April 2011

TIME TO INVITE CINDARELLA TO THE BALL: Transfer agents under pressure

glass_slipperFund distribution is increasingly global. Nicholas Pratt examines the strain this puts on the transfer agents and how providers should react

It all used to be so straightforward for transfer agents when funds were local. Increasingly though, promoters are exporting their domestic funds to new international markets even though these were originally designed to be distributed locally. There has also been the emergence of new platforms and fund types specifically designed for cross-border distribution. Consequently, promoters are building huge new platforms for international distribution, with a particular focus on emerging markets in Asia and South America.

For the transfer agents (TAs) there is increasing pressure to adapt their services to match these new distribution channels. Laurent Majchrzak, head of global distribution at Caceis, says: “It is not so much a major operational overhaul but about developing specific add-ons for new markets. In some areas, such as the US, the changes are mostly technical, whereas in others they are more cultural. In Asia, for example, huge efforts have been made over the last ten years by service providers to help clients capture more flow and overcome the cultural barriers that come from a business to a consumer model.”

From a systems perspective, global TAs would like to be able to develop a single global platform that is able to serve all markets directly, says Aubrey Nestor, product architect at Bravura Solutions, a software supplier to the TA industry. The main benefit of a single global system is that it reduces the work needed in the back-office – lessening the need for sub-registries. And it also makes it easier to produce a consolidated cash flow forecast in real-time for all markets rather than trying to weld together separate systems.

Whether this single global system is feasible depends on the various tax, regulatory and processing requirements of each jurisdiction and how much they vary from the market that the core system was based on. Generally, most TAs will have a core system based on a specific market, such as Luxembourg. And whereas some markets like Singapore and Hong Kong have relatively few rules governing the marketing of cross-border distribution, others such as India and Italy have more onerous obligations where any cross-border funds have to go through a local correspondent bank. In these cases it may be deemed easier to develop a separate front-end rather than incorporating these requirements into the core system.

Nestor says: “Although there are differences from country to country, they’re not too great and with sufficient time and money you could develop a software solution to deal with them.”

Bill Gourlay, director, fund segment strategy, product and client segments at RBC Dexia Investor Services, says the idea of having one global TA system is a misnomer: “Even if you have a core platform that is used in multiple locations you will always need to add some specificity for local markets and regulations. Whenever we deploy our system in a new location, it is not simply a case of dropping it in and turning it on. There is a lot of time spent adapting it to local market requirements.”

The adaptation effort is all the more onerous because of clients’ expectations of the transfer agency function, says Gourlay. “The TA role is the obvious part of the process
that clients expect you to be able to do. It is the distribution process which is the driver of change.”

Consequently, it is the transfer agencies and not the distributors who have to adapt and this creates cost, says Caceis’s Majchrzak. “To become part of that distribution chain is valuable and something that promoters are willing to pay for. TAs have to provide services that give distributors access to the international market but without them having to make any changes to their systems. While we make the technical changes, the cost involved is borne by the promoters and, ultimately, investors.”

Franklin Templeton Investments is one of the few asset managers that performs the transfer agency role in-house. Paul Brady, director of its international transfer agency, says: “We have a global TA division but we don’t have a global TA system. Where we have domestic products in different regions we are using different TA systems, but where we have a global product for global distribution, we use a single TA system that spans multiple time zones.”

There are also fewer stand-alone TAs, such as IFDS, which also face challenges from global distribution. Simon Hudson-Lund, chief executive, says: “Our strategy has been to develop best-of-breed applications and then link them together at the front- and back-ends. What has changed is that the cost of linking at the back-end has become more expensive and, increasingly, firms want a central hub for the front-end to serve multiple regions.”

The TA is often seen as the Cinderella of the asset servicing world. It is taken for granted in many ways by fund managers and distributors and leaves little room for transfer agents to provide demonstrative value or generate significant margin, particularly in Europe where distribution is controlled by banks, says Hudson-Lund. “As a stand-alone TA it is very hard to operate outside a market like the US or the UK which is why we work closely with State Street [a financial services provider] and its asset servicing operation in Europe and Asia.”
The challenge for the TA industry is to make their function much more important in the overall asset servicing chain and to make clients appreciate the extra expense they are incurring from global distribution trends.

Paul North, head of product development at BNY Mellon Asset Servicing, says: “Clients tend to value the sale rather than the administration of the fund and the TAs’ rate cards are down in Europe because of competition. So it can be hard for TAs to justify a higher cost for distribution in Asia even though it is a more technically expensive process.”

Perhaps the opportunity for transfer agencies lies in offering a more advisory-based service or distribution support.

North says: “The TA function is developing into a wider range of services in addition to consultancy – providing marketing material for distributors or web services for distributors to enter trades and download relevant AML [anti-money laundering] forms – so I can see a more focused and richer distribution support service emerging.”

As Gert Rautenberg, managing director with responsibility for transfer agency and fund solutions at Brown Brothers Harriman, says: “Generally, TA has been about administration support, registrations and record-keeping. But if it becomes something more focused on distribution support, this may change and the remuneration model may change as a result. We are sitting on a lot of data in terms of transactions and positions and if a TA wanted to, it could do a lot more with that data in terms of analytics rather than reporting.”

For some fund managers, a global distribution support service is less of a paradigm shift and more of a reasonable expectation.

“I don’t like the term transfer agent, it should be banned,” says Martyn Cuff, chief operating officer at Allianz Global Investors. “I prefer to call it distribution operations.

“And I expect any firm providing this service to help me navigate distribution in all the countries I operate in and not just sit in Luxembourg or Ireland and only deal with things once they come across the border. I don’t expect them to know everything but I expect them to have a global end-to-end view and a global end-to-end competence. I expect them to be able to advise me on setting up my supply chain, not just be a part of it. That is what I see as distribution operations.”

Cuff accepts that his view may differ from what many other fund managers see as the trading agent’s role, which he agrees is often undervalued by fund managers, making it difficult for TA’s to make sufficient margin.

“The production and distribution of a fund are two completely different processes requiring different skills, different economics and different systems. The bundling of the distribution operations with production operations as we have seen with the large asset servicing firms is one solution.

“A stand-alone distribution operations service should be a profitable activity. And we as an industry are doing ourselves a disservice if we do not allow that to be the case. If that means fund managers paying more for a service that can clearly demonstrate global and end-to-end competence, then so be it.”