Manual processing stings especially in the investment fund services industry. Order placement, confirmation, fund transfer and reconciliation processes remain dominated by little or no automation, says market research firm Aite Group. In one case, a fund management firm spends $812,460 (€600,000) annually on faxes for its Taiwanese investors—representing 30% of the total transfer agency bill and 2% of AUM.The new Aite report, “Investment Fund Processing in an Era of Heightened Risk Awareness, Increased Regulatory Demand, and Financial Austerity,” which derives its findings from interviews with 20 market participants, adds that manual processes and low levels of automation are not strictly the province of Asia. A firm in Europe says that order confirmation via transfer agents is highly manual and time consuming. “The firm believes that confirmation should occur on trade date or T+1 but it usually slips by two or three days, and the firm is therefore forced to rely on FTEs [full-time equivalents] from the firm’s fund buying desk to dedicate 25% of their time to chasing transfer agent operatives,” according to Aite.
A second European firm, according to the report, uses “high levels of automation” for mutual fund processing but skips automation for processing alternative funds. A firm based in North America has “a relatively high level of automation for order placement and confirmations, but much like the first European firm, has lower levels of automation for fund transfers.”
The research, commissioned by Clearstream, was gathered during the first and second quarters of this year and offers other key insights into the extent of manual processing:
Manual processes spur increases in the number of fund settlement failures. The single biggest cause of settlement failures for 50% of interview respondents is faulty reference data caused by the manual input of “errors and miscommunication during the fund settlement process.” More chances for error come with the retyping of data into multiple systems during order entry.“Miscommunications” between buyers and sellers can lead to confusion in operations departments over the details for transactions. “On the settlement date, the seller may deliver what it believes is the correct quantity of the right security and claim what it believes is the correct payment, but the buyer will reject the delivery if it has a different understanding of the trade,” Aite says. By the end of the day, there will not be enough time for the parties involved to clarify the situation and these operational lapses may result in sellers or their custodians being incapable of deliver securities on time.Much of the work that market participants do with transfer agents especially in far-flung parts of the world is highly manual.Interviewees report that alternative fund processing is “an area of particularly high manual effort.” A respondent based in North America says that its straight through processing rate for investment funds processing is 86% overall with the 14% of manual processes caused by its support for hedge funds. The operations head at the firm says that the “complex structures and customized trading processes” of hedge funds are contributing to the lack of automation. The firm reports that it has “many more transfer agency relationships to support for hedge funds in comparison to other investment funds,” according to the report. “It has relationships with six transfer agents for plain vanilla funds but relationships with around 40 transfer agents for hedge funds.”
While much that Aite has found is not shocking, it is very troubling because firms are under growing pressure to cut or freeze headcount in operations especially in areas where bodies have been thrown at problems for years. Leaner profits are compelling firms “to support increasing volumes of data without increasing FTE headcount,” according to Aite. Translated, this means that those humans implementing manual processes will have to do even more.
Inherent in the report, which covers many more areas than manual processing, is an expiration date for the manual processing of key securities operations. This is painfully true given that volumes are forever rising while humans remain error prone, wear out and, at some point, can do no more.
So it would seem that firms are paying one way or another whether they stick with costly manual processes or move on to automation. To carry the thought forward, once the costs of manual systems exceed those of automation, firms would logically embrace IT solutions (or even outsourcers). By then, though, a lot of damage may have been done.
Attend FTF’s ReCon NY on October 22nd to hear about how automation can help firms overcome other costly reconciliation and confirmation procedures.
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