In search of the perfect hybrid

Today's technology is driving people to behave the way they did before they relied on computers. Instead of automating their thinking, automation is now enabling people to become proactive, to think for themselves and tailor their finances. Today's intelligent customers, for example, want to be in the position where they can respond instantly to the Chancellor's budget, and take for granted the technology that allows them to invest how they like, when they like, and with whom they like.

A key driver in that process is the way the back office is increasingly stepping into the limelight, connecting with customers and giving them new freedom and options. As it shapes the nature and potential of the front office, it also features prominently in the mind of the modern buy-side operations director.

The transfer agency (TA), or the fund administration component of the shareholder record-keeping process, is an increasingly complex area whose importance is central to the success of any buy-side operation. The TA element starts once portfolio managers have decided their investments, when the asset value has been determined, all the shares in the underlying companies have been computed, and the fund price established – in other words, when the product offering is ready to be sold to the institutional and retail marketplace. Traditionally the domain of the chief operations officer, TA presents asset managers with the conventional questions associated with technology and services: whether to concentrate on its strengths – performance and fund management – and outsource everything else, or invest in the parallel technology operation to handle the shareholder administration.Operations directors face a delicate balancing act in deciding which elements of the technology to outsource, and with it, which elements of the customer relationship they are prepared to keep or pass along to a third party.

Some fund managers go all the way, placing every aspect of the TA's technology and customer relationship in the hands of a third-party administrator. Others retain everything themselves, wanting to control and manage the whole process. However, an increasing number choose the third way – the hybrid solution – opting to select a technology provider who can offer platforms to support the TA, while retaining control of the staff and all of the touch points with the customer.

When opting for the hybrid solution, operations directors seek out a TA provider who can best support all the critical technologies that allow them to focus on maintaining the crucial customer interactions in house. They choose to invest in a single, co-ordinated solution from a single supplier, housing all the critical technologies in one place.

But what are these critical technologies? First, the core engine that provides the varied 'black box' functionality across multiple currencies, multiple products and time zones, in different countries, both off- and onshore. Next, the front-end technologies impacting the web and call centre. These allow the operations and marketing teams the opportunity to offer customers the interaction of their choice and the customers the fund platform options. Finally, there are the integration technologies – the so-called workflow and STP solutions – that pull everything together.

These combined technologies are key as they amalgamate a series of tools that deliver a single solution. Two examples are STP and fund supermarket platforms. In the past few years, major steps have been taken to automate the process by which fund dealing and settlement has become 'hands off' for brokers and distributors. The securities industry globally has benefited hugely from the success of Swift standards. In fact, market adoption of ISO 20022 messages is predicted to grow quickly in the next few years, with a number of players such as Fidelity, Invesco and Schroders leading the way.

Regarding STP, MFT offers the integration capability to bring together related services from multiple third parties, and can cope with multiple systems, be they in-house or outsourced, legacy or modern. This is achieved by providing a message exchange solution designed to convert data from various sources into a standard format that is used to process via the TA. Once the processing is complete, messages are converted for onward transmission to the fund manufacturer or distributor.

The growth of fund supermarket platforms has been substantial over the past two to three years. This growth has placed new pressures on TAs due to their unique approach. Unlike the traditional model where the selection of the TA is solely determined by the asset manager, the decision to use a fund supermarket platform is controlled by customers and their advisors, if advice has been sought. It is no longer the fund manufacturer who makes that decision. This approach gives end-users a greater say in where and how their accounts are serviced and in the UK this has seen over 70% of ISA sales in 2006 and 2007 processed by fund supermarket platforms.

To stay ahead in all these areas, the hybrid TA technology provider spends millions of euros every year. The demand for such consistently high investment patterns has narrowed the field from what was a fragmented sector five years ago, to a market dominated by a handful of well-resourced TA technology providers. These providers need to continually re-evaluate their offerings. In terms of services, they must invest in data centre infrastructure and look for process, capacity and power improvements to deliver against ever higher service level agreements. MFT recently migrated its technology platform to IBM's i-Series 570 hardware, which provides a commercial processing workload (CPW) in excess of 14,000 and 200 terabytes of storage.

This consistent level of spending among the leading TA technology providers has evolved new products, distribution and operational methods, as well as improved back-office processing across the board, with more stringent, automated processes around audit and compliance, significant reductions in errors through higher automation, integration and information, combined with significant cost savings. Consequently, with their sophisticated call centre, workflow, web and STP functionality, TAs are no longer mere record-keeping systems.

Operations directors benefit directly from this all round firepower, sourced from a single provider. They can control the outsourcing balancing act with one phone call, knowing that their risk management, audit and compliance are at home on a single, outsourced TA system. They also benefit from single system reporting, consolidated MIS and speed to market. At the same time, customers can manage their accounts with a holistic view of all their holdings through a single consolidated database, however complex the mixture of UK funds, European offshore funds and/or Asia funds. These are powerful controls whose benefits cannot be underestimated.

As for the future, with such an established TA model in place to service traditional funds it is only a matter of time before the alternative investment market – hedge funds, private equity and commercial property, for many years the private domain of the institutional and high net-worth client base – will be opened up to a more scalable, retail client base across global jurisdictions. This growth across Europe will be fuelled by the ongoing drive for open architecture, the medium by which most investment portfolios will be transacted and managed.

One thing is certain. One of the keys to success in TA is technology and being clear on your strategy – outsource, in-house or hybrid. If the hybrid is the right route for your operation, selecting the right partners is vital to ensure that they can support your business today and in the future as your business evolves. >