Funds Europe talks to Calastone’s Edward Glyn about the importance of automation and why investors’ demands for new technology could be the biggest driver.
The purest form of alpha is cost-reduction and manual intervention creates friction and cost, reduces efficiency and increases risk. Manual processes do not benefit any part of the supply chain. So says Edward Glyn, managing director, Global Markets for Calastone, and a long-time advocate for automation.
However, while the argument in favour of automation has long been accepted, the funds industry still features manual intervention in certain markets and for certain processes. These gaps are evident in the research conducted by Funds Europe into the state of automation in the global funds industry.
The study, supported by Calastone, surveyed over 600 funds professionals in 39 countries. Among the survey’s headline findings were that only half of respondents considered their firm to be either fully (15%) or mostly (35%) automated. And despite all the advances in digital technology, 67% of firms still use fax.
The presence of manual processes is a particular problem for those asset managers looking to satisfy investors’ demands for new digital asset classes and the same kind of digital tools they can access in other parts of the financial services market.
“As the industry becomes more sophisticated about how it engages with investors and distributors, none of the flashy front-end tools will be available without an automated back-end,” says Glyn. “Automation is essential to any firm wanting to exploit the opportunities offered by new technology.”
This is supported by the survey, which examined the different drivers for automation and found that client service (75%) and revenue expansion (61%) were the most commonly cited options, ahead of operational cost reduction (49%).
“Some markets are more sophisticated than others and that means different drivers for automation,” says Glyn. “The core processes like order management and clearing and settlement are still important. And in times when markets are harder, you have to focus on sweating assets and competing on price. But you also have to focus on growth. Very few firms have shrunk their way to greatness.”
“Some markets are more sophisticated than others and that means different drivers for automation.”
Money market funds are high value and low volume and there is still enormous value in automation there, says Glyn. “This was highlighted during the pandemic when clients needed updates on their cash positions and found that many of their service providers were unable to provide this because the funds process was not fully automated.”
This example showed that a lack of automation is not simply a problem for transfer agents and the asset servicers at the downstream end of the chain and that there is an impact for end investors.
So, should the industry be doing more to promote the need for automation, especially among the ‘upstream’ participants in the funds process, such as end investors, advisers and pension funds? “The transfer agents and the asset managers know the benefits of automation very well but there is always more that can be done,” says Glyn.
One thing is to penalise the so-called ‘fax’ offenders and other users of manual processes – for example, insisting that initial orders are only sent by automated or electronic means. However, this can be problematic. As Glyn says: “Ultimately, the asset manager wants their products to be as accessible as possible, so there is a reluctance to impose conditions on order formats.”
Instead, there need to be more incentives on offer, says Glyn, as seen by the number of asset servicers that offer reduced rates for orders received via automated means.
Calastone’s approach to automation has always been about removing barriers to automation, says Glyn. “We didn’t want to force anyone to do anything differently.” Instead, Calastone has taken on the burden of converting manual processes into an automated order flow.
That burden has become easier, says Glyn, partly because of the network effect of Calastone’s growing client base and partly because the relevant technology is more accessible. But there is also a greater will to automate.
“Firms that have an ambitious strategy based on new technology like tokenisation know that this is not achievable without automating the basics,” says Glyn. “People want the same flashy front-ends that they get with the challenger banks, but that is not possible without automating the back end.”
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