Do you believe consolidation among asset managers will continue and what impact is this having on fund service providers?
This has been something that has been going on for some time across the broader asset management industry. The long-term trends are the move away from the active long traditional funds towards lower margin beta products like ETFs to private equity and emerging markets. That margin pressure has been building and unrelenting for some time. As a result, you do see consolidation at the asset management level plus trends that drive towards more and more outsourcing.
One example has been the BNP Paribas and Janus Henderson deal in the US where BNP Paribas has taken on all the operations of Janus Henderson, and they are working with us to use that as their base to grow their US business.
It’s been a few years, but the Standard Life–Aberdeen deal was one of the standout events, and a lot of that was to get to that scalability on the revenue and the cost front.
I think this will continue as the market has continued to rise, hedge funds are failing a little bit and that pressure on the long active fund will continue. So asset managers will have no choice but to continue to look at how to optimise their cost efficiency and look at how to support a global business and provide a better service to clients. Third–party administrators have to play a crucial role in that, as well as the technology.
Let’s talk about the potential of technology when it comes to cost efficiencies, automation and operations then – how big is its role and what trends are you seeing?
It has to start from the technology front. There’s an overall service and operational model that has to complete the package, but if you don’t have the right technology in place you will never get there.
If you step back and think about AI, for a while it’s been more of an abstract esoteric notion as far as fund serving is concerned. But more recently we’ve got to the point where we start to see the tremendous potential it can have in terms of automation for the fund servicing business.
A lot of the back-office is repetitive checks throughout the day to make sure all of your inputs are coming in correctly: the trades, the corporate action and any sort of potential exceptions are flagged as soon as possible. In many situations you still need human intervention in many of these steps to validate these exceptions. Now we’ve worked on automation with our clients in recent years to a point where they truly are focused on exceptions but when you have market-driving events like we had at the beginning of COVID-19 and the volumes spike throughout the days, all of a sudden a fund accountant went from looking at 10-20 exceptions for a given fund, to maybe resolving hundreds of thousands in the same time frame. So when you look at a price variation control where typically an administrator might have a policy that says if a stock moves more than 5% in a day, you have to look at that price exception and validate that it’s a true valid exception. But when the market is moving and you’re in trouble, you need a tool like AI to help cut down on the false positives and make it possible to address other things. When you think about digitisation and further automation using modern technology like AI, these are the kind of toolkits you need to bring to the picture.
Will the result of this automation ultimately benefit fund service providers through further outsourcing from the fund managers?
Where they can outsource they are almost obliged to at this point. Because they do need to generate that cost efficiency if not to keep the traditional business profitable but to fund investments into the other sectors that are growing. They have to outsource it to the right partners who will enable them to grab these cost efficiencies while enabling them to access different markets. You need the underlying flexibility in your software ecosystem to be able to move that way.
What kind of culture and mindset do fund administrators need to have to embrace these kind of technology developments?
As with any major business transformation it needs to be driven from the business for it to succeed. We can bring the toolkit, but unless the client – the fund administrator for us, and increasingly some of the larger asset managers themselves – has that business leadership it can’t come together.
As an example, Northern Trust and its transfer agency business, a couple of years ago it announced a new programme called Matrix, where it is looking to reinvent the entire service model around an event-driven architecture. What does that mean? It means from end-to-end, the point of interaction through the entire Northern Trust ecosystem – customer portals or API interfaces – all the way through the front-end, middle- and back-office systems, they need to be signing the same song. When there’s a digital event that’s happened, if you want to have a digital journey every part of the system has to be enabled for that to happen. There’s no doubt that Northern Trust had to make significant investments in this programme to enable that including things like the portals and making digital what used to be a manual event in customer onboarding.
But it needs a core platform like Multifonds in the background the be able to interact with it correctly and in the right format. If we had simply brought the product to Northern Trust without any investment at their end, yes they would be able to take advantage of things like further automation on exceptions with AI, but they wouldn’t be able to bring the client on that journey without further investments.
Are these investments taking place across the largest players – bank-owned and independent?
There is a lot of investment going on even if it’s not as public as someone like SS&C. What I’ve seen from the global third-party administrators is the investments they are making are across the board. They are looking to consolidate their business onto a more global platform rather than several accounting systems, depending on the market and asset type you are looking at. With a competitor like SS&C they have a much different approach to building their footprint, through a lot of M&A with different systems and platforms. That’s traditionally a challenge in terms of scalability. But there’s no doubt there’s a difference in how these investments are being made.