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DLT and the new model transfer agent

James Bolton FundsDLTTransfer agents are certainly living in interesting times. With increasing pressure to transform, re-engineer and improve service, now is the time to lay down a solid base to future-proof the TA business, enabling it to grow digitally and enhance its service to the investment fund industry.

At their most basic, all of the challenges facing transfer agency activity in Europe can be broken down into two areas. The first is what should – or can – be done with the problem of its legacy technology. The second revolves around the question of the role of the TA and its relationship with distributors, platforms, custodians, CSDs and asset managers, or in short, what services will it be able to provide in a transformed distribution chain.

Is current tech really sustainable?
Looking at technology to begin with, transfer agents have built up a vast and clearly overly-complex array of operational solutions, processes and systems across the years. The tangled complexity of some is understandable. Traditionally, transfer agents have favoured tactical solutions for day-to-day or short term challenges, with little time spent focusing on the wider longer term and strategic needs of the business. As a result, the history of transfer agents is one of constant but minor technological leaps, each one holding promise and delivering but ultimately not significantly contributing to an enhanced and superior TA model as a whole.

Additionally, because of asset manager expansion, TAs have established themselves in multiple jurisdictions as part of a “Global TA Model”. This has added to TA systems complexity as asset managers have demanded that local market specificities and requirements are supported, often adding to the challenge of untangling and simplifying TA technology for the future.

At the heart of transfer agency woes lies the fact that all of its progress has been built on a backbone of legacy systems dating back some twenty years. These systems were developed around the concept of optimising processes for operations that were – and in most cases still are – basically inefficient. Duplication of work and manual processes have long been a bugbear in the TA world and indeed in the entire fund distribution chain.

On the other hand, there is no doubt that this sporadic, reactive approach has produced some good results. Rates of straight-through processing for example have improved greatly. There is now advanced STP for interconnection between systems. The range of services on offer has also grown. From investor registry, order processing and cash management, TAs are now offering distribution support services around data and information and attempt to get closer a true global transfer agency model.

This is all well and good but transfer agency remains a low-margin business and the pressure to reduce costs is relentless. The scope for finding long-term solutions – and more cost savings – to legacy issues is becoming smaller with each layer built on a near-obsolete underlying system. The brick wall is approaching.

Delivering data to all

The other facet of this problem is services, particularly around data. In addition to increased regulatory reporting requirements, transfer agents, as the classic man in the middle, are expected to provide information upstream and downstream, to both asset managers and investors.

Asset managers see TAs as the gateway to distributors and investors. They are the first point of contact for client experience especially during onboarding and account opening. For this reason, some asset managers prefer to keep investor and distributor servicing in house rather than outsource it to a TA. Asset managers also want to become closer to end investors and be able to include their expectations in product development and strategy. This requires an understanding of markets and investors based on investor and transaction data.

For their part, investors have seen the great strides made in other sectors and now take as a given high service levels, access to information and transparency, in real-time. Any out-of-date process that disrupts a seamless experience – such as being asked for KYC and AML documents multiple times – leads to a disconnect and reflects badly on the fund brand.

In short, the volume of key information that flows through transfer agents means that data provision can only grow in importance.

Nextgen TA operations

With a revived retailisation and an ongoing Amazonisation of the fund industry, the efficiency of TA platforms must be improved to deal with greater levels and associated volumes of D2C and B2B2C business.

This requires new and better integrated distribution and operating models with partners, that is to say better connectivity between operational functions, distribution and portfolio management. All actors must be able to have an end-to-end view of the entire process.

Client centricity, digital interactions and the rise of information self-service requires reshaping offerings to make them more personalized and more in real-time. Transfer agents, and indeed all actors throughout the fund distribution chain, are looking for solutions that reduce operational complexity.

In this new world, TAs need a complete change in their approach. Transfer agents should transition from batch processing and aiming for mass operational activity to continuous processing and reporting and, crucially, a renewed focus on exception management. Mass operational activity will become largely redundant as processes are re-engineered with systematic controls and intervention being on exceptions. Such an approach is the only way to cope with the volumes and the drive to keep costs low.

In such a next-generation chain, transfer agents will be central. There is therefore a need for transfer agents to move from distribution support to distribution integration.

A DLT infrastructure

In this context, transfer agents are seeking a way that will enable them to deal with a high number of investors in the most frictionless and automated manner possible.

One way to reach this goal is via a shared, industry-wide, distributed infrastructure based on DLT and blockchain. Transfer agency activities based on blockchain enable the recording and updating of fund registers in a distributed ledger in a way that is reliable, secure, transparent and auditable by all parties in real-time.

Importantly, because actors move from their own siloed infrastructure to a shared infrastructure, trade processing and information sharing are greatly enhanced while the need for duplicated operational activities is removed. Such an infrastructure enables peer-to-peer interaction on a scalable basis.

On the technical side, using DLT leads to the reduction or elimination of redundant technical activities, such as parallel data maintenance, and overall rationalisation of systems.

A DLT infrastructure, combined with microservices and APIs, is ultimately a clear way out of the complexity that exists today in the TA sector. It allows transfer agents to be in a position to phase out existing systems with one that can respond to the needs of all actors in the distribution value chain.

The new world in practice

So what does this look like in reality? Account opening becomes digital onboarding with a multilevel accounts structure to reflect distribution networks. This opens up opportunities for real-time feedback, workflows and automated controls, thus enhancing customer service and reducing client acquisition costs. Best-of-breed KYC solutions are integrated via APIs.

For transaction processing, order reception is executed in real time with all controls upfront to ensure process automation and immediate feedback to the investor. Fees and tax computations are also done with upfront controls and automated processing. Cash settlement is based on event-triggered workflow automation, as opposed to batch processes, with connectivity to payment providers and ready for digital currencies.

Information delivery moves to APIs, web portals and front-end distribution with real-time information available at every step. With all actors having a permissioned view of onboarding and transaction processes, transparency throughout the fund processing cycle is greatly enhanced.

The advantages of a DLT infrastructure are indeed many. It opens up the route to transfer agents being fully integrated throughout the distribution process while reducing their workloads.

Most importantly, it puts the transfer agent in a position of being able to support investors, distributors and asset manager with new real-value services. To do this, operating models, processes and technology infrastructures must be reformed and DLT as the backbone is the way forward.

By James Bolton, Project Director at FundsDLT

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