Innovation overload


Technology is changing the way we live, work and invest. Experts discuss how transfer agency is reacting as the movement gathers pace

Sorya Tea
Senior vice president for investor services
Brown Brothers Harriman

Mark Standish
Vice president for product management
Quartal Financial Solutions

Paul Stillabower
Global head of client experience
RBC Investor & Treasury Services

Ghassan Hakim
CEO
Riva Financial Systems

David Moffat
Group executive of financial services
IFDS

Kelly Ashe
Sales and marketing manager
Pacific Fund Systems

How has the rise in financial technology affected the role of transfer agents? Is there a risk of the function becoming obsolete?

Sorya Tea: The word ‘fintech’ might be recent, but it’s not a new development for transfer agents and we have worked with software companies for many years.

Innovation is happening at a faster pace and the industry is definitely evolving. However, the recent advances in technology we have seen are mainly impacting retail relationships—rather than the institutional space—where direct customers are taking advantage of the rising number of digital options available to them, such as online shopping and online and mobile banking. Research shows that consumers are becoming less reliant on traditional face-to-face interactions.

I don’t believe transfer agents are at risk of becoming obsolete, especially in the institutional/wholesale space. There will be numerous opportunities for more automation, which will allow us to focus more on value-added services that cannot be automated.

We are dedicating more resource than ever to actively monitoring how fintech can enhance our servicing model and investors’ experience at Brown Brothers Harriman.

Ghassan Hakim: There is no doubt that the rise of fintech has stirred many aspects of the financial services world, not excluding transfer agents. However, the consensus at the moment seems to be of uncertainty as to the real versus the perceived impact.

What is sure, though, is that change is continuously coming. But, perhaps the new changes will make their impacts at a faster pace than in the past. Transfer agents need to be ready for what’s coming and perhaps the most likely shorter-term impact is investors using personal apps, bypassing clearing organisations and possibly distributors, to transact directly with the transfer agents.

Will the actual function of a transfer agent become obsolete? It is unlikely in the near- to mid-term horizon, and the answer may not be in the technology but in how the regulators react and set new fintech rules. It is difficult to foresee a financial world without some form of central registry to keep track of a fund’s shareholders, in/out flow of investment funds, regulatory reporting and mandatory know-your-client (KYC) and anti-money laundering (AML) oversights. It will be interesting to see how collaborative the industry participants will be with fintech and amongst each other, and whether real standards emerge for the benefit of the ultimate investor.

Paul Stillabower: The rise in fintech firms and the approach they adopt has had an impact on transfer agents and the funds industry as a whole. Fintech can provide the solutions that both transfer agents and asset managers need in order to innovate, and help them to flourish in the long-term.

Transfer agents were historically slow in adopting technology to automate and standardise their processes. Less than 10 years ago, the industry was considered a manually intensive business. However, a significant amount of investment has been made by the industry in improving its technology to achieve higher rates of straight-through processing (STP) and reporting capabilities. That being said, many of the core components a transfer agent carries out will likely be affected through further advances in technology, to one day reach full automation. It is therefore imperative that transfer agents continue to evolve by leveraging the vast amount of data that they hold. This big data, if packaged in the right format, will assist their clients in gaining a greater understanding of distribution trends.

Transfer agents will not only continue forging partnerships with the fintech sector to help achieve their objectives, but also adopt a fintech mindset by adopting agile methodology and building innovation labs. Fintech is likely to continue playing a significant role in this evolution and become a valuable collaborator. 

David Moffat: The challenge for existing agents is to evolve the processes already in place so disintermediation by outside players can be avoided.

The development of fintech within the asset management sector has been moving at a glacial pace compared to banks and payment networks, resulting in a number of start-ups entering the industry.

Rather than risk disruption in the industry, transfer agents have the chance to innovate and transform existing processes using the likes of robotics, artificial intelligence and moving the point of servicing closer to the customer.

Kelly Ashe: The fund administration industry is in a constant state of flux, and transfer agents in particular face the continual need and expectation to improve their business processes to meet the ever-changing dual needs of their clients and the end investors.

The ongoing challenge for transfer agents to improve their levels of automation and efficiency, as well as respond to pressures on reducing fees, is substantial, and the threat of a game-changing disruptor entering the industry to exploit the inefficiencies and excessive costs that exist has never been higher.

The traditional role of the transfer agent will change in response to increasing automation across STP platforms via application programming interfaces (APIs), utilising cloud net technologies to network data streams, ultimately leading to a situation where exception processing only is the standard industry-wide, regardless of fund type.

With evolution an inescapable fact, fund administrators must adapt their business processes and operating models to keep their services fit for purpose as asset managers become more demanding and the regulatory environment continues to mature and expand. Those that fail to keep up with the pace of change risk obsolescence.

Mark Standish: There is a very real risk that technology will replace many of the functions that transfer agents perform. Technologies that have been little more than buzzwords, or for technology geeks, are moving from start-up mode to being credible solutions for business problems. In the wider financial industry, blockchain and distributed ledger technology (DLT) are starting to find real business uses and are a focus for most major financial institutions with expectations of reduced IT costs, improved data sharing and lower operational costs.

When you look at a key transfer agency service such as the shareholder registry, this is an obvious application of blockchain or DLT technology. Once you have a secure, distributed, immutable ledger of shareholder transactions, this information can be made available to authorised third parties for the provision of other services. These services, usually part of the transfer agent’s bundled offering, are no longer tied to the transfer agent and can be supplied by others using the data secured in the ledger. Transfer agents will have to respond to this threat and turn it into an opportunity or watch as the traditional pillars of their service are eroded.

Which technology developments do you expect to have the biggest effects on transfer agency? Blockchain, artificial intelligence, or something else?

Hakim: Blockchain, by far, is currently the most transformative technology development that will have the biggest impact on the role and function of the transfer agent. Blockchain is the technology that is most likely to eliminate the middle man, mainly the clearing organisations and the distributors, allowing investors to send their personal transactions directly to the fund, as represented by the transfer agent. Could there be a scenario where the investor transacts directly with the portfolio manager, informing that manager of available funds to invest or requesting redemptions or switches, and so eliminating the transfer agent? Unlikely in the foreseeable future, given the possibility of making that fund manager ineffective by channeling attention to the flow of transactions rather than on the market and investing opportunities. However, this is not to discount other technology advances that will impact the transfer agent.

Artificial intelligence could eliminate the resource-intensive back-office functions, allowing investors to self-service themselves at levels never experienced before, such as making adjustments to their own trades. Further, the continuous spread of everything that is mobile, and expectations of immediate responses, will cause transfer agents to completely overhaul their infrastructure, which today consists of old legacy transfer agency systems.

Moffat: Blockchain’s ability to record transactions means the technology should be a cornerstone for asset managers looking to ‘change their propositions’ and engage with clients more directly, at the same time as utilising the low risks blockchain offers.

For example, IFDS carried out a test where a mutual fund transaction was processed and recorded on a private blockchain without any input from intermediaries. Once the order had been made, the record was added to the firm’s main register and data was not compromised.

Regulators are increasingly interested in blockchain because of its risk reduction by streamlining back-office processes, which will ensure obligations arising from transactions are certain and cannot be denied or fraudulently modified. Another demonstration of its safety is how debtor and creditor ledgers on the blockchain are tamper-proof, removing the need for confirmations and reconciliation.

Registries and sub-registries can be maintained directly on the chain, and payments can be re-joined tightly with delivery events, negating the need for clearing, settlement and confirmation processes, which effectively minimises counterparty and credit risk.

We estimate that the influence of blockchain on the space could lead to asset managers experiencing significant cost savings by dealing with the consumer directly via the blockchain.

Ashe: Blockchain, by its very nature as a digitised distributed ledger, clearly has the potential to greatly facilitate the role of the transfer agent.

Much of the industry’s experimentation with blockchain to date has focused on how trades are recorded, which could affect how and when transfer agents receive information used to manage the shareholder record. Furthermore, the open and transparent nature of the blockchain technology offers the potential to streamline compliance functions like AML, KYC and fraud detection.

Such potentially disruptive technology may change what transfer agents do and how they do it, but will likely ultimately force a more effective use of automation technology in the industry. An example of this can be seen occurring already with the traditional role of the transfer agent changing in response to the increased automation and interaction across STP platforms via APIs, utilising cloud net technologies to network data streams, ultimately leading to exception only-focused processing.

Standish: Short-term, the collation and analysis of the data that is already available to provide business intelligence gives an insight into the business and profit sources. Blockchain and artificial intelligence could be expected to have the greatest medium-term impact—blockchain and DLT for shareholder registry and service provision, and artificial intelligence in AML and KYC procedures, potentially coupled with blockchain identity validation. Longer-term, the impact of service-based distributed processing and data transfer with common standards will transform data management and reduce the reconciliation requirements across the entire financial industry.

Stillabower: Over time, blockchain and DLT will be materially significant in both the transfer agency and distribution space. The emerging technology has potential in a number of areas, but is more likely to evolve in pockets of internal processes. Blockchain should be viewed as a fundamental infrastructure development rather than as a replacement for transfer agents. It may become a key component of the client experience, but it will not necessarily revolutionise the industry, at least not in the short term.

Blockchain has the potential to reduce risk and increase transparency and traceability of transactions, but regulatory and compliance requirements still need to be met. RBC Investor & Treasury Services will be an active sponsor in developing the potential opportunities that blockchain presents in supporting the buy side. Given the extensive amount of big data that transfer agents hold, there is scope to develop in areas such as predictive analytics to help fund managers understand buying behaviour across a wide range of demographics.

Tea: I think artificial intelligence and robotics are more elaborate words for automation initiatives. While they could improve some core processing components of the transfer agency function, this would be limited as we are already at high levels of STP. At Brown Brothers Harriman, we have always focused on optimising operational processes including trading, cash, reconciliation and data input and reporting.

From our perspective, the technology developments that have the biggest impact on our transfer agency models are online capabilities for the institutional and wholesale funds buyers. This will be particularly transformational in the AML/KYC space, enabling online account opening and documentation uploading, in addition to the use of online dealing and reporting. However, we need to keep in mind that in order for a truly new model to be successful, full regulatory and market support is critical. As an example, online account opening will only work if an electronic signature is fully accepted.

What kind of benefits would greater automation bring?

Stillabower: The European Fund and Asset Management Association SWIFT Fund Processing Standardization Report (mid-year 2016) suggested that a significant number of fund orders still have some type of manual intervention. Transfer agents’ fund order automation rate is approximately 90 percent for Ireland, while Luxembourg is 82 percent. That means 10 to 18 percent of the orders processed, which amounts to more than 300,000 orders a month, are processed manually.

The benefits of striving to 100 percent automation are obvious. Efficiency and operational risk mitigation are key objectives, which in turn would improve the overall client experience while opening opportunities to enhance services that leverage the big data that transfer agents hold.

Ashe: Back-office administration, by its very nature, is perfectly suited to be automated, and investing in STP technology is essential. It is repetitive, often involving very complex data-intensive processes, and it has a lot of underlying moving parts. Maximising the advantages offered by technology to increase automation is crucial if an administrator wants to be both efficient and accurate. An excellent administrator will not only maximise the use of technology but will also constantly seek out new and improved technologies, continually pushing the boundary of what is achievable in terms of automation. Of course, all of this comes at a cost, so this is a significant factor of the overall operational challenges facing an administrator.

At Pacific Fund Systems we have seen a significant emergence of the automation of private equity fund structures. First retail and mutual funds were automated, then hedge funds, and now private equity funds. In this new world, data is everything. With regulators pushing for greater openness and accountability across the industry, the new requirements for disclosure and transparency will increasingly fall to the administrator.

The pressure to deliver more data will increase exponentially, not just because end investors will demand access to more detailed and sophisticated information at their convenience, but because fund managers will have an intensified need to gain a deeper understanding of investor behaviour as changing distribution trends emerge, alongside risk insight and analytics tools. Leveraging big data is not a new concept for the funds industry but fund administrators have been slower to react, partly due to legacy technology issues.

Tea: Over the past decade, the industry has made significant efforts to automate transfer agency processes, with a focus on transactions, cash processing and reporting. Manual processing takes up valuable time and resources, as well as increasing the margin for error. Further automation across the servicing chain would mitigate risk by removing the human element of these processes and allow increased focus on more value-added services. We also recognise that a manager’s level of automation and efficiency can affect its speed to market for new products and its ability to answer clients’ demands. It is therefore important to work with a transfer agency provider that is focused on scalability.

Standish: Automating processes within an organisation has a material impact on the bottom line. Realigning expensive human resources to manage complex problems that cannot easily be solved by rules is more efficient and more rewarding.

While not everything can be solved by rules-based processing, in many cases the amount of data that can be processed against complex rules may identify patterns and activities that the human eye would never see. However, it is when you consider the impact of automation between organisations and across markets that the economies of scale and efficiency, and innate ability to trust the data received, that the biggest benefits are gained.

Moffat: To date, automation initiatives in Europe and Asia’s transfer agency markets have come about due to third-party suppliers identifying a commercial niche to exploit, rather than transfer agents actively collaborating with distributors to find more efficient ways to work together. As a result, there are many services and functions around trading and settlement where these third parties can—and have—exploited automation, yet so few examples of innovation centre around the more mundane administration functions.

The next steps in automation will likely be in the collection, analysis and use of data sub-sectors. The second Markets in Financial Instruments Directive requires fund managers to have a much greater understanding of who is buying their products, for what purposes, in what concentrations and in combination with what other products. Services that allow fund managers to look at the underlying adviser and consumer behaviour—through banking and platform nominee holdings—in near real-time will radically alter the product design, marketing and sales activities of fund managers in a very short time-frame.

Hakim: The key benefit of increased and smarter automation is meeting the expectations of the next generation of investors. This is a generation that is growing up on mobile devices, social media and a borderless world.

They have no patience for filling out long applications, snail mail and periodic reporting. They want information at their fingertips and they will tend to follow online reviews from fellow investors rather than hearing the advice of a sound financial planner.

As a result, when fund manufacturers implement automation that meets those expectations, that’s where the key benefit will manifest itself. Automation also brings greater control over compliance, whether in knowing your customer or identifying suspicious activities, eliminating possible human errors.

Another benefit from smart automation is the introduction of timely dashboards that provide fund manufacturers instant information on possible trends, allowing managers the opportunity to react and address them. 

Finally, as has been the case for years, automation usually brings about lower costs for the fund manufacturers, eliminating redundant systems, streamlining underlying infrastructure and reducing headcount, all of which should translate into lower expense ratios for the investors.

Are these changes happening fast enough in the industry?

Standish: The banks and exchanges are at the cutting edge of applying new technology. Partly, this is as a result of a surge in interest in blockchain technologies since the arrival of bitcoin. The latest developments, such as Corda from the R3 consortium, aim to resolve many of the public/private issues and are an indication of where we believe the industry is moving.

The majority of these technologies are still to be proved in business use, though there are many initiatives that are starting to have an impact. The funds industry has not yet experienced the same pressures that the banks have, but already, downward pressure on fees, regulatory requirements and an optimisation of third-party costs are raising the question of what more technology should be doing for an organisation. While there is merit in not being on the cutting edge, it is a brave organisation that ignores, or makes no attempt to anticipate, the developments in the wider market.

Tea: ‘The industry’ refers to a broad space that includes retail and institutional investors, so we are seeing change occur at varying paces. For the retail space, technological advancements are happening more quickly, whereas the institutional market might not be at the forefront but it is definitely benefitting from the learnings seen in the retail space and adopting those.

Moffat: Many of these changes are driven by the intended and unintended consequences of regulatory change. As a result, most asset managers would argue that the changes are happening too quickly and without regard to the imposed cost.

Changing a business model can only happen when a clear financial case can be made for the investment, or when a shift in the law or regulations requires it to. Left to their own devices, asset managers and transfer agent service providers have shown a reluctance to invest in improved operational models and services. As a result, step changes are, in general, either driven by the regulators or by new entrants with disruptive propositions.

Hakim: Before we look at how fast the changes are happening, we need to ask ourselves if the changes taking place are indeed the right ones for us to make, and whether they are addressing the problem or challenge we are solving or addressing.

The idea is that we should not change just for change’s sake and, once we identify the right change, then we need to ensure that we are implementing these changes the right way and not introducing chaos, confusion and inefficiencies.

With that in mind, our industry is a highly regulated one, so for changes to be materially effective, existing regulations and regulators need to adapt to them. So, maybe the question should be phrased towards how fast the regulations are changing as a result of the rise of fintech and its influence over our industry. At the end of the day, I believe that the regulator will control how fast the changes are happening. 

Historically, regulators have always lagged behind new technology innovations and advances. However, this time around we are seeing our regulators becoming more proactive and engaged by participating in the discussions with fintech, and hiring resources with relevant fintech experience.

Stillabower: We continue to hear the maxim that ‘we live in a digital age’, yet in the funds industry an average of over 10,000 daily fund order instructions continue to be processed manually for Irish and Luxembourg funds. There is no easy route to 100 percent automation, but this must be an aspiration for transfer agents if they want to remain in step with technological evolution.

More can always be achieved to advance the changes required, but with finite resources available there is a fine balance between moving the industry forwards through innovation and implementing equally important regulatory obligations.

Ashe: The fund administration sector is changing quite rapidly, as more and more demands are placed upon administrators to comply with ever-increasing regulatory and reporting requirements demanded by the world’s regulators, tax authorities and investors.

As a provider of software, we invest time and resources to analyse the ways in which the needs of fund administrators have changed and will continue to change, and constantly monitor the industry to identify what adaptations are in view as we seek to ensure solutions are in place by the time, or before, they are demanded by administrators.

The systems used by fund administrators must be able to cope with the ever-deepening due diligence obligations of the transfer agent to investigate and to validate the identities of the investors, the parties related to the registered entity and the ultimate beneficial owners.

The price of getting it wrong is not simply embarrassment or minor licence breaches—it will be major punitive fines and incalculable reputational damage.

Do you think the funds industry is in for more disruption? What kind of measures should managers take to deal with this?

Standish: Without question, given the state of the global economy and the political forces that are sweeping all before. On that macro level it is becoming harder to run an asset management business where the markets do not behave rationally, and significant changes are brought in overnight. So, better data, analysis and artificial intelligence would help a manager to respond.

At the detailed level, a renewed focus on the costs of the business and the costs of doing business compared to the sources of revenues is important. Controlling costs, optimising fee collection, knowing what is profitable and choosing the right avenues for growth are all areas in which technology can support and improve the business execution.

Moffat: For many asset managers it feels that few certainties remain. Changes in distribution, investor demographics and pricing, and the shift to low-cost alpha and passive investing, all combine with a shifting regulatory landscape to make planning for the future very difficult. Many are struggling due to costly legacy products and an aging cohort of underlying investors with few ideas on how to shift their brand to appeal to a younger audience. Asset managers should look to work with technology providers to streamline their systems and processes, providing clients with up-to-date technology. However, unfortunately for some, the answer is to do little but cling on and await a buy-out.

Ashe: As well as being more highly regulated, the global investment environment is increasing in complexity as many fund managers move away from a business model designed around a single asset class.

Fund administrators will need to adapt accordingly. They will be expected to administer funds holding both traditional and alternative investments including hedge funds, derivatives and real estate, for example. Similarly, thought must be given to evolving trading strategies, even increasingly prevalent practices such as high-frequency trading.

Administrators that have the systems in place to offer this expanded range of services across both traditional and alternative funds have a real opportunity to expand their offering by taking advantage of the convergence between traditional asset managers and alternative asset managers, including private equity and real estate investment strategies. It will no longer be enough to offer a limited service to just one segment of the market.

The true cost of regulatory change is another disruptive factor, and not just because of the effect it continues to have on the squeezed margins and the impact on the fund administrator’s profitability. It is the fundamental change in how we view information and, more specifically, the responsibility associated with it.

Managers increasingly need to know exactly who their investors are, and the administrator will be responsible for locating, recording and reporting this information. It is fair to say that omnibus accounts are unlikely to survive such stringent transparency measures as directives implemented worldwide continue to oblige managers to know who the ultimate underlying beneficial owner is at all times.

Stillabower: The growth and diversification of technology giants and ecommerce groups should not be viewed lightly. Defined industry norms are being challenged by the influence of technology advancements. With the generation of digital natives only a short time away from becoming investors, their expectations of transparent choice, advice and access will need to be met.

Choice will mean a variety of financial products available in one place, which are readily searchable and easy to understand in order to make comparisons. In terms of advice, this will include professional advice, as well as that of active investors providing their performance ratings and returns. Investors will want to know they will receive the services they need, when they need them. As for access, this means a secure platform that is convenient and intuitive to use.

The more consumers that take an interest in investment, the more interest technology giants will take in supporting the investment infrastructure.

Transfer agency, however, is a complex industry and involves more than keeping a register of shareholders up to date. If the industry does not evolve in parallel with the inevitable evolution of fund distribution, it is only a question of when the technology, media and telecom sector will become a serious participant.

Tea: I don’t like the word ‘disruption’ because of its negative connotation. I view it more as looking for the new opportunities that will potentially improve or transform the industry, processes and business models. It keeps transfer agency an exciting and challenging place.

Of course, more than ever, careful resource planning and allocation is crucial to ensure all elements are looked at holistically, including the regulatory, risk and compliance framework.

When we are looking at ways to evolve, we are ensuring we are working with the right partners. The right partners are those who are investing in technology.

Hakim: While the political world around us seems to be temporarily rejecting globalisation, innovative technology and changing demographics in every corner of the globe are ultimately taking our industry towards a more global, interconnected, borderless, 24/7 market. If today’s technology is considered disruptive, let us visualise what a one-global market could do to our industry. 

A reality in which any investor, anywhere in the world, can invest in any fund from any jurisdiction at any time, using any mobile medium, and can expect immediate feedback. This will be a transformational disruption to our industry, and the signs are all there. This is not a question of if this transformation is going to happen, but when. 

Managers today need to study the changing demographics, understand their culture and expectations, ensure they have diversity and inclusion amongst their teams, be open to change, challenge the status quo and let go of old habits. The refreshing good news about our industry and all of its participants is that we are recognising this change and are already taking steps to address this reality.
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