An article in conjunction with Accelerando
The funds industry found new ways of working during the Covid-19 lockdown. It also learned new lessons. It is likely to emerge from the crisis a different animal, operating in a subtly different ecosystem, where agility and resilience will be among the keys to success. Henning Swabey, Managing Director and Head of Europe at Calastone, examines how the lockdown has touched different parts of the funds chain in different ways
Among the most affected were those at the sharp end of marketing and those in the back office engaged in transaction processing.
The former had to abandon their much-loved roadshows and find new ways of communicating with wealth managers and other distributors. Suddenly, those with the biggest budgets found themselves no better off than any other player that had mastered Zoom.
The back office teams got a crash course in ‘secondary connectivity’ – in other words how to operate from a laptop on the kitchen table while still interacting with the office technology stack and a host of counterparties, some of whom still used paper processes.
Marketing by video
The biggest shift was the discovery of Zoom – not just as an alternative to face-to-face meetings but as a contact accelerator. Gone the line ‘Can we meet up next time I’m in town?’ to be replaced by ‘Can we do a video call next week?’. This was a new immediacy. For smaller firms struggling to keep up with the big boys with roadshow budgets of £1,000-plus per person per day, this was a Godsend.
The crisis has proved something of a leveller. ‘Already in 2019 we found many smaller, best-of-breed managers with remarkable net inflows,’ says Philip Kalus, founding managing partner at Accelerando Associates: ‘This trend has remained intact in 2020 year-to-date.’
‘Digital communication and campaigns, which until recently were at best sales and marketing add-ons, are suddenly of prime importance,’ he says. More agile firms (often small to mid-tier ones with less bureaucracy) are taking advantage of this. ‘The remote and video-driven environment is democratising fund selector face-time – in particular for managers without local representatives,’ states Kalus
‘Punchier, faster, more direct’
Agility also shows itself in being able to respond quickly and deliver relevant, timely, specific material. ‘Many of the big firms have been content to push out macro stuff. In the smaller firms the different units are more aligned. You can be punchier, faster, more direct.’ One example: The key thing for fund buyers has been to know the level of redemptions firms have been experiencing. ‘If you can’t communicate that quickly in a straightforward and transparent way you are in trouble – certainly in the UK, the Nordics and Asia,’ he says.
People talk of performance alpha. But service alpha is almost as important. ‘It’s about time of response, relevance of response, getting technical stuff across quickly. There is a thin line between being very proactive and outspoken and not annoying people and pushing too hard,’ says Kalus.
Will things go back to being the same as before? Many people will return to their offices, but many more will work from home than did before. Kalus thinks that a lot depends on how long the lockdown will last. ‘I believe it will go on longer than people think. Even once restrictions come off people will think twice before reverting to the old travel/meeting routine. Partly there will still be a sense of risk; partly they will ask themselves ‘Is it worth it?’
The funds industry adapted quickly to the new environment. Kalus talks of clients managing to switch a fully booked multi-day tier one fund selector roadshow in Europe to individual video meetings without losing a single appointment. Many of those video meetings have gone well. Feedback suggests that video meetings can be ‘more intimate and personal’. One well known Credit Suisse fund selector was quoted as saying: ‘I realise we’ve done too many meetings.’
So that behavioural change looks more than just a temporary phenomenon. ‘Smaller, mid-tier firms have the chance to turn a one-off opportunity into a low-cost marketing tool, a way in to the big fund selectors, that puts them on the same level as their bigger competitors,’ concludes Kalus.
Back office: automation is key
For back office staff, the lockdown has put the spotlight not only on secondary connectivity in the fund transaction chain but on the continuing reliance in some quarters on manual processing and off-line communications.
Working from home is fine if you can maintain your normal e-links, locate and communicate with everyone else in the transaction chain (and be able to share information with colleagues) and still get what you need in a timely fashion. Oh, and provided it is all done in a robust, secure environment.
However some market participants are still communicating by fax – which is something very few people have access to at home these days. There are parts of the funds world that remain stubbornly wedded to faxes. A recent survey conducted by Calastone found frequent delays in dividend-processing across Asia, where fax and email continue to predominate. The same survey found many fund providers across Europe were also behind the curve, with relatively few having automated processing of dividend information.
Dealing with paper workflow from counterparts (requiring so-called ‘wet’ signatures) is difficult enough in normal times. It becomes a nightmare when those at the other end are themselves operating from home.
The lockdown highlighted the importance of digital operations to underpin business continuity. At Calastone our network is fully digitized – from order routing through to settlements, transfers and dividends. Our execution management system (EMS) is set up to support clients working from any location.
Secondary connectivity should be a major part of any business continuity plan. Calastone’s EMS allows clients to operate normally from home. Where they had counterparts still using paper processes we stepped in at speed to connect them to our systems, and where we had built secondary connections within our clients’ technology stack they found themselves with a further fail-safe in case their primary STP network went down.
The ability to sustain normal working in a very abnormal period proved a challenge for everyone in the funds industry. One thing is certain: the regulators will have been watching intently.
Operational resilience has steadily moved up the regulatory agenda in recent years. A paper produced last year by The CityUK and PwC said: ‘Regulators are looking to treat operational resilience on a par with financial resilience.’ Since then, Britain’s Financial Conduct Authority (FCA) has promised to review firms’ business resilience and their ability to support clients. Asset managers are particularly in their sights.
‘The lockdown has given new momentum to the industry’s automation drive,’ says Mr Swabey, Calastone. ‘The key point is that resilience is about more than crisis planning: It is about building robustness into everyday processes and reducing vulnerability.’ Technology has a big role to play here. Automation and full straight-through processing drive out risk. Allied with regular testing, automation builds in scalability and helps make businesses shockproof.
Increasingly the regulators want to see a structured approach to operational resilience, starting with a governance-based strategy involving top management and constructed around risk frameworks that identify the maximum tolerable disruption and take in all third-party relationships. ‘Failure to get that right could prove costly,’ says Mr Swabey.
Winners and losers
They say you should never let a good crisis go to waste. The lockdown has turned some of the old ways of working on their head, opened up new marketing opportunities and reinforced the need for fully automated ‘all weather’ processes in the back office. Agility backed by resilience is the new order and winning firms should take the message on board.
The ability to respond quickly, ramp up a digital communications strategy and optimise the reach and intimacy of Zoom – these are all key qualities in the competition for distributors’ time and attention.
As for the back office, asset managers and other funds industry participants should look on this as an opportunity. A survey in 2019 by PwC looked at investors’ priorities and gauged their satisfaction in six key areas. Operations, they concluded, was the area where the gap between expectation and satisfaction was at its widest.
Firms that visibly close that gap could well steal a march on competitors.