Managers are advised not to lose sight of the client in the drive to improve operational efficiencies, writes Greg Bright.
The world is going to hell in a handbasket. As funds under management shrink, fund managers are dealing with redemptions from many funds, freezes on some and hurdles to closing others. The Government has indicated clearly that it wants fees and charges to come down, at least in relation to super.
Financial planners have had to soothe shell-shocked clients and are themselves suffering from a lack of investments.
At the coalface of the managed funds industry – where the planner meets the investor – there is just as much pent-up demand for improvements in operational efficiencies as there is in the largest of fund management back offices.
And, according to the heads of two of Australia’s largest dealer groups, industry-wide improvements must be from the perspective of the end investors, not just from the perspective of the fund managers’ businesses.
“The client is going to pay for it, whatever’s delivered,” Marianne Perkovic, chief executive of Count Financial, told a joint IFSA/Professional Planner seminar, Accelerating Operational Efficiency in Financial Services, in Sydney in April.
“The biggest opportunity we have is to get to straight-through processing (STP), which we haven’t been able to deliver as yet. We’ve been talking about end-to-end STP for years,” Perkovic said.
“We need to focus on the platforms to have a more effective delivery of executions and transactions. The product has to come back to one of simplicity.”
Grahame Evans, managing director of Professional Investment Services, told the audience of about 60 fund management operations executives, systems vendors and custodians that the baby boomers still had “most of the money” and the industry needed to make sure that it was meeting their needs.
“You have to be extremely careful that you don’t take [improvements in administration] only from your business’s perspective,” he said.
“It has to be from the client’s perspective.”
Evans urged the industry to collaborate more in areas where there was no competitive advantage.
“Think about how much money we waste in all developing the same things,” he said.
Operational efficiency was not just about technology, because technology was only an enabler. It was about an efficient market place; and price was not necessarily a good indicator of how much someone valued a service.
Issues facing financial advisers included:
• reducing the cost of providing quality advice;
• providing certainty around their requirements;
• reducing the cost of acquiring new business;
• improving the quality of advice, although this was still very subjective; and
• improving the delivery of the advice.
Deen Sanders, the deputy chief executive of the FPA, agreed that “efficiency which doesn’t put the client relationship at the centre of the process will fail”.
“Efficiency that doesn’t ensure the quality of advice and the experience for the client will amount to rolling the dice on new risks,” Sanders said.
He warned against compliance masquerading as efficiency and improvements which started at the wrong end of the chain – the product end rather than client end.
He said the industry needed to be careful in attempting to minimise the risk in the advice process by removing planners’ critical “thinking role” and any sense of decision making.
At the same time, the industry needed to reconsider its prices and value proposition and to reposition itself to be trustworthy.
“There’s a real sense of concern from the community around financial services,” Sanders said. “Greed is no longer good. Clients are frozen. Market trust and adviser trust have been shocked.”
Geoff Lloyd, head of advice and private banking at BT Financial Group, who chaired and helped organise the seminar, said IFSA planned to continue to push for industry-wide improvements in funds administration. The operations and technology committee of IFSA, which he chairs, is considering changing its name to include “efficiency”, as a reflection of this push. Lloyd is planning further workshops and meetings to discuss more detailed aspects of the issues.
Richard Gilbert, IFSA chief executive, said that regulatory costs for the industry were likely to go up steeply, around the world, and improved efficiency was one way of counteracting those costs.
“Otherwise we will never get costs down [by] the 20 per cent that the Minister [Senator Nick Sherry] wants us to,” he said.
The industry should be “faxless” and it needed to improve its systems to achieve this.
While there was unanimity about the need for client focus with any move to improvements, where to start was a different question.
Geoff Hodge, the managing director of systems provider Milestone Group, said during question time that it was most important to make a first move for a collaborative effort; it mattered less what the effort was actually aimed at achieving.
BT’s Geoff Lloyd observed that one area which could benefit from a uniform industry-wide system, as a starting point, was in calculating adviser commissions – a task that most firms handle awkwardly with tailor-made software.
And Rob Brown, the chief executive of Ausmaq, said it would be easier for those organisations with scale, such as the custodians, to force change.
He said there was no single silver bullet to improve operational efficiency, because there was no single target. If a good idea required 100 per cent take-up by the industry to work, then it should not be pursued on practical grounds.
The use of Ausmaq and SWIFT by all industry participants would enable existing industry capabilities to be better leveraged, according to Phil Davies, executive director and head of technology at Milestone.
The glacial pace of improved efficiency in managed funds is in sharp contrast to that achieved by stock exchanges around the world, and this has probably been a major contributor to the popularity of Exchange Traded Funds, which compete with managed index funds.
The Australian Securities Exchange has seen monumental transactions growth since CHESS was introduced in 1996 with about 70,000 transactions processed each month, compared with 6000 per month prior to CHESS. From a costs point of view, clerical staff processed an average of 44 transactions per month per person prior to CHESS and more than 1000 per month after the automation shift.
Martin Spedding, executive director of Bluedoor Technologies, a DST International company, said: “We’ve been talking about this stuff for a long time, at least since the mid-90s. I wonder whether the industry is up for a 20/20 Summit on the subject.”
And Mark Pratt, chief operating officer at Australian Unity Investments, said: “We are very good at talking about ideas but we haven’t done anything about them. I wonder whether I will see straight-through processing in my lifetime.”
Spedding said there were two levels of issues – issues at the enterprise level and external issues at an industry level.
Quoting figures from Paragem dealer servicing company, he said that administration represented about $6.3 billion a year (0.63 per cent of assets).
“There is a lot of money up for grabs. You can bank that money yourselves for a time, or you can share it with your customers, or more importantly you can use it to offer higher-value services.”
At the custodian’s level, operational efficiency is not only about costs and speed, it is also about risk.
Jean-Marc Pasquet, managing director and head of Asia Pacific for BNP Paribas Securities Services, said there were three main causes of inefficiency at the institutional level:
• trade instructions and process – because automation, such as with SWIFT, did not have 100 per cent take-up;
• unit pricing – a diverse range of unit pricing methodologies was used and there was a lack of consistency in the compensation practices for unit pricing errors;
• taxation – a simplified approach would be more efficient.
Ray Lester, director of delivery services at NAB Asset Servicing, said a major issue for custodians at the moment was valuations, especially for unlisted assets.
“The regulators are right onto it,” he said.
“I always thought that one asset would have one price but I’ve had instances where different clients want to value the same instrument differently. A standard would be helpful.”
The Australian Custodial Services Association has met with ASIC on the issue and is pursuing further discussions.