Fund distribution: In search of operational excellence: myth or reality?

Fund distribution In search of operational excellence : myth myth or reality?

Fund distribution In search of operational excellence : myth or reality?

CONTENTS FOREWORD

03

THE FUND DISTRIBUTION ROAD TO OPERATIONAL EXCELLENCE

05

FOCUS ON SELF PRESERVATION

06

REINVENT THE BUSINESS MODEL

08

REINFORCE RISK MANAGEMENT & CONTROLS

10

TRANSFORM OPERATIONS & SYSTEMS

11

FUND DISTRIBUTION A COMPLEX LANDSCAPE

14

DISTRIBUTION MODELS AND DISTRIBUTION CHANNELS: FROM MULTI JURISDICTION, MULTI-COUNTRY TO MULTI-CHANNEL

14

VARIOUS BUSINESS MODELS IN THE FUND DISTRIBUTION VALUE CHAIN

15

FUND DISTRIBUTION SUPPORT IS GROWING IN SIGNIFICANCE ACROSS

17

VIEWPOINTS ON AUTOMATION FROM INDUSTRY PARTICIPANTS

18

STILL A LONG WAY TO STANDARDIZATION

18

COMPETITIVENESS ACROSS FUNDS MARKETS

18

INDUSTRY INITIATIVES AND CONCLUSION: A PUSH TOWARDS EFFICIENCY

19

CONTACTS

20

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In search of operational excellence: myth or reality?-

3

Foreword

Acknowledgments First and foremost, we would like to thank the following custodian and fund administration institutions for contributing to our current research by sharing their thoughts and expertise with us: BNP Paribas, CACEIS Investors Services, EFA, IFDS, and RBC Dexia and Société Générale Securities Services. Within Ineum, our special thanks go to all the members of our Investor Services practice department. Finally, grateful thanks go to Mike Mathias and the editorial team. The views and opinions expressed herein are those of the authors and interviewees and do not necessarily represent the views and opinions of Ineum Consulting firm.

Foreword In this report we present a framework that is designed to enable organizations to achieve operational excellence. Focus on self preservation, reshape your business model, reinforce risk management, and transform operations: these steps have become the most important management challenges. We also explain why this approach is needed in the current environment, and provide examples of how it has been applied by some market participants who actively support fund distribution. Many aspects of the fund distribution industry’s transformation remain unclear, and tremendous uncertainty surrounds even the most basic questions: how to cut costs, which competitive advantage to build, how to ef ficiently control operational risk, how to streamline operations, etc. At the same time, automation and standardization are necessary and valuable when three conditions are met. First focus on self preservation: which non core business should be exited to refocus on core activities? Second, reshape your business model to increase client retention. Third reinforce risk management and controls. Our research conducted in April 2009, revealed that:

• Market participants who actively support fund distribution tend to look at their customers from the perspective of their own business model. Rarely have they tried to gain a full understanding of the constraints and dynamics of their key customers’ business models. • Although reducing cost is necessary, it will not be suf ficient to help executives to thrive sustainably in the years to come. What is needed is to do business differently; • Successful business model innovation can generate significant new growth, create a new base for competition and change the cost structure; • The industrialization of processes offer most groups the potential for significant cost savings. Despite the number of initiatives supported by the industry, operational excellence in fund distribution has not been achieved by all the players. It is our hope that this report will serve as catalyst for change.

Michel Kabanga KAYEMBE Investment Funds Advisory Services, Practice Leader

4 - FUND DISTRIBUTION -

In search of operational excellence: myth or reality?

The fund distribution road to operational excellence

The quest for operational excellence in fund distribution has gained momentum over the last decade. In May 2009, the European Fund Asset Management Association (EFAMA) reported that “much has been achieved in the fund processing of cross border trades, but more can be done”. Setting higher standards within the distribution value chain would help, but few service providers have demonstrated the ability to achieve operational excellence. So, what do we mean by operational excellence in the context of fund distribution? We present four steps for moving towards operational excellence. The figure below illustrates the four phases:

Figure 1 The fund distribution road to operational excellence

1

2

3

4

Focus on Self Preservation

Reinvent the Business Model

Reinforce Risk Management & Controls

Transform Operations & Systems

• How to cut cost and increase processes ef ficiency ? • What are the non core business in order to refocus resources on core activities?

• What is the shape of the business portfolio?

• How to ef ficiently control operational risk on fund distribution activities?

• Which long term competitive advantages to build-on • How to implement a in the post-crisis era? regulatory oversight and compliance strategy? • How to improve customer satisfaction to drive loyalty and sales effectiveness ?

• How to streamline operations? • Which outsourcing or off shoring strategy to adopt in order to reduce the cost base? • How to improve business performance through Scorecarding? • How to maximize benefits from post merger integration?

Source: Ineum Consulting

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5

The fund distribution road to operational excellence Focus on self preservation A clear sense of the organizations’ core needs will enable the non core activities to be identified. A firm can now start analyzing where it can cut costs significantly.

Figure 2 Core and non core activities & managing cost in fund distribution

I. Order Management

IV. Position & Account Management

VII. Referential Data

I.1. Order collection I.2. Order validation I.3. Order routing I.4. Order processing

IV.1. Cash position management IV.2. Securities position management IV.3. Holdings management

VII.1. Clients VII.2. Funds VII.3. Distributors VII.4. Accounts

II. Corporate Actions

V. Portfolio management

VIII. Commissions

II.1. Corporate actions identi fications II.2. Corporate actions handling II.3. Corporate actions noti fication to client

V.1. Portfolio selection V.2. Client acc ount management based on ass et allocation model and risk pro file V.3. Portfolio modeling V.4. Portfolio simulation

VIII.1. Commission calculation and management VIII.2. Trailer fees calculation and management

III. Settlement & Clearing

VI. Reporting

IX. Management & Control

III.1. Settlement III.2. Reconciliation

VI.1. Clients reporting VI.2. Others VI.3. Fund management co. reporting VI.4. Tax & legal reporting

IX.1. Regulatory & compliance IX.2.Tax paying agent IX.3. Anti-money laundering regulation IX.4. Define and monitor KPI

Managing cost in fund distribution Fund processing costs 100%

80%

60%

40%

20%

0%


Order routing

Cash management

Errors Queries & Reconciliation

Total cost

Key messages • Market participants who are actively supporting fund distribution tend to look at their customers from the perspective of their own business model. Rarely have they tried to gain a full understanding of the constraints and dynamics of their key customers’ business models. What are their key business priorities, what keeps them up at night? Such knowledge can provide the basis for developing offerings that meet specific customer needs, and can help to create value for customers. • Major players have embarked on programs to reduce costs. Although this traditional approach is necessary, it will not be suf ficient to help executives to thrive sustainably in the years to come. • What is needed is to do business differently. But reinventing business models isn’t easy.




Interview with Marc Vanmansart, Head of Client Services at EFA Could you describe some of the core processes within your organization? The operational model of EFA is unique. Compared to a “classic” Transfer Agent, our processes such as registration, dealing or cash management are less segregated. This first step towards reorganization of the main TA functions will be followed by a more precise review of the processes. Indeed, a clear division or an industrial split such as registration or dealing is much less present than in the “classic” model. As we are active mainly in Luxembourg with few of fices abroad, we have chosen not to be organized by country. Incoming orders processing is one of our core processes. Each order is allocated to a department, e.g. Transfer Agent or Fund Accounting. Once it has been redi rected to the Transfer Agent department, we have to ensure that it is processed before the cut-off time. There is a simultaneous procedure to record the shareholders data in the register including AML and KYC reviews and in parallel a partial processing of an order. Due to this single approach, it is highly effective. In spite of the impact of this extensive process review, EFA would define its organization as rationalized rather than industrialized. For instance, the client does not have to comply with the predetermined process, meaning that EFA can respond to client constraints. Definitely, our organization is more client driven.

agent service offerings are not established as a standalone service but bundled with fund accounting or custody. Third, the nature of customer demand is a key cost driver. For example, some clients have to be served locally. This implies additional recruitment costs to hire resources with local knowledge and language skills to provide an advantage over other competitors. How profitable is the Transfer Agent business? It is dif ficult to be profitable as a transfer agent due to the huge number of staff, the number of delegated activities to third parties; as well as cost of change to IT. In cases where investor services is part of a global service offering, the cost of running a transfer agent business is compensated by other services such as custody and fund accounting. Within the transfer agent, profitability analysis per client is crucial. Elements to be considered: distribution network, communication channels, etc. In the case of CACEIS, standard Transfer Agent services are combined with value-added activities as part the Prime TA® offerings.

Interview with Matthieu Pasquier, Chief Operating Offer Fund Distribution Services at Société Générale Securities Services (Fund Distribution Services)

What would you consider as the major cost drivers within fund distribution? Could you give us some tip s on how costs are ef ficiently Profitability from fund distribution is being managed? squeezed from two directions: 1) cost inWe have combined a mass production approach and tailor crease due to global asset managers who made service. For example, we have industrialized our reare becoming more demanding, and 2) priporting capabilities by standardizing as far as possible our contract note and cash flow reports. Various templates have ce reduction due to increase in competition. been prepared in order to respond to each individual client For example, SGSS has used the on-boarding process to request. Other initiatives include: the implementation of a cope with the huge number of demands expressed by major document management system, an electronic archiving sysclients. To name a few: BCP procedures, Key Performance tem, as well as an Optical Recognition Character platform. Reconfiguring systems and processes also implies change Indicators (KPI) and integrated risk management. This was management. The virtuous circle of the productivity gains achieved in two years and reflects the most demanding stancan be described as follows: reorganization of the proces- dards. ses, selection of IT packages adapted to the new organiOnce the on-boarding process has been completed, additiosation, and change management. The success of change management is a primary condition to the success of the nal complex requirements are formulated which go beyond project. To sum up, the choice for the client has to be made traditional services. For example, the facility to handle a between a cheap offer with low quality and a tailored made “daily cash settlement” process. This implies an effective mioffer but with a higher price. tigation of counterparty risk for the Transfer Agent.

Interview with Etienne Carmon, Head of International Product Development at CACEIS Bank Luxembourg What would you consider as the major cost drivers within fund distribution? The first constraint is defined by the asset manager in terms of number of countries in which their funds will be distributed. For example, CACEIS opened an of fice in Hong-Kong from which French, Luxemburg and Irish domiciled funds are distributed. Secondly, the business has to be profitable. As such, transfer

FUND DISTRIBUTION -

How profitable is the Transfer Agent business? For SGSS, the transfer agent business must be “profitable”. Our approach is to manage costs ef ficiently and to develop value-added services. The custody and fund accounting activities are much more mature in terms of customer services than the transfer agent. However, the transfer agent function has now moved from a simple back-of fice to provide more complex and technical services including legal aspects. These value-added activities will compensate output pressure on production costs and price reductions being demanded by the client. SGSS provides its added value through: reporting, distribution support and customer services.


7


Reinvent The business model Once executives have secure access to long-term resources, the challenges are to understand the drivers of change affecting the fund distribution industry redesign the future business model; and determine the type of clients needed to compete effectively with other service providers.

Figure 3 Business model and challenges ahead Targeted Client Segments & Drivers

Business Model

Key driver: Expanding Marketplace & Investors

Challenges

Operational architecture

• Global fund manufacturer

Global footprint Centralized or Decentralized around operational hub / expertise centers

• Round trip business

Operating model based on 2 locations

• Local asset manager (one country such as France, Germany…)

Operating model through one location such as Luxembourg, Ireland, France, Hong kong

Organizational Model

• Align many different economies, tax regimes, languages, AML, business cultures

• Client Driven

• Build common elements and reuse them across the broad markets

• Mix of Client & Process Driven

• Process Driven

• More markets and more distributors participating with increasing interfaces • Ensure that the integration of high volume will not mean automatically more additional resources • Focus on added value services such as cash management, commission and trailer fees, customized reporting

Source: Interviews conducted by Ineum Consulting with BNP Paribas, CACEIS, EFA, IFDS, RBC Dexia, Société Générale Securities Services

Figure 4 Fund distribution marketplace High

s e c i v r e s f o h t d a e r B

GLOBAL DISTRIBUTION WITH A PRIMARY FOCUS ON “IN-HOUSE” FUNDS

GLOBAL DISTRIBUTION WITH A PRIMARY FOCUS ON “THIRD-PARTY” FUNDS

LIMITED FUND DISTRIBUTION CAPABILITY

THIRD PARTY FUND DISTRIBUTION WITH A LIMITED SCOPE OF SERVICES

Low In-House

Distribution Model

Open Archit.




The fund distribution road to operational excellence Interview with Thomas Bruno, Vice President & Head of Transfer Agency at IFDS What is your current business model? Global distribution brings with it common challenges across an extremely diverse and expanding marketplace. Just as Europe has to work to align many different economies, tax regimes, languages and business cultures, so to must the global Asset Manager and its service partners work to harmonize many demands within one framework. The challenge to our market is to build common elements and reuse them widely all markets. This is especially challenging as these common elements often must be simple in form and configuration to be useful in many places – often resulting in a tool that satisfies only a portion of the need and results in cumbersome manual workarounds. To that end, today’s models are a mix of standardized and customized processes with numerous interfaces between systems. Our focus must remain two-fold: 1) continue to streamline and obtain scale for core activity, 2) align the custom elements in ways that allow them to become configurations of a single model, not redundant versions with completely unique elements.

Interview with BNP Paribas: Frank Roden, Head of Client Solutions - Global Fund Services Luxembourg Pierre Tarsi, Head of Operations Alain Faure, Global Fund Services - Product Manager

nably managed. The weaknesses of this model are: 1) the risk of loss of our knowledge and, 2) the fact that the people may not have an overview of the process. Therefore, the challenge lies in the management of people. The objective is to have a flexible staff that can be switched from one task to another and help them to support the stress in a mature way. So investment in training is important. It is also a way to motivate staff and to retain them. If staff are stable and collaborative, the knowledge stays inside the firm and BPSS is able to achieve two main objectives: higher quality and risk mitigation. The key value of the business is to shape the behaviour to give the right example. A lot of initiatives are organized such as breakfast meeting to share feelings and point of view.

Key messages • Business model innovation requires market players to fundamentally revisit how they operate and their capabilities to create value for their customers. It isn’t about mere restructuring. It is a cross-functional redesign, a fundamental change in what is sold and to whom; and how the value gets delivered. • Fund distribution is still, for the most part, a global business and supporting in-house versus third parties products. • Successful business model innovation can generate significant new growth, create new base for competition and change the cost structure. • Given the risk involved in radically redesigning the way value is delivered to the customer, and considering all the structural change, it is essential to have a sound risk management and control function.

What is your current business model? The business model is defined by the targeted segment, depending of the type of activities. Currently BPSS supports 3 different models: • For Global asset managers: operating model is supported by the fund distribution (team everywhere) • For round trip business: operating model based on 2 countries (subset of the 1st model) • For French fund manager: operating model through Luxembourg The current organization is very process oriented: this model has been proved ef ficient and secure; the risks are reaso-

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9

The fund distribution road to operational excellence Reinforce risk management & controls In an uncertain world, risk management will be viewed not as a constraint but as a new way of thinking about productivity. This is a crucial component to strengthen the level of control, increase awareness of regulatory oversight and comply with local rules such as AML procedures in Asia. Figure 5 Managing risk

Illustrative risk 3

1

2

4

5 9

y t i r e v e S

6 8 7

1

2

3

4

Probability Nbr.

Major Risks identified

Criticality

Impact

1

Capacity to absorb additional volume (new business)

High

Execution delay, financial loss, increase in staff

2

IT risk : interface with distributors

High

Capacity to trade and accept order

3

Update of static database

High

Order will not be transmitted on time

4

Capacity to collect prices (NAV)

High

Order processing

5

Missing shareholders data

High

AML risk – Subscription / Redemption can’t be processed or partially


Interview with Etienne Carmon, Head of International Product Development at CACEIS Bank Luxembourg What is your perception with regard to investor protection, and reputational risks for cross-border funds distribution? All legal and regulatory matters are treated seriously due to the high reputational risk of our transfer agent business. For example within CACEIS, we perform in Luxembourg the validation and controls of AML / KYC procedures although preliminary works are executed locally in countries such as in Hong Kong.

Interview with Marc Vanmansart, Head of Client Services at EFA How operational risks are mitigated (Managing claims and errors)? Managing claims and errors is an integral part of the Quality and Improvement process. The objective is to mitigate or reduce operational risks. For this purpose, a dedicated committee has been created. The goal of this committee is to


analyze the main reasons for dissatisfaction, to identify the sources of quality failures and to take the relevant measures. This workshop has to manage the global and recurrent issues affecting the quality of the service provided by EFA Registre. The capabilities of this committee are the following: • Assessment and follow-up of the quality level: the analysis of the data are made upon various sources such as quality indicators, reports provided by the Customer Service & Quality Management, technical hitches, Total Quality Management meetings (TQM) with our clients and reports made by our Management. • Assessment of the relevance and the ef ficiency of flows and procedures: this assessment is based on the failures quoted above. • Initiation of actions or projects in order to improve procedures or systems or any structural component of the offer provided by EFA Registre. At the same time, EFA offered to its clients the possibility to follow-up the operational risks relating to TA and fund distribution activity, with scoreboards. These scoreboards are made with a predetermined frequency and a series of qualitative and quantitative indicators.


The fund distribution road to operational excellence Transform operating & systems The next step is to determine how to streamline operations. For example, outsourcing or offshoring strategy to adopt, and how to improve business performance. Many of the more traditional tools of process improvement are entirely appropriate. Lean Management or Six Sigma methodology can be applied to the unique requirement of delivering operational excellence in three ways: Figure 6 Automation is still a myth in fund distribution

R O T S E V N I

Performance Measurement & Risk analytics

Funds selection

Distributors Order Placement

Order Placement

Portefolio construction

Cash Management

Order Routing

Order receipt Status : - confirmed - Rejected - cancelled - Pending

T N E G A R E F S N A R T

Reporting

AML control

Order Acknowledge or reject

Order Processing Order confirmation : contract note or MT515 or XML message

Maintain registrar

Commision and trailer fees payment

F U N D M A N A G E R

reconciliation

T R A N S F E R T A G E N T

cash & security settlement

Trailer fees calculation

System set up Negociation distribution agrement G N I T D N N U U F O C C A

Cash and security settlement

NAV calculation

C U S T O D Y

Processes where a manual intervention is required


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11


Key challenges • GLOBAL ASSET MANAGERS HAVE A HUGE NUMBER OF DISTRIBUTORS • Define a unique point of access for distributors: access to numerous TAs via an “aggregator” for consolidating and routing order, handle multiple reconciliations, … • CONSOLIDATE INFORMATION • Centralise shareholder register and related fund positions • TRAILER FEE CALCULATION • Calculation of trailer fees based on shareholders and distributor positions using different methods (daily average or month-end holdings), production of the reports and transmission to distributors, support high level of distribution hierarchy, …. • TAX HANDLING • Calculation of national tax regimes (such as Irish tax, European Savings Directive, German Tax, …), producing tax reporting for shareholders • REPORTING • Various reports: contract note, statement, NAV confirmation, forecast report, performance and to be produced in different languages and formats Source: Ineum Consulting

Interview with Olivier Portenseigne, Head of Shareholder Services at RBC Dexia How to streamline operations? IT industrialization: industrialization begins with the implementation of a common platform for all our entities. The main objective is to reduce the maintenance and development costs. RBC Dexia has selected the option to develop an inhouse system. Thus the time to market for all additional developments is minimized. This also means that nearly any type of requirement can be implemented regardless of the country of distribution. Additionally, we have various initiatives aiming at standardizing all incoming messages in terms of content and format. In terms of communication channels, we are in favour of using SWIFT messages or web access to increase the automation rate. One additional constraint is the type of operating model implemented by the client. I.e. whether transfer agent service offering is delivered as an unbundled service or integrated with Fund Accounting and Custody. The first option usually brings more constraints in terms of interfaces. In terms of organization, we tend to retain staff for the long term. This is reflected in the quality of service delivered to our clients and the level of knowledge gained by our employees. RBC Dexia ha s set up a “TA Academy” that del ivers training courses on various topics such as internal processes. We are also promoting our employees by rotating candidates from production site to new position such as business analyst.


Process ef ficiency is measured using Lean Management or Six Sigma methodology. This is a unique opportunity to bring to the same table people from production as well as business analysts. It is also a way to identify non value added activities.

Interview with BNP Paribas: Frank Roden, Head of Client Solutions – Global Fund Services Luxembourg Pierre Tarsi, Head of Operations Alain Faure, Global Fund Services – Product Manager One of the most important challenges of operations is to deliver ef ficient processes. BPSS promotes STP solutions for fund promoters and distributors. Several solutions are proposed to capture the order and to standardize and automate the flow. Connectivity team has been set up in order to find “win win” solutions with the client i.e. increase the STP rate and decrease the fees per transaction. STP solutions increase the volume of orders processed. The solution proposed depends on the size and the platform used by a distributor. For example, the SWIFT solution can be used by a distributor processing large volumes and capable of paying for connectivity to the SWIFT network. In addition a desk dedicated to secure STP flows within Operational teams has been deployed. The aim of this STP Desk is to anticipate or/and solve operational problems. This service addresses the communication between the client, the IT team (IT is responsible of the monitoring of the system) and the operational team. If the problem is corrected at the beginning of the process, the quality of the process is improved resulting in increased ef ficiency.



The other challenge is to ensure that the integration of high volumes does not mean automatically additional staff. The solution is a combination of an STP solution and improved processes using Lean Six Sigma. In the future, the objective is to meet client requirements, improve the ef ficiency but also to develop new services, new solutions, and in fact new ways of doing our jobs! The culture of the company has changed. BPSS wants a flexible work force to address their client needs and to provide timely responses to client requests. The staff should be trained to develop and improve the level of knowledge of the transfer agent environment and the possible impact of each action on the operations. This knowledge enable than to quickly correct any error and thereby to avoid operational issues. This is the main ob jective. Improved staff involvement is motivational. Thanks to Lean Six Sigma methodology, people can participate in continuous improvement through workshops. BPSS considers its staff as a real asset participating to the growth of the firm. A “well educated” work force is key to deliver ef ficient process. The philosophy is “kill the risk”. The margin on t he transactions is so small that any risk should be erased. Mitigate the operational risk limits the loss and increase the level of quality.

Key messages • Industrializing processes offer most groups the potential for signi ficant cost savings. Companies that industrialize their processes can compete on ef ficiency and quality by pulling these elements: • Measurement and benchmarking of key operational performance indicators along the fund distribution value chain. Indicators include employee productivity per function such as dealing, register maintenance, order processing, cash management, etc. • Reduction of complexity through streamlined of operations: companies competing on industrialization across countries will share platforms across different markets: US, Asia, Europe, etc. • Differentiation of value chain activities: 1) as either core or non core, 2) and as either locally (such local transfer agent) or sharable within the group (such as global transfer agent) • Managing claims and errors: this requires that claims and errors are segmented by amount and process complexity, accelerate settlement, implement effective controls. • Reconfiguring operations and systems also imply organizational change to tackle the complexity of the fund distribution landscape.

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13

Fund distribution a complex landscape

The trend towards open architecture has greatly increased the complexity of the distribution chain particularly for those companies that support the fund manufacturers.

Distribution models and distribution channels: from multi jurisdiction, multi-country to multi-channel Key attributes in fund distribution • Simplicity in fund distribution is not a “panacea”. Transactions tend to be processed ef ficiently when subscription orders are placed by investors purchasing fund shares from manager and fund distributor who belong to the same group. • Complexity increases when clients subscribe to third party funds, especially when the domicile of the fund differs from the country of distribution. Executing and settling orders will increase the complexity. Ineum Consulting has conducted a survey in April 2009 based on a filtered sample of 25 leading service providers active in fund distribution with total assets of EUR 8,298 Bio. The research revealed that the fund distribution players could be clustered into 3 groups: fund distribution support including fund distribution platform, on-line fund supermarket and routing & settlement platform. Figure 7 The complexity of fund distribution





Various business models in the fund distribution value chain The fund distribution marketplace • “Funds distribution support” offers support services to fund promoter and fund distributor. The scope of their services range from negotiation of distribution agreements, order capture and centralization, trailer fees calculation and payment, till reporting delivery. • On-line fund supermarket provides access to a wide range of mutual funds from different fund manufacturer. The primary attribute of a fund supermarket is simplicity. • Routing and / or settlement platform usually acts as a central hub between the custodian banks who are responsible for the maintenance of the cash accounts and transfer agents who maintain the shareholder register. Key findings from our research • More than 114,000 funds are distributed on a worldwide basis. Out of which: 54,973 funds are allocated via “fund distribution support” and their dedicated platforms, 6,000 funds via on-line fund supermarket technology and the remaining 53,300 funds via routing and / or settlement platform.

Figure 8 Key fi gures from our research Service Provider

Number of Service Providers

Number of Funds

Assets under Management (Bio EUR)

Fund Distribution Support

14

54.973

3,097

Online Fund Supermarket

6

6,000

365

Routing and / or Settlement Platform

5

53,300

4,836

Total

25

114,273

8,298


• In terms of assets size, the “fund distribution support” and their dedicated platforms are the most appealing structure managing EUR 3,097 Billion. • On-line fund supermarket has captured EUR 365 Million which represents the smallest portion of the fund distribution market share. • Routing and / or settlement platform manage the biggest portion of the assets that are currently distributed, with a total volume of EUR 4,836 Billion. Market players and their respective operating centres • Fund administrators and (mainly) transfer agents are helping fund manufacturers to extend their channels of distribution from France, Luxembourg, Italy / Spain and United Kingdom as revealed in our research.

• On-line fund supermarket platform have been in operations in United Kingdom and United States for many years and recently to emerge in France and Germany. Cofunds, Fundnetwork, Hargreaves Lansdown and Skandia / Selestia share 80% of the on-line fund supermarket in United Kingdom.

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15


Figure 9 Fund distribution players and main operating center Fund Distribution Support

Group

Main Operating Center

All Funds Bank (AFB)

Intesa Sanpaolo / Santander

ES / IT

Attra

DZ Bank

LU

Axeltis

Natixis

FR / UK

Fund Channel

Crédit Agricole

FR

Fund Distribution Support

BNP Paribas

FR / LU

Fund Distribution Services

RBC Dexia

LU

Fund Distribution Services

Société Générale

LU

Prime TA®

CACEIS

LU / HK


• Some of the most popular order routing and / or settlement platforms available on the market include FundSettle, Infomediary, Monte Titoli and Vestima. Those platforms operate from different locations and mainly in countries that have strong expertise in cross-border fund distribution such as Luxembourg.

Figure 10 On-line fund supermarket parent companies and main operating center On-line Fund Supermarket

Group


Cofunds

IFDS / Threadneedle / Jupiter / Prudential…

UK

Cortal Consors

BNP Paribas

FR

Fundquest

BNP Paribas

FR/US

FundsNetwork

Fidelity

UK

Hargreaves Lansdown

Hargreaves Lansdown

UK

Metzler fund Xchange

Metzler

DE

Skandia / Selestia

Old Mutual Group

UK


Key findings from our research: market players in the distribution value chain • At first glance, “fund distribution support” and their dedicated platforms appear to interact with all the players in the distribution value chain. A closer look at the interactions allows us to identify different operating models which underpin complexity and inef ficiency.



Fund distribution a complex landscape Fund distribution a complex landscape

Figure 11 Routing and / or settlement platform parent companies and main operating centre

Platform

Routing Platform

Settlement Platform

Group


FundSettle

v

v

Euroclear

BE/LU

Infomediary

v

-

Brown Brothers Harriman

LU / UK / US

Monte Titoli

v

v

London Stock Exchange Group

IT

Vestima

v

v

Clearstream

LU


Fund distribution support is growing in signi ficance across the distribution value chain

Figure 12 Fund distribution value chain


Key findings from our research: market players in the distribution value chain • At first glance, “fund distribution support” and their dedicated platforms appear to interact with all the players in the distribution value chain. A closer look at the interactions allows us to identify different operating models which underpin complexity and inef ficiency. • Among the operating models encountered on the market, service provider such as Axeltis, All Fund Bank (AFB), Prime TA® or Fund Channel provide interim services such as “service bureau” to fund manufacturers and distributors to solve the spaghetti junction of fees arrangement, distribution agreements, capturing in different formats to Transfer Agents until the settlement of cash and securities. Contacts with custodian banks are established to collect the position statements. • Unlike “fund distribution support” with their dedicated platforms, on-line fund supermarkets as well as routing and / or settlement platforms have relatively low interaction with fund manufacturers.

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Viewpoints on automation from industry participants

According to industry practitioners, 50% of the transactions processed worldwide still required manual intervention. In the distribution value chain, operational excellence reflects the capability of the industry to embrace full end-to-end straightthrough processing (STP),from fund registration to transaction processing cycle.

Still a long way to standardization Several market players have maintained that operational excellence remain a challenge to the fund distribution industry. Accepting the necessity of trade-offs to cope with innovation, comments IFDS Standardization or automation, as measured by STP rates, remains in the 40 – 60% range for most Funds and Distributors. Two important points should be noted when discussing a “numeric measure” of our industry’s success with STP. • Luxembourg is a valuable domicile for cross-border fund products due to its attractive regulatory regime. Two examples would be “side pockets” and “gating”. The market’s response to these ‘environmental ’ developments will hinder higher STP rates. • Second, most published statistics on automation are solely focused on the automation of order flow. I.e. the transmission, receipt, “booking” and confirmation of the actual trade instruction. What still remains to be measured and discussed are other elements of the trade life cycle such as settlement, reconciliation, and commission. The impact of non standardization implies flexibility and frequent organizational changes, comments RBC Dexia

Competitiveness across funds markets Rather than being considered as competitors, Luxembourg and Ireland have developed different capabilities while responding to different requirements. Luxembourg and Ireland still remain the most attractive fund centres, reports BNP Paribas Ireland should not be regarded as a competitor to Luxembourg. It is an attractive offshore location for US and UK funds, and is now well-known for its expertise in the alternative world. Luxembourg on the other hands retains the top spot with respect to the number of distribution agreements signed per years. The culture and the multilingual environment reinforce the attractiveness of Luxembourg. Both places must work in harmony to retain that position in the European fund distribution industry. France is a major place for fund distribution using the most secure networks but with more constraints, comments Société Générale The French fund distribution structure differs from that of Luxembourg. In the French model, the process involves the settlement of subscription or redemption through Euroclear. French managers tend to sell French funds outside France. Luxembourg appears to fit their requirements. It is a leader in fund distribution and able to bypass the constraints of the local CSD and distributes their funds worldwide. On the other hand, the French market has the advantage of secure settlement, i.e. applying the delivery versus payment rules (DVP). Distributing investment funds in as many markets as possible remains a key requirement from fund managers, comments BNP Paribas The selection of the world location depends on where the opportunities are aligned with BPSS strategy. Therefore, the Singapore of fice is now being used as fund distribution base and Hong Kong will be next. However, Korea and India have not satisfied the criteria for new distribution of fices. BPSS believes it is clear that Asia has strong potential for development especially as a large part of the fund distributed comes from Luxembourg platform. For Société Générale, it is not viable to open new of fices in multiple global fund distribution locations. It prefers to rely on the group, or the paying agent’s network, or local partners.



Industry initiatives and conclusion : a push towards effi ciency

Industry initiatives and conclusion: a push towards ef ficiency The fund distribution industry remains highly fragmented and complex. Several ongoing initiatives should normally improve the cross-border processing of funds’ orders. Some of the developments supported by the industry include: Fund Processing Passport, usage of the SWIFT ISO 20022 messages, or specific initiatives led on a regional level such as the Asian Fund Automation Consortium. The European Central Bank has been embarking in a challenging journey to resolve the complexity of the fragmented fund settlement issues through Target 2 Securities program. Despite the number of initiatives supported by the industry, operational excellence in fund distribution has not been achieved by all the players.

Figure 13 Initiative

Sponsor

Released date / Enter into force

Objective

Useful links for additional information

Fund Processing Passport (FPP)

EFAMA

2005

FPP is a set of key “operational” information that fund promoters should provide on their investment funds in order to facilitate their trading.

www.efama.org

Swift 20022

SWIFT

2012

SWIFT’s ISO 20022 Funds solution enables greater levels of automation and risk reduction in replacement of the ISO 15022 messages

www.swift.com

ISSA Working Group

Fund Managers, Custodian, Distributor, Transfer Agent, Central Depositary, Messaging

2007

The working group proposes practical ways of gradually reducing barriers to operational ef ficiency in pan European cross-border funds processing.

www.issanet.org

Asian Fund Automation Consortium (AFAC)

Mainly fund managers

2006

AFAC is a group committed to driving STP initiative within the Asia Pacific fund industry by de fining a common STP strategy for each country, taking advantage of different technological platforms already available promotes automation and recommends the use of the SWIFTNet Funds ISO20022 compliant messages.

AFAC Regional Contacts

Target 2 Securities (T2S)

The European Central Bank

2013

The ECB aims at making Europe a better place to invest and trade with multiple CSD by providing a single IT platform enabling settlement of securities and fund shares in Europe.

www.ecb.int


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About Ineum Consulting Ineum Consulting is a strategy, organisation and information systems consulting company. Ineum Consulting, objectively helps its clients make strategic, operational and technological decisions. The company’s range of services, based on its in-depth knowledge of its clients’ businesses and ability to implement specific solutions, is a unique asset. Ineum Consulting has 1,300 employees in Algeria, Australia, France, Belgium, Morocco, Luxembourg, the Netherlands, Switzerland, United Kingdom and the United States. It is part of Management Consulting Group Plc, listed on the London Stock Exchange

Contacts Michel Kabanga KAYEMBE Associate Partner Investment Funds Advisory Services, Practice Leader Ineum Consulting Luxembourg Mobile : +352 621 32 01 95 Direct : +352 26 37 74 21 Fax : +352 26 37 74 982 [email protected] 41 Zone d’Activité Am Bann L-3372 Leudelange

Eric CRABIE Partner Ineum Consulting Luxembourg Mobile : +352 621 32 01 92 Direct : +352 26 37 74 20 Fax : +352 26 37 74 982 [email protected] 41 Zone d’Activité Am Bann L-3372 Leudelange

Fund distribution: In search of operational excellence: myth or reality?

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