Peeking behind the curtain - A look at true straight-through-processing for fund distributors Some weeks ago I wrote about straight-through-processing of pan-European investment funds from the perspective of the end-user, or self-directed retail investor. In that scenario, I assumed that, as the retail investor, I am oblivious to the back-office processes that enable me to receive valuable customer-oriented service, transparent pricing structure, and investment fund products with high value and high performance. The scenario also assumes that the open architecture facility already exists to easily review my consolidated account information and fund performance, conduct market research over a range of fund providers' products, and execute desired trades, through whichever channel suits me - over the Internet, via WAP/3G, via branch or call centre, via financial intermediary, and so on. Now let us take the viewpoint of the fund distributor - the fund supermarket operators, the banks, the financial advisors. We have built it -the open architecture fund supermarket - and they have come. But suppose the retail investors have made the journey in faith to our flashy website, logged on, made a trade, and then the inconceivable happened. The trade was not processed at the appropriate cut-off time for the fund, because the distributor's back office operator keyed the wrong numerical figures into the fax bound for the fund manager. Metaphorically, like Dorothy and her stolid companions, the retail investor has lifted up the heavy veil behind the fancy display, only to discover that their wizardly oracle is but a charlatan. In truth, fund distributors by now may have embraced the concept and benefits of multi-channel distribution, but still encounter massive hurdles in the back office to achieving true straight-through-processing. One European standards-setting industry cooperative recently estimated that of the greater than ¤4 trillion funds under management, over 50% of the 30 to 50 million orders per year are placed manually. The cost of manual processing is a staggering over ¤1 billion! Accounting also for all non order related processing and reporting, the cost of rectifying processing errors, risk of market movement, risk of reputation loss, and the cost of lost customers, then the estimated total cost of manual processing to the industry rises to ¤5 to 10 billion. The issues for the distributor are complex, and made more so by the heterogeneous nature of the European market's varied tax codes and financial regulations. At the heart of the problem - the key driver for change - is the high incidence of manually intensive and therefore error-prone processes. In stark contrast, this same driving force in the late 1960s in the U.S. led to the establishment of a unified clearing, settlement, and custody framework. Additional indicators in Europe's unique market environment underscore the need for innovative change. These are: - The requirement to integrate to multiple systems and communication protocols imposed by the fund managers and their 3rd party administrators - The difference in trading and processing business models, including the roles of participants, across borders - The need to service an increasing number of fund distribution channels - The increase in transaction volumes over time - The demand for competitive and transparent pricing - Shrinking profit margins - The need to present, store, manage and access increasingly higher volumes of fund information Figure 1: The pan-European fund industry is in need of a true straight-through-processing model that can offer integrated order entry via multiple channels; flexible and independent interfaces to all clearing and settlement systems; exceptions-only operator handling; and real-time reporting and control mechanisms. Unfortunately, but perhaps fittingly, fund distribution bodies are caught somewhere in between the demands of their customers and the inertia of their product suppliers. Of the latter, much can be said about the competitive nature of the industry driving the fund managers and their transfer agents to develop proprietary systems using non-standard messaging protocols. With an already large investment in the legacy system - some in excess of ¤100 million - they are loath to give up their competitive advantage for a unifying system and standard. With the customers, however, distributors wield a certain influence over the fund providers. And it is herein that straight-through-processing yields its greatest benefits for the distributor. That is, distributors, not the fund providers, have traditionally held the direct customer relationship. It is the immediate concern of the distributors, then, to address the investors' needs. Moreover, with current uncertain market conditions dampening transaction levels, distributors may have to look towards a fees cost-basis, rather than a commissions cost-basis. To justify the fees paid by ever-more-demanding customers, distributors must be able to offer sound advice, high performance fund products, and reliable and cost-effective back office administrative systems. I would suggest that the customer-distributor relationship could be used to influence the fund manufacturers to embrace standardisation in clearing and settlement systems and messaging protocols. This is an industry-wide effort, which needs buy-in and cooperation from all involved stakeholders - not an easy task, but one that can reap sizeable benefits. In the end, whether or not the curtain is fully drawn on a distributors back-office operations, the customer-facing presentation must not mask an inefficient and costly administration that employs hundreds of staff to process trades via fax, telephone, spreadsheet reconciliation, and the like. The STP alternative is the one that will safely return Dorothy, and her fellow satisfied customers, 'home'. 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.