Why is the growth of ETFs proving to be challenging for the asset servicing industry? And are there any opportunities to be had?
Over recent years, there’s been a major shift as asset managers have recognised they need to develop exchange-traded funds (ETF) capability in order to remain competitive.
But while the ETF market has continued to boom, the increasing complexity of ETF products has really atcheted up the technical and operational pressures on fund administrators.
ETFs have unique operational processing requirements that are very different from the traditional funds many administrators are geared up to support. For an ETF, you need to create a basket that replicates the movement of each share in the index, and as money comes in or goes out, you have to continually keep buying or selling shares in order to match up to the index.
So it’s a lot more complex and faster moving, and fund administrators have had to create highly manual spreadsheets to support their daily ETF operations. And remember, the margins on ETFs are wafer thin, so the more manual a process is, the higher the risks and cost of servicing the business.
But there are opportunities. We’ve looked at the ETF problem and come up with customisable servicing platform, where the ETF basket management is fully integrated into the fund accounting platform. This gets rid of all the manual workarounds, increases the automation and reduces the costs, but also creates a real opportunity for fund administrators to scale up their ETF operations and take on more and more business. ETFs are a massively cost competitive product, and providers who can operate the most efficiently will be the biggest winners.
What challenges are fund administrators facing at the moment?
Today, the majority of asset managers have now outsourced their fund administration to third party providers. As the market has matured and core services have become more commoditised, pricing has become more competitive.
And it’s been tough for fund administrators—regulation has increased and this has also increased their costs, and the investment products are becoming ever more complex.
To preserve and grow margins, fund administrators need to be able to contain costs, while at the same time broadening their servicing offering, for example into areas such as ETFs. And the key to this is using technology to create greater automation.
The latest Temenos Multifonds survey revealed that increasing operational efficiency is the key priority for asset management, were you surprised about this result?
To some extent, yes. Third party administrators are often worried about efficiency because they are selling back-office operations and they want to have the best efficiency that they can to have enough margin and make money. But for the asset managers, the typical concern is about performance and attracting more flow, and the back-office is typically not at the top of the asset manager’s mind.
This signals that the industry is under more and more pressure, and when you have pressure, you start to look in places that may not have been as important in the past.
However, many fund administrators are now viewing their technology platform not just through the traditional lens of efficiency and cost, but the future opportunities it can create by helping them enter new markets, launch new and innovative services, and win new business.
What current technological trends are you seeing in the industry?
Asset management and fund administration are the digital laggards in financial services, but this is changing. There’s a lot of focus on distribution, partly spurred on by regulation like the second Markets in Financial Instruments Directive (MiFID II) and RDR, and the need to better engage with investors and help advisors and sales channels become more effective.
We are also seeing a much greater application of technology across the front, middle and back office, with people exploring the use of AI and robots to help unlock much greater operational efficiencies.
The Temenos Multifonds survey also found that technological innovation in operational support is not keeping pace, with 94 percent of respondents saying that it needs to accelerate. What is delaying this acceleration?
Primarily, the reason for this is the fear of change. If you manage a third party administrator that is servicing 20 major asset managers, making changes will require some migration of data that will potentially interrupt client services, and this is something that third party administrators are very concerned about.
We have been involved in many transformations with third-party administrators. Clients want service providers to renovate, innovate, and improve the platform. However, when you start a discussion with the third-party administrators about innovation and replacing their ecosystem, immediately the fear of its impact on the client kicks in.
This is why third-party administrators need to be more brave and transparent with their communication with clients. With the pace of change, volumes of data, complexity of financial instruments, and ever increasing demands from asset managers and investors, you cannot keep up with all of this with a 30 year old legacy system, which will never be able to compete with a modern platform.
Improving operational efficiency is now a key priority in asset management, and an important driver of profitability. To keep pace with the demands of the industry, third party administrators now need to invest in the technology, data and services to help asset managers compete in the digital world. They need to open up new asset classes, unlock insights from data, improve the user experience, and increase oversight and control.
How do you see the landscape of asset servicing evolving over the next 12 months?
12 months in our industry is not a long time, it is a very slow moving industry. However, in three to five years, we will see clear winners and losers. There is a group of players that are brave and are pushing for change, and are recognising both the need and urgency to digitally transform their businesses, to become more efficient, more competitive and increase scale. I think that this group will be very successful.
Those who don’t change may wake up five years from now, and say “let’s make changes, let’s transform”, but by then it will be too late.
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