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Asset Management

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Getting Your Fair Share

New technology for shareholder services has many investment managers reviewing their transfer-agency contracts.

The phrases "shareholder accounting" and "transfer agency" may not be glamorous, but the technology that services these areas manages some of the most important data at any mutual fund: client information.

While the back office rarely gets the attention it deserves, buy-side firms would be lost without transfer-agency technology, the tools that keep records of each shareholder's accounts and transactions. In fact, Needham, Mass.-based consultancy TowerGroup notes that servicing the client accounts for 15 to 20 percent of a fund's expenses.

In addition, transfer-agency services constitute much of the client interaction that goes on between mutual funds and their shareholders, either as call centers or storage for client data. For this reason, examining shareholder-accounting technology is vital in an environment where customer servicing can equal a competetive edge.

"In order to interact with customers, you need their underlying data, and the transfer agency is the entity that owns that data," explains Gavin Little-Gill, senior analyst with TowerGroup.

Many transfer-agency-technology vendors have gone beyond the scope of simply housing and processing shareholder records, Little-Gill notes. Added value for a fund, he continues, is attained from new products and services that enrich the scope of provisions for a transfer agency.

Many buy-side firms believe that their current technology adequately serves their operations and that this area of the industry is relatively static. However, some firms are finding that evaluating the marketplace and bringing in new service models allows for enhanced functionality and significant cost savings in an economy where every customer, and every penny, counts.

Passing The Buck

Los Angeles-based investment manager Payden & Rygel, which holds $50 billion under management, recently revisited its transfer agent's technology capabilities, and made the switch from National Financial Data Services, a subsidiary of Boston Financial, to UMB Investment Services Group. UMB utilizes SunGard's shareholder-recordkeeping, document-management and workflow-management systems.

As a result of NFDS' affiliation with Kansas City-based DST Systems, Payden & Rygel was licensing one of DST's TA2000 shareholder-recordkeeping terminals, along with a proprietary front-end technology.

However, the firm's shareholder base had outgrown the systems. "We're not a large shop so cost constraints were definitely a problem," explains Yot Chattrabhuti, vice president of Paydenfunds, one of the two fund families being serviced by UMB. "It was not cost efficient to license more systems, or have multiple systems on each desktop. But we're a hybrid shop doing shareholder-servicing calls in-house, so we need constant access to shareholder information."

The firm realized that there were alternatives in the marketplace that could cut costs and increase the efficiency of the operations of the fund families, totaling $2.5 billion in assets.

"We emphasized finding a partner that could provide real-time processing, as well as a graphical interface that we could install onto everyone's desktop in-house," says Chattrabhuti.

He notes that Payden & Rygel never considered operating an in-house transfer agency but didn't want to outsource entirely. So, a combination was found with UMB and SunGard. "If you rely strictly on a transfer agency, and you're not interfacing with clients, you lose contact," says Chattrabhuti.

Evergreen Service Company, which performs transfer-agency operations and shareholder accounting for the $114 billion in assets under management in Evergreen Investment's mutual funds, recently transitioned to a partially outsourced model.

"We consider our core competency to be servicing our clients," notes Ann Marie Becker, president of Evergreen Service Company, who declined to name Evergreen's former transfer-agency partner. "Our first interaction on an account is something that we think we should do in-house, but when it comes to other areas that are not necessarily facing the customer, we turn to an outsourced-service provider."

Although DST wasn't the right choice for Payden & Rygel, it was for Evergreen. The fund company is now partnering with DST, says Becker, which houses much of the firm's transfer-agency and shareholder-accounting technology. In addition, Boston Financial, DST's affiliate, performs many of Evergreen's business functions, such as reconciling shareholder records with banks, scanning applications and paperwork, and cash processing.

"A new aspect of transfer-agency technology is the peripheral product and service offerings that vendors are making available to funds to help lower costs," explains TowerGroup's Little-Gill. "Anything from providing electronic statements to segmenting client information - in order to enable funds to offer tiered service - adds value to shareholder servicing."

Keeping It Local

Another relatively new idea in the marketplace is the concept of a small-tier buy-side firm opting to bring a vendor solution entirely in-house. While large and expensive mainframe technology may have prohibited smaller firms from doing so before, client-server technology, with increased scalability, has enabled firms such as Rydex Funds to maintain control of their transfer-agency technology and shareholder accounting.

Maryland-based Rydex, an investment manager with $8 billion in assets under management, opted to shelve its proprietary shareholder-accounting technology, and bring in PowerAgent, a transfer-agency system from Envision.

Kevin McGovern, vice president of Rydex Fund Services, explains that Rydex Funds had specialized needs. "We had unique attributes to our funds, such as dynamic funds which price twice daily, as well as anytime trading, and we found only pockets of this flexibility in other transfer-agency systems," he says.

McGovern also notes that a mainframe would have been a "money pit" for programming subtle business changes. "When you look at the long-term costs for supporting a mainframe, they either stay stagnant or increase, especially when you have to layer in new anti-money-laundering or customer-identification rules. With a client-server system, we can just make an adjustment here or there using one system administrator," he says.

In addition, he says, going to one of the big vendors in the market would not have garnered Rydex the individual attention that it was looking for based on its unique needs. "We were going to larger players and they didn't see a market for multi-priced funds. It would have been a costly effort for us to have them build that," he says.

"Firms have more leverage with a vendor who is smaller," agrees Gene Kim, a senior analyst from Financial Insights. "If you're a small mutual fund hooking up with a major player in the market, how much attention are you going to get?"

McGovern notes that an outsourcing model with a transfer agency might produce the same lack of attention. "Although some service providers do a good job, they're not going to differentiate between Fund Company A, B and C," he explains. "If B does something different than A and C, that's a problem."

One Size Doesn't Fit All

While small- to mid-size firms may find turning to a third-party transfer-agency provider compelling, the big investment firms remain committed to proprietary technology development.

"Once you reach a certain size, it makes it easier to deal with some of the capital and costs of building systems in-house," explains Tim Thornton, a principal for The Vanguard Group's Information-Technology division. "Vanguard spends over half of its operating budget on technology."

The Pennsylvania-based firm, which has $620 billion in assets under management, made a decision 13 years ago to internalize its shareholder-accounting and transfer-agency technology on a mainframe platform, says Thonton.

Although Vanguard's decision was made more than a decade ago, client servicing was top of mind even then. "We felt that we could focus on creating a better service model for clients," Thornton says. "People think of record-keeping as stodgy, but it ends up bleeding through in terms of the ways you service your clients. Everything seems to be inextricably connected to technology."

To Outsource or Not to Outsource in TA Technology
In-house works best for core-competancy functions such as:
  • answering phone calls
  • answering e-mails
  • broker interactions
Outsourcer works best for functions with economies of scale such as:
  • cash processing
  • document scanning
  • reconciling shareholders' records with banks

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