Bluerock Supplement : December 2002

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BR Supplement - December 2002 (355k)
Which Distribution Model? Which Technology?
Keywords: investment fund, straight through processing, distribution, technology, fund manager, architecture


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Which distribution model... Which technology? Solving the dualities of investment fund distribution in Europe The European investment funds sector continues to re-mould itself to fit the shifting contours of the post-Bubble Economy landscape. Like the movement of the tectonic plates that affect our planet's topography, the opposing forces of several key influences shape the hills and valleys of today's investment marketplace. It is the reconciliation of these dichotomous influences - Distribution vs. Efficiency - that ultimately will lead to a winning solution, despite an uncertain and changing environment. Successful distribution players in the altered investment funds landscape should be able to offer quality of advice, choice and access to investors, and to master distribution efficiency with appropriate technology-enabled processes. Mapping the new competitive landscape A survey of the current landscape, from industry sources such as SWIFT, Cerulli Associates, Forrester Research, and The Times, reveals some unsettling indicators, including: - Approximately 30% of fund manager costs are spent on back-office, administration, and accounting functions - A manual fund valuation via fax/phone costs an average of GBP 30, compared to just GBP 1 if automated - The cost of processing a US mutual fund order is 17 cents, compared with over EUR 35 for a European investment fund order - Considering all non-order related processing and reporting, error remediation, risk management, and cost of losing customers and reputation, then the estimated total cost of manual processing of fund orders to the European industry is a staggering EUR 5 to 10 billion Despite the realisation from fund distributors and their third party administrators that automation and straight-through-processing are the keys to successfully managing overheads and controlling administrative costs, various interrelated factors affect their efforts to drive forward change. Multiple and un-coordinated order entry points exist across the distribution chain, no "universal processing platform" or communication protocol for fund processing data is used, and distribution dynamics vary widely across Europe's boundaries. Add to these drivers the disappointing fact that the growth in customers, assets, and trade volumes have not materialised as forecasted. Ever-more educated and demanding customers continue to ask for increasingly higher volumes of fund information. Many customers still want human interaction before making, or during, an investment decision, despite also using the innate self-help capability of the Internet. The battlefield is bounded by an institution's distribution quality - that is, quality of advice, choice and access given to investors and customers - the depth and breadth of their product distribution, and the holistic nature of their technology-driven offering. Plotted against this competitive backdrop, independent financial advisors and advisor networks typically inhabit the quadrants with high quality of advice, service and product access, but suffer in the efficiency of their distribution processes and technology uptake. The opposite is typically true for banks, third party administrators, and larger distributors and fund managers. The Winners' Square is occupied by those organisations that can successfully combine distribution quality and efficiency, with technology that enables both of the former elements in an end-to-end, seamless value chain. Distribution vs. Efficiency: The inherent dualities An organisation's distribution model and ultimately success on the battlefield, takes form based upon the decisions made along a sliding scale of seemingly opposing drivers. The challenge for fund distributors traditionally has been to reconcile the dualistic influences of both "distribution drivers" and "operations/technology drivers." The figure, below, highlights the most important of these dualisms. Driving the distribution decisions is the need to address the different requirements of different end-users - from the retail investor on the front-end, to the front and middle office customer relationship officer, to the back office operator or system analyst - in an enterprise-wide fashion. Contrast this with a need for an operationally efficient and cost effective single, integrated system. Less integration points means fewer points of failure, and decreased maintenance overhead. There is the need to provide and service the growing distribution channels, while simultaneously providing for an efficient and cost-effective back office. Intuitively, these drivers would go hand-in-hand. But in practice, our industry has already learned the lesson of the unsustainable business model that emphasises one of the operatives at the expense of the other. The example is of a fund supermarket that can offer fund distribution via a web-enabled front-end, but is unable to continue delivering value to the customer from the back office due to manually-intensive, error-prone, and costly processes. There is the need to offer open architecture to address customers' demand for product choice, while simultaneously offering and managing their own funds to a high performing standard. The age-old supermarket dilemma still applies here: how to ensure your own branded products are received well by consumers, while still offering the range of brands to attract the range of consumers. There is the need to increase the Assets Under Management (AUM) and remedy the drain of assets away from investment fund products, while addressing the other side of the equation, that is, management of costs and risk in lieu of shrinking profit margins. And, certainly not least in importance, is the need for an industry-wide unified platform for fund distribution, yet one that can address the country-by-country variations of distribution models, dynamics and regulations. These drivers should not be taken mutually exclusive of each other. Nor do they influence decision-making equally. This then begs the question: how does a fund distribution organisation find the solution to address the distribution vs. efficiency dualities? The right technology - combined with appropriate people and processes, of course - will turn the tide of the battle for the intended victor. Which technology? Elements of the ideal solution To address the multiplicity of pan-European investment fund distribution, an equally multi-faceted 'ideal' technology system is required. Taking into consideration the aforementioned decision drivers, one can overlay a blueprint for an ideal technology-enabled solution. Strong yet flexible. The ideal system must be well designed, in total, to be a completely integrated, solid system. At the same time, it must extremely malleable, with open integration interfaces, perhaps a common messaging foundation, and modular customisable applications to fulfill different end-user requirements. Seamless connection. Distribution growth is unsustainable without a commensurate growth in back office efficiency and cost-effectiveness. The ideal system addresses this by being scalable and robust to growth in transactions, users, accounts, assets, and information. The system should provide a seamless connection from the retail investor customer, over various distribution channels, to the operator in the back office, and beyond. Each user may have different 'windows' but with a view to the same data. The ideal system should banish the days when a back office operator or financial advisor would have to query two or more disparate systems, then compile figures and accounts using a contrived spreadsheet, then post a paper statement to answer a simple portfolio valuation query from a customer. The time and materials costs (e.g., paper & printing charges, fax machine and postage, etc.) are prohibitive, and, in this digital age, an anachronism. 'One stop shop.' The system must enable open architecture fund distribution - an offering of multiple fund products and savings vehicles from multiple providers, all under a consolidated account portfolio. A Fund supermarket-style 'one stop shop' would encourage competition on the basis of fund performance and value. In order for a fund distributor to differentiate their products as value for money on a supermarket shelf, they have to offer lower (or no!) initial fees and management charges. True straight-through-processing. With ever-shrinking profit margins, an organisation's success in keeping and growing assets under management but not at growing expense depends largely upon the use of straight-through-processing technology. Less manual intervention and more 'exceptions-only' operator handling equates to lower mid to long-term operating costs, and allow distributors to re-focus on the actual product's performance and appropriateness of their constituent investments. Fund managers would be able to justify their annual management charges and fees. Flexible processing engine. Considering Europe's diverse investment funds landscape, the ideal system must embody both a common technology platform, or foundation, and an architecturally flexible rules-based processing engine to operate on a country-by-country basis. In lieu of a single communication standard for investment funds, the system must be 'fluent' in the languages of all the major European service, or 'utility', providers. The New World re-visited Despite Europe's varied distribution models, the newly risen hills and valleys of the post-Bubble Economy emphasise the one reality of operating efficiencies on an enterprise-wide scale. The bursting of the 'on-line' channel does not herald the "end of the Internet" as a tool to efficiently deliver highest quality, winning distribution. Investors will continue to demand ever-increasing levels of service and functionality regardless of distribution channel. In this landscape, straight-through-processing efficiencies are more important than ever before. Combined, the ideal elements described above create an infrastructure and a system that is cost effective, functionally rich and highly flexible. The solution has strength, yet suppleness to reconcile inherent dualities of the investment fund industry, and to adapt to the new competitive landscape, which may change still. Tomorrow's conquerors are those who use today's reality, who carefully survey and pioneer the changed and changing landscape, to position themselves for the eventual market recovery. Investia is dedicated to helping financial institutions in the investment services marketplace to deliver technology solutions which can: rapidly improve operating efficiency; create new distribution strategies; and, build profitable new business streams. Investia's technology platform embraces straight through processing from the front-end pre-trade to the back-end clearing, settlement, custody and administration. Philip Alipio is a Product Manager focusing on business development, sales and marketing at Investia, with over seven years experience in both consulting and managerial roles in government, development banking, and financial services institutions.