Delivering Innovation into the TA world

Rising costs make themselves felt

Transfer agents (TAs) today are facing a number of difficult headwinds. Firstly, investors are now less willing to support higher fees. A recent survey by Deloitte1, for example, found that asset servicers’ fees declined by 18% in 2019 – a sharp year-on-year drop-off. This pressure is in conjunction with growing demands from regulators across the world, further driving up costs.

Poor technology and systems are increasing business risks, with many TAs saddled with multiple IT systems with little integration, often still reliant on manual intervention. With trading data being disseminated to TAs via fax, PDF or spreadsheets, errors, risks and unnecessary costs can result. This makes the process by which TAs provide vital information via their registers incredibly inefficient. Everyone in the chain has their own versions of the data on each fund.

While strides have been made by TAs in enhancing their STP (straight-through-processing) through their portals, they are only a partial solution and do not enable full STP. Exceptions and breaks, and therefore reconciliations, are still regular occurrences. Aside from the valuation and reputational risks this entails, it can also generate added costs.

But the issues go far beyond just reconciliations. According to a recent study by Funds Europe that looked at the cost pressures faced by TAs, orders account for 36% of cost, followed by KYC at 23%. Costs are also increased by transfers and cash processing, further impacting the TA.

The need to innovate drives change

Alongside this, the need for innovation is being propelled by investors who are seeing digital improvements in their personal and professional lives. With the emergence of popular online retail trading platforms like Robinhood, asset managers recognise they need to digitalise and provide low cost investment solutions if they are to benefit from the opportunities the next generation of investor could bring.

As more asset managers go down a path of digitalisation to improve the investor experience, TAs will need to evolve by automating their core processes as they play such a crucial role in linking the mutual fund value chain . If they’re unable to evolve, it could undermine their place in the future of the industry; an asset manager’s distribution chain is only as strong as its weakest link.

Through automation and digitalisation, TAs can help simplify the investment process for asset managers, reducing their costs while making investing easier. That said, there still appears to be a significant disconnect between the wants and needs of asset servicers and asset managers. While 62% of asset managers told Deloitte in a recent study that digital drivers were the main selection criterion for clients, just 40% of asset servicers said the exact same thing2. Despite this, a move to digitalisation could be quite straightforward for the TA, with many of the technologies that can bring about these changes already available to them.

TAs look towards the future

The Financial Services industry is undergoing a period of unprecedented digital transformation, and a number of new tools are already at the disposal of the industry such as DLT (distributed ledger technology) and cloud computing. In particular for the asset servicing industry, the incorporation of DLT into various TA activities is likely to have major ramifications.

A DLT-enabled TA would, for instance, be able to create a single source of truth which could be made accessible in real-time to the relevant market participants. Through DLT, a new register could be established by the TA that can be updated across the entire distribution chain as and when trades occur. As it would no longer be necessary to reconcile multiple records, errors and costs would dramatically decline. Combining this technology with cloud computing and APIs, along with the latest approaches towards systems architecture, the entire end-to-end TA process could be automated. This digitalised TA model could usher in massive benefits across the entire funds value chain.

Similarly, it could also help fund administrators to future-proof their businesses as the industry looks to develop solutions that support activities such as asset tokenisation, an area that the industry is looking towards as a means to open up new ways of investing. There is clearly an opportunity here for the asset servicing industry, where the process of tokenisation could be enabled through a DLT-driven fund administration infrastructure, ensuring that they can help asset managers deliver a high value, customised and differentiated service to their investors.

Is it possible?

The fundamentals of this new vision already exist, and the technology is ready. Calastone has been utilising DLT and cloud alongside a microservice architecture as part of its order routing system since 2019.

This existing technology platform represents the foundation of the fund administration system we have created, DMI Fund Services. This complete transfer agency solution enables transfer agents to digitalise their core activities, establishing a fully digital and real-time distributed register. With the DMI, fund administrators can quickly move towards the industry’s ultimate goal – a single “source of truth” that updates in real time, ending the need to reconcile separate versions of the data on which the entire funds’ ecosystem depends.

Our DMI-driven fund administration infrastructure could help providers generate cost efficiencies of over 50%. By leveraging DMI, TAs will be able to navigate their way through the ongoing digital revolution while offering lowered cost for their shareholders, clients, and their clients’ investors.

Henning Swabey, Managing Director - Head of Continental Europe, Calastone

1Deloitte Asset Servicers Survey 2021

2Navigating Through the Storm, Deloitte, February 2021