Ranked fifth in world fund markets behind the United States, France, Luxembourg and Italy, with some $356 billion in assets under investment and growth at 9 percent per year, Australia's fund management industry is still clogged by manual, paper-based processing and reliant on legacy fund management systems, partly due to a complex regulatory structure.
Unlike the Depository Trust & Clearing Corp.'s FundServ, that facilitates straight-through processing in some 95 percent of transactions between U.S. market participants, STP is virtually nonexistent in Australia, with little progress so far apparent in adopting the messaging standards necessary for industrywide STP. "The managed funds industry has done little and is well behind other markets," said Mark Bennett, head of business solutions at Credit Suisse Asset Management (CSAM).
MFundEC, an Investment and Financial Service Association (IFSA) committee set up to standardize work flow and communication formats, estimates that industrywide STP could cut costs by some 20 percent ($392 million) per year and deliver better risk management. But despite MFundEC's efforts since 2001 to publish Swift-compliant messaging standards, and the rollout by hub providers of services that could eventually lead to STP of transactions, the industry seems at a crossroads. Participants are weighing the priorities of implementing messaging standards and the fit of various provider solutions. "I think the debate is still running strongly," said Angus Richards, deputy managing director at the Australian Stock Exchange (ASX).
Originally due for launch in 2003, the ASX is now set to roll out its full hub solution, FundConnect, by Q4 2004, but that depends on "a sufficient level of supportive feedback" by June 2003 before the build proceeds. "Many industry participants are very enthusiastic about the hub, while others see the hub contrary to their commercial interest. A similar debate is going on in Europe, where FundSettle and Vestima continue their efforts to achieve critical mass," Richards said.
Wraps and master trusts dominate funds distribution in Australia where a number of layers exist between the investor and the fund manager, including financial planners, wrap platform providers, master trusts and custodians. To enable STP, each of the layers must facilitate messaging between them. Consolidation is also a feature of this market. The top 10 institutions, including Commonwealth-Colonial First State Group, AMP and National Bank-MLC, manage 70 percent of total funds. Distribution of funds has stratified. At one end, institutions are acquiring financial planning businesses to capture market share and economies of scale. At the other, small and medium firms are merging or being acquired.
As participants embrace electronic communication via hubs, which link them to their proprietary distribution channels, observers fear that the absence of interoperable messaging standards to allow hubs to communicate with each other and participants to easily switch between hubs will fragment the industry.
"If the industry does evolve four or five big vertical silos, and there is not a lot of cross traffic between them, or it is in the interests of the silos not to provide an open architecture, a hub would face a more limited opportunity in terms of transaction volume, particularly in the retail sector," ASX's Richards said. "Our challenge is to ascertain if major funds industry participants wish to join a hub structure," he added. "The question also is whether a standards- based, open-architecture networked solution has sufficient appeal to gain critical mass in a reasonable time frame."
A deal between the ASX and Melbourne-based software house IWL Group, which has significant take-up in the financial planning, to interface its FundLink technology to provide FundConnect's STP capability fell through. However, according to CEO Otto Buttula, IWL will enter the market as a transaction provider in its own right with an MfundEC-compliant service using FundLink.
Buttula believes the large integrated institutions have a commercial imperative to adopt a peer-to-peer approach that would protect their distribution channels and this causes some reluctance to take up MFundEC standards with a single industry hub such as that proposed by the ASX.
The ASX approach will not be attractive to large institutions, according to Buttula. "Realistically, with large Fund Manager Dealer Groups such as Commonwealth Bank and National Australia Bank already enjoying scale and automation benefits, why would they use their advantages to open the market to smaller institutions?" he said.
Chairman of MFundEC Program Steering Committee Geoff Purcell, said standards for 55 percent of identified transaction flows have been defined in the last 18 months. These cover high value, high cost, high volume, transactions between master trusts, wraps, fund managers and custodians, as well as retail standards for applications, redemptions and switches.
Adoption of STP messaging standards cannot be mandated by IFSA, because it lacks that charter from its board. In the absence of regulatory imperatives, MFundEC will shift its attention toward industry adoption instead of new definitions until they are required. "The biggest issue we now face is getting take-up of the standards. Given that the benefits of STP are networked in their effect [the more partners using them, the better the results]," Purcell said.
Neither will MFundEC endorse any particular hub provider. "The provision of standards will be compromised if we start to say we support one solution," Purcell said.
Upgrading legacy systems to enable electronic communication with the hubs is another barrier. According to MFundEC, an investment of $40,000- $100,000 would allow most fund management systems to receive XML messages from hubs via an STP interface. Some fund managers could upgrade their systems beyond that to facilitate STP in their core technology, but face the burden of connecting to multiple hubs with no uniform standards yet in play. Lack of critical mass or buy-in from retail distributors is also of concern. "We're not going to spend bucket loads of money committing to one vendor until we're reasonably sure that hub is going to get support from the planner groups and right now there is no indication of who will win that one," said CSAM's Bennett who also points out that dealer groups drove the formation of DTCC's FundServ initiative.
Industry fragmentation is also a concern for custodians, said Graeme Arnott, chairman of the Australian Custody Services Association (ACSA). "The lack of [standards] means we will get from the industry different message types or different interpretations of a standard and we will have to deal with them. The more rigor in the industry, the better it is for custodians--but we have the least influence on their decision." One way forward might be an industry agreement to implement a very limited set of mandatory standards, as was the case with Swift adoption.
While supporting standards, Peter Phillip, CEO at Sydney-based InvestmentLink argues they in themselves are not a solution. "To many people, this sounds like a solution--but it's not a solution because how are participants going to get transactions?" Information aggregator and hub provider InvestmentLink claims 7,500 advisers (60 percent of the total), 1 million investors and 1,300 funds use its reporting service. According to Phillip, large institutional clients and planner groups also use the e-portfolio new retail transaction service, including Commonwealth Bank's Colonial First State Group, BT Funds Management, Macquarie Bank Group and large independent planner group, Count Wealth Accountants.
Phillip believes Investment Link has achieved critical mass in the industry's high volume retail sector via planner groups and that STP is achievable without messaging standards. "The message format is 5 percent of the problem. We've offered MFundEC standards to every one of our customers, we've said we would support it, and not one of them have suggested they wanted to take it up."
The Commonwealth Bank's Colonial First State Group (CFS) supports the adoption of industrywide standards, said Steve McGregor, general manager, administration and business systems. "CFS has been actively involved in development and publishing of standards and we, in principle, support and encourage the development of industrywide standards via MFundEC," he said. But CFS has so far signed with non-MFundEC compliant hub InvestmentLink. "Some of our larger dealer groups in the industry use InvestmentLink. These dealer groups are our clients, so it's important to service their needs." This supports observers' views that dealer groups will drive hub selection by fund managers, irrespective of standards. But McGregor argues that CFS does not have an exclusive relationship with InvestmentLink and that adoption of MFundEC standards will allow CFS connectivity with both peer-to-peer models and hub providers. "This will continue to be our priority and will be possible if a common standard (MFundEC) is adopted," McGregor said.
InvestmentLink's approach is incremental according to Phillip. "We currently have a critical mass of fund managers on InvestmentLink and get them started with very little up front capital cost. Most fund manager's systems can't do STP today, but with some basic integration they can often automate 50 percent of steps that make up full STP. This saves time and money and can be done cheaply. The last thing on a fund manager's mind is whether it is MFundEC compatible." he said.
At the other end of the transaction, Phillip's approach is to interface STP capability in planners' desktops. "Planners can execute a plan online through e-portfolio by pressing a button. Some of our clients are already using this new capability where a planner can complete all the paperwork for a transaction without typing because it is taken straight out of the financial plan."
Standards are fundamental according to hub contender Ausmaq, which claims its service is close to critical mass in the less complex, lower volume, wholesale market. "Whether it's a hub or peer-to-peer model, one needs to adopt the industry standards. If the industry is spending a lot of time and money you can't just say Oh well, we'll do our own model,'" said CEO Richard Burrows. Ausmaq developed its Mainhub prototype last year, which launched in March, and has signed on 27 fund managers, 800 products and eight wrap providers, he said. The only MfundEC-compliant hub, Ausmaq also claims to be first to market with an industry standard solution. Ausmaq's also provides fund managers with a low cost Web-based start up option (Mainlink). Burrows said this allows fund managers and wrap providers to benefit from Mainhub without having to build complex interfaces to legacy systems.
While hubs for the wholesale market will deliver some benefits and savings through STP, capturing large retail flows are vital to their long-term viability. Ausmaq's approach, which the ASX would follow, is to first get industry buy-in for wholesale flows and then facilitate the more complex retail solution. Support from the large integrated institutions (i.e., those who also own retail distribution) for MFundEC standards is therefore a key issue for Ausmaq and the ASX. Some predict the ASX will withdraw its FundConnect initiative. "The problem is that fund managers won't invest without a concrete benefit, especially in the current market," said Phillip.
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