The administration of Australia’s retail managed funds industry took a hammering from systems providers at the recent Investment Administration 2009 conference, although some suggested that improvements in efficiency were on the way.
The chief executive of a large Australian-owned global provider, Iain Dunstan of Bravura Solutions, said that fax machines would have gone the way of the telex machine if it had not been for retail managed funds.
“The people at Sharp and Ricoh are probably very grateful for retail financial services,” he said.
And he was backed up by another speaker, Tim Hamer of the messaging service firm SWIFT, which is owned by a consortium of global banks, who said a survey showed that in Australia on average there were about 16,000 faxes a day sent between platform providers, managers and custodians.
He said that a managed fund back-office operation with 40 people, for example, could process about 1000 fund trades a day. But the same-sized broker operation, in the more automated world of listed stocks, could process about 50,000 trades.
The 12th annual Investment Administration conference, produced by Investment & Technology and the Australian Custodial Services Association, had just under 300 delegates representing managers, custodians and super funds. It was held at the Sydney Convention and Exhibition Centre on March 3.
However, Dunstan predicted that as a result of the financial crisis, managers were at last looking to replace some of their problematic legacy systems as they strove to wind up small or closed funds.
“The large organisations have started to engage consultants to at least look at the problem,” he said. “But the smaller ones haven’t. The business case for replacing legacy systems is more difficult for smaller firms.”
The replacement of legacy systems would be the main driver for big institutions’ IT strategies over the next two years, he said. There would be a flood of people going to the market for new systems once the critical financial pressures had lifted.
For instance, it cost about $30 million a year to maintain a first-generation fund admin system, which still accounted for nearly half the market. This could be replaced with a third-generation system, which cost about $10-12 million to install and only $3 million a year to maintain. However, cash-strapped firms might respond by saying that to make the shift would cost $42 million over the coming 12 months to take the project forward.
Most of the cost reductions are due to significantly lower head count and lower hardware costs.
However, Tim Worner, a principal of the Australasian consultancy Morse, questioned some of the benefits being promised by the systems providers.
“When I spoke to some people about this topic (towards a homogeneous system in managed fund transacting), they offered me presentations that they had done three or five years ago to copy,” he said. “I think the benefits are still overstated. Scale is still an issue … For example in unit pricing, there’s a field where we are about the same (with automation) as was the case for best practice manual pricing eight years ago.”
Rob Brown, the chief executive of the NABowned Ausmaq fund servicing company, agreed that scale was probably the most important issue.
“But I think the industry has moved on and those institutions which are most motivated about it are those with scale,” he said.
Dunstan presented some results from an independent survey of managers and life offices undertaken last December, which showed that 41 per cent of firms intended to “wrap and extend” their existing systems and another 30 per cent would re-write applications in a modern code.
“We can’t build a bigger and better financial services industry using 1980s technology,” he said.
“We won’t get out of this malaise if we don’t change the systems the business is run on. The longer and longer we put off the decision to change, the riskier and more dangerous it becomes.”
Dunstan said that the continued use of legacy systems encouraged a mindset of apathy and would eventually lead to a stifling of creative thinking and innovation within an organisation.
“Legacy environments embody rigidity, making it difficult to respond to new business initiatives or competitive pressures. Markets and business models change, making the original design a constraint on the business.
“The lead time required to respond to business requirements blows out because it inhibits the ability of IT to respond in a timely manner to new requirements. There is a longer time to market due to coding and testing.
“There is also greater risk of being unable to recover from a system problem.”