In traditional equity markets, the processing of dividend information and payments are fully automated, and have been for many years now. This contrasts sharply with what is happening in the funds industry globally, where the activity continues to be inefficient and occasionally error-strewn.
What is the knock on effect?
The responsibility for processing and reporting dividends on behalf of investors lies with the fund distributor. Yet, the exercise is unduly complicated by the fact that distributors frequently receive dividend information from fund managers and transfer agents in formats that are often inconsistent.
Moreover, where firms say they are automated they still do not feed dividend information directly into a distributors back-office system. Instead they rely on them to interact with a portal forcing manual interactions, potential delays and errors.
Calastone’s recent survey of 25 fund distributors across Hong Kong, Singapore and Taiwan exposed the sheer scale of the problem facing the industry.
The survey found fund providers overwhelmingly sent files to distributors via email and fax, with only a handful being shared through STP (straight through processing) or self-service online platforms. This ongoing reliance on email/fax communication channels routinely forces distributors to manually integrate data into their systems at huge time and expense.
For instance, the Calastone study found that 27% of respondents took more than a half a day to integrate information received via fax, post or email PDF into their systems. Conversely, those distributors processing data shared through self-service online platforms or STP spend far less time on migrating dividend information onto their systems each day.
Is unnecessary risk and cost inherent in the system?
According to the study, 83% of respondents said that manually inputting information into their systems consumed the bulk of their time when processing dividends, followed by chasing for files (68%).
As a result, 32% of distributors acknowledged that receiving unstructured dividend files usually delayed investor reporting by one or two days although 20% said it could sometimes be as much as three to five days. Exacerbating matters further is that distributors often have a large number of fund provider relationships to deal with.
This continued reliance on manual processing puts investors at risk in addition to the industry’s own reputation. For example, if an investor receives their dividend report late, then it is quite possible their dividend payment will also be delayed. This can be particularly challenging for accumulation fund investors as late dividend payments can affect the number of new units credited to an investors’ holding if the market moves up in the interim.
Market participants in Asia universally agree that greater automation needs to be implemented if dividend processing is to be improved. Despite this, it is uncertain as to whether fund providers – at least those in Europe – will change their existing practices.
Fund providers seem slow to change old habits
Asian distributors – when asking their European fund providers when they intended to deliver an STP dividend information feed – found 39% had no plans to automate dividend information processing, although 22% confirmed they would eventually. Less reassuringly, 22% of distributors did not even receive a response from their fund providers when asked.
The absence of automation in dividend processing is a problem that adversely impacts everyone in the investment chain, not just the distributors and investors.
As stewards of investment it is incumbent on every player in the funds industry to protect the investors interests. Not least to preserve the future of their business, but also their reputations. We would all do well to remember that brands are built over time, but can be destroyed in seconds.