Funds Europe talks to Henning Swabey about Calastone’s new focus on continental Europe and the private wealth market.
Calastone describes itself as an organisation that has grown both organically and opportunistically. It started with a mission to create an elegant solution to one of the industry’s most persistent problems – the lack of automated processing.
A lot of the archaic processes that have long been banished from other asset classes have lingered in the funds market. Whereas the equities market has been experimenting with algorithmic trading for more than a decade, in some instances, funds are still being purchased and redeemed via fax.
But what has been the fund market’s operational shame has been Calastone’s gain. By sitting between the fund manager, distributor and transfer agent, Calastone has been able to standardise the messaging between them all and it has now grown to become the largest global funds transaction network.
Calastone began with the UK market but then soon found that it needed to include Luxembourg and Ireland if it was to capture any of the cross-border funds market. Next was Asia-Pacific, where examples of automation were few and far between because many Asian firms preferred to hire more staff than implement automated processing.
Now Calastone is turning its attention to continental Europe. In October 2017 it appointed Henning Swabey as its new head of continental Europe. Formerly responsible for building RBC’s Investor & Treasury Services business in Asia-Pacific and the UK, Swabey – who is half British and German, grew up in Belgium and married an Italian – has been given the role of defining Calastone’s business development strategy in Europe.
“The big challenge that we have in comparison to the other markets where we have developed a large market share is that automation is already very well developed in Europe,” says Swabey. “A lot of the distributors are bank-based and are big users of Swift and its messaging standards. And there are a lot of super-aggregators that use automation.”
There has been a lot of consolidation in the market and that has created this idea that any asset manager or intermediary has to be either a big player or a nimble specialist, says Swabey. Any firm stuck somewhere in the middle will find themselves under pressure and this is fuelling the need to expand their offering and enhance their processes.
A prominent feature of the fund management market in mainland Europe is the number of private banks, family offices and private wealth managers that operate in the market.
Swabey draws a distinction between the high-net-worth, mainstream wealth management market, which can be seen as a branch of the retail/wholesale market, and the ultra-high-net-worth, private banking market, which can operate more like an institutional investor but without their infrastructure budget.
“I believe Calastone is able to offer a huge number of benefits to the private wealth sector,” says Swabey. “We can significantly reduce the cost of investing in funds and unlock operational alpha by reducing costs as opposed to portfolio manager-driven alpha.”
However, for some private wealth managers and their ultra-high-net-worth investors (UHNWIs), the reduction in operational, financial and especially reputational risk that comes with automation is more appealing than the promise of reduced service fees. UHNWIs are used to the very highest levels of service and are constantly being approached by service providers for their business, an embarrassing case of “fat fingers” is mitigated by a fully automated process.
A lot of these UHNWIs that have built a fortune over generations are akin to sovereign wealth funds in terms of the power and influence they wield as investors. “What they truly value is the client experience,” says Swabey. And while these powerful investors might value a high-touch, personalised service, increased automation is what will ultimately help to make this possible, he says. “Wealth managers and family offices are looking to enhance and improve the investor’s experience and not employ people for the sake of it, especially if this increases the cost of running their business or reduces their clients’ returns.”
If a private bank or family office is able to automate more of its back-office processing and more of that operational chain, it will be able to devote more time and attention to its investors.
Swabey, who has also lived in Japan, says: “There is a saying in Europe that the customer is King, but in Japan, they say the customer is God and that you should be honoured to have been chosen to service them. I believe that there is great wisdom in this, especially when servicing UHNWIs. And the more you automate what happens behind the investor, the more resources you can devote to what happens in front of the client.”
Despite the generally high levels of automation within the European funds market, there are pockets within the private wealth market where there is no interest in the latest apps or online portals and manual activity still persists in certain processes.
One example is the funds transfer process, which is typically triggered when a HNWI changes wealth management firms or when a wealth manager changes firms and brings their clients with them. The existing process across the continent is time-consuming, costly and prone to error and operational risk.
Calastone has looked to Italy, where this issue is especially acute, says Swabey. “There are so many different intermediaries and manual processes involved just to re-register a fund, despite the fact that there has been no change in the beneficial ownership of that fund. This is a pressing issue for the Italian market, but the issue is consistent across a number of European markets and we hope that demand for automation will grow across the continent.”
Swabey also expects MiFID II to have a transformational effect on the European market, not least because it will bring much more transparency to the fees and charges involved. In Europe’s asset management market, there is a 30%-40% post-charge margin for asset managers, and investors also pay for the costs of the intermediary unitholder chain.
“Many of these distribution charges have been passed down to investors but under MiFID II and a detailed breakdown of those charges and fees, many of them will realise that they could work with distributor A or manufacturer B for the same service but at a different cost,” says Swabey.
“The directive will focus more attention on automating parts of the distribution chain and bringing down those costs. Using Calastone’s system, private banks and asset managers can get full visibility and control of their order flow.”
(First published in Funds Europe, June 2018, http://www.funds-europe.com/june-2018/sponsored-feature-continental-shift)