Fund administrators and registries make up the beating heart of the managed funds business. They pump critical and timely information down the industry’s arteries, allowing everything else to function.
Over time, registries in particular have been asked to do more and more – and if predictions are correct, they will be the key to the next stage of the industry’s evolution.
The problem is, this is a low-margin, highly pressured business where automation is patchy. In research we conducted with Global Custodian magazine earlier this year, we found that the majority of fund administration processes in Australia were still not fully automated, including registry.
In many ways that did not surprise me. Over the years, registries have tended to build new capabilities on top of old ones as demand for data – from asset managers, investment platforms, custodians and investors – has increased. This is an ecosystem built through evolution and not by design.
In a recent Calastone white paper ‘The Future of Fund Administration’, we compared that with the way a coral reef mushrooms. New systems may be impressive, but chances are they are just covering up the old core. Information is often spread across lots of different IT systems and sometimes across different countries.
All this generates unwanted friction, cost and risk and hampers flexibility and innovation.
Investment in registry operations lags
In some areas, Australia’s fund administrators are actually ahead of the pack. Our research with Global Custodian showed high levels of investment into compliance and distribution support, for instance, putting Australian firms ahead of other regions in levels of automation.
Investment in registry was the lowest in the world, however. More than four out of five Australian respondents in our research said that they viewed registry as ‘a necessary but unexciting’ part of their fund administration activities. While progress is being made, analogue processes are still used to update fund registers, with no real-time visibility.
But, as our recent white paper highlighted, pressure for change is growing. And with that pressure comes opportunity.
The pressure is clear. Fee compression is feeding back from asset managers to asset servicers such as fund administrators. At the same time, more and more asset managers are looking to connect directly with investors rather than selling exclusively through platforms. In a recent global survey we conducted with Funds Europe, nearly two-thirds of asset managers said they were planning to grow new wealth management arms.
That means digital offerings – which in turn will require more digital support from asset servicers. Registries will be critical in delivering the cost efficiencies and customer service levels asset managers are increasingly looking for.
Automation means cost reduction
But herein lies the opportunity. For a start, automating and digitalising will remove the friction in today’s mainly analogue processes and significantly assist with cost control. Cost reduction is the purest form of alpha and automation is the best way to achieve it.
But that is just the start. We have a vision for the future of registry that enables a shift to a fully digital infrastructure based on cloud and distributed ledger technology (DLT). It would pave the way for a real-time central register – a single version of the truth – and instant data sharing. And it would be managed, as now, by the registry.
Not only would this materially reduce cost throughout the funds ecosystem but it would unlock the potential for registries to be ready to deliver the products of the future – which will inevitably depend on immediately accessible, real-time information.
Servicing tomorrow’s tokenised products
The products of the future? I’m talking about tokenised assets – which I and many others believe are just around the corner. They will not only transform transaction costs but make micro-investing – through fractional ownership of assets – a scalable proposition. That, in turn, will open up the world of investing to an entirely new cohort of investors, to the benefit of everyone in the industry.
We also saw in our Global Custodian survey, that 83% of Australian respondents feel that the advent of tokenisation would require a radical overhaul of the registry function, by far the highest in the world. That suggests there is both an appetite for change in Australia and a sense of realism about what it will entail.
The critical elements of this new operating model are already deliverable. At Calastone, we are demonstrating that with the launch of DMI Fund Services, our new DLT-based solution for fund administration. A full-service infrastructure, DMI Fund Services automates and digitalises registry and has the potential to halve the cost of servicing clients.
The next-generation investment landscape may look very different from todays, but registries can ensure they remain a pivotal part of it.
