Fund transfers – the new route to service alpha?______

Henning Swabey - Head of Continental Europe

Investment fund transfers are becoming increasingly ubiquitous between fund managers as investors – frustrated at the desultory performance and high fees relative to cheaper ETFs (exchange traded funds) and index trackers – shop around for returns. Henning Swabey, Head of Continental Europe, Calastone, outlines some of the challenges involved during the asset transfer process, and identifies potential solutions for the industry.

While asset transfers should – in theory – be quite straightforward exercises, the reality is very different.  In fact, asset transfers are highly inefficient and add sizeable costs for end investors at a time when returns are already being heavily squeezed. However, the funds’ industry is beginning to rise up to the challenge. Recent efforts by ALMUS to address the market practice needs for fund transfers are an indirect response to the lack of automation and the associated risks. Nonetheless, more needs to be done.

Bridging the incompatibility gap

Asset transfers can involve a multitude of different intermediaries including custodian banks, financial market infrastructures (i.e. CSDs [central securities depositories], CCPs [central counterparty clearing houses]), transfer agents (TAs), registrars and fund administrators. With any one transfer transaction involving up to six to 12 different counterparties in a chain, costs can rapidly spiral upwards eating into client margins.

Some of the more complex asset transfers can take up to three months to complete, owing to the legacy technology in some corners of the industry (e.g. continued reliance on fax machines, telephones, physical letter correspondence), a lot of which actually pre-dates the Millennium itself. Again, this creates unnecessary costs for investors.  The intermediation and dependency on old systems and technologies causes other problems too, principally operational risk, a point made by Duncan J. Christie, managing director at IFDS in Luxembourg.

Investment fund transfers are also high-volume transactions, meaning errors and mistakes can easily creep in as a result of intermediation and legacy technology. As TAs do not control the entire end-to-end process, transfer errors can be very difficult to remedy exposing providers and managers to reputational risks should problems or delays arise.  If these issues persist, investors will shortly lose patience.

Compounding matters further is that transfers have picked up as a consequence of regulations such as RDR (Retail Distribution Review) and MiFID II (the Markets in Financial Instruments Directive II ), both of which have introduced strict disclosure requirements on asset managers’ costs and charges, thereby making it simpler for investors and financial advisors to compare different investment products.

Christie also pointed to an absence of standardisation in parts of the transfer agency process as being a major barrier to automation. While efforts to standardise transfers have been going on for a long-time, acquiring industry-wide consensus is still a challenge. Nonetheless, Christie said that providers such as Calastone and SWIFT were playing an instrumental role, together with the market practice groups, in driving forward standardisation and automation in this area.

Time to change

Any reform of the transfer process needs to take into account client experiences and customer service, both of which are critical to building trusted customer relationships and robust brands. At a time when consumer experiences elsewhere (e.g. e-commerce, share trading, online retail banking, insure-tech) are being totally reshaped by technology and digitalisation, the funds’ industry is lagging behind.

Allocators have made it clear they want the funds’ world to embrace technology so as to make the actual investment process more digital. Transfers are no exception to this. If firms want to raise capital from investors moving forward, the operational processes behind transfers need to become more efficient.

If transfers cannot be expedited, investors will simply look elsewhere for alternative sources of returns, primarily institutions which have more robust underlying technology facilitating superior user experiences. A failure to implement the necessary operational or back-office enhancements creates other problems too, namely making it harder for new, innovative client-facing technologies – such as robo-advisory solutions– to flourish.

Making the change happen

Calastone has extensive experience driving automation in fund management, having just launched its eagerly awaited Distributed Market Infrastructure (DMI), a Blockchain-enabled system designed to facilitate the trading, settlement and servicing of mutual funds, an initiative that could net the industry up to £3.4 billion in savings on their fund distribution costs alone[1]. New technologies offer further scope for transparency, automation and a more robust Straight-Through-Process (STP) for cumbersome activities such as fund transfers.

Christie agreed automation needed to be delivered quickly irrespective of whether it was being led by SWIFT, Calastone or some sort of distributed ledger so as to facilitate lower transactional costs for investors during the transfer process. “The key thing for our industry is that we reduce our costs and automation will continue to be a primary lever to do so,” he said.

In addition to streamlining transfers, there are calls for better automation of subscription and redemption processes too. According to Richard Street, Head of Europe, US and Australia, Global Client Coverage at RBC Investor & Treasury Services, the industry still relies on fax and other paper formats to initiate subscriptions and redemptions.  There is a suggestion that unless asset managers look to enhance their distribution process by digitizing investor experience, they could miss the opportunity in attracting the digital tribes as potential customers.

The funds’ industry continues its long journey of steady change. Customer service is of critical importance as firms start to see how new digital entrants service their investors.

Whether or not the industry experiences significant disruption in the short term, the funds industry would do well to explore how their operating models can leverage technology and automation to improve investor experiences during processes such as transfers.

During challenging times, service and operational alpha can significantly contribute to a firm’s bottom line and the investors’ returns. By streamlining and digitising their businesses, the funds ecosystem will win the hearts, minds and wallets of investors.


[1] Calastone (December 3, 2018) Calastone launches world-first blockchain powered global funds marketplace in May 2019

Henning Swabey, Head of Continental Europe

Featured articles