added value and charging transparency.
Of prime importance, unless a promoter wants a no-frills, conveyer-belt type of service, has to be a willingness for both the administrator and the promoter to adopt a partnership approach to taking the business forward. There has to be effective ongoing communication and understanding, not only about existing business demands but also future plans and product developments. Communication lines should be short and there should be no inhibitions about day-to-day operatives liaising with their opposite numbers.
Service levels should be clearly defined and formally documented and the administrator must be prepared to be measured against them. Formal quarterly review meetings should be organised to report not only on performance levels achieved, but also to discuss wider business issues and future developments.
Flexible reporting is another key component in the client relationship. As product design advances and different distribution channels are opened up, so demands for different styles of management information will grow and administrators will increasingly need to be flexible to meet new challenges.
From the fund promoter’s point of view business success relies on efficient distribution and many funds originally designed only for institutional marketing are now finding their distribution opportunities widening to the extent that they become semi, or even fully, retail orientated. This shift has revealed a serious gap in the market for retail transfer agency capability and there are very few administrators able to properly meet requirements. To support fully a clients’ marketing development plans administrators need to have a multi-currency, and, on a pan-European basis, multi-lingual transfer agency and registration system capable of handling tens of thousands of shareholder accounts, as well as having mother-tongue staff trained in being the client company’s interface with its investors.
The quality of any service is very much a reflection of the standard and philosophy of the people offering it. Education, training and staff development is becoming increasingly important factor in new business reviews and administration companies looking to stay ahead need to view training, particularly customer-care training, as an ongoing investment.
In the pitch for new business internationally recognised accounting standards applied to fund administration operations can make all the difference. In the custody world the FRAG 21 audit is well known, and similar to the SSAP 70 qualification in the US. Very few European third-party administrators have put themselves forward to be measured against these standards. Just having a detailed procedure manual in each operational area is no longer good enough as an indication of operational supervision and risk management. Internal control frameworks should be in place and viewed as “living” documents demonstrating to clients that the risks inherent in looking after their affairs are both properly understood and properly controlled.
The debate still continues that “big is beautiful” and that a “one-stop-shop” is the only viable administration service model. However market trends in the US, usually soon followed in Europe, are pointing to the growing use of specialist providers. Without doubt all the third-party market participants are very professional in their undertakings but the best global custodian is not necessarily the best fund administrator and pricing structures are not always as clear as they could be. Employing separate service providers gives an institution or promoter the opportunity to select “best of breed” and to have an exact understanding of fees and charges. Procedures can often be arranged so that the administrator co-ordinates the communications with the custodian then, in effect, a single reporting line can be achieved.
Another factor now becoming apparent in the changing landscape of cross-border distribution is that institutions and promoters may well enter into strategic alliances requiring relationships with a range of custodians. The ability for an administrator to have multi-custodian capability, and to be able to manage relationships on behalf of the client to produce a single reporting line will become a key advantage.
With the much-heralded private pension boom just over the horizon and the anticipated effect that that will have on mutual funds, promoters can expect an upsurge in individual investor enquiry. Investors will become increasingly better informed and the demand for internet and e-commerce dealing solutions will grow. Initial requirement will be for information provision only, but dealing capabilities directly interfaced to the administrators transfer agency system will soon be required. Most third-party, and some own-administration, companies are developing this facility but few, if any, currently have a straight-through dealing capability.
Prospects look bright for mutual fund management groups in Europe and both new entrants and expanded cross-border plans from existing participants can be expected. Competition for this new business amongst the fund administrators will remain fierce but there are roles to play for both the heavyweights and specialist providers. Every institution or promoter has its own individual style and the ability of fund administrators to add value by being flexible enough to meet these styles is going to be the telling difference.
Rodney Williams is head of client relations and sales – Europe at Cogent Investment Operations