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Caught in the extranet

Two weeks ago, I looked at some of the arguments for and against fund management groups, recognising that the majority of new fund business is being originated via fund supermarkets and achieving economies by dismantling their own distribution operations both for direct business and advisers.

I believe that the fund industry cannot remain immune from major consolidation indefinitely but there are clearly going to be some significant players for whom the prospect of becoming pure manufacturers is unacceptable.

In that case, they must recognise the fact that in a number of key areas of operation, particularly service, their current offerings to advisers are woefully deficient compared with the life and pension community and the minimum levels of operational efficiency that advisers are demanding.

Adviser businesses, or at least those that are successful, are increasingly focusing on operating a long-term service relationship with clients. This means that they need to have the mechanism to access detailed information on the current values of those investments as well as the historic levels of contributions and a wide range of other information at a moment’s notice.

The fund supermarket community has made this a cornerstone of their offering since the inception of their services. Over the last four years, life offices have worked hard to deliver this sort of information on a system-to-system basis using so-called contract enquiry services. Let me be very clear that this information should be delivered directly into the adviser’s own system by system-to-system messaging and not by using extranet services that are designed with a vastly varying look, feel and navigation and require the adviser to enter the details of a contract into a browser, receive a response, print it and rekey it into their own client management systems.

Such an approach is an inefficient way of doing business. As I put it to one group of fund managers recently, imagine your reaction if you were asked to go through such a process in your own business.

Expecting advisers to use extranets to get valuations is just seeking to decant costs out of your business into theirs. It is treating advisers with contempt and is not a sensible way to approach business partnerships. It is not without reason that a number of IFA firms have banned the use of provider extranets in their offices.

My firm carried out research which shows that it is more expensive for an adviser to get a valuation than to make the enquiry over the phone.

The EMX messaging system should offer a solution to this problem but it falls short of what is needed for a number of reasons. First, its browser-based offering replicates the same inefficiencies as the extranets.

The alternative FIX-based offering removes this weakness but not without adding the considerable cost for the adviser firm or their software provider of investing in a FIX engine. To date, EMX implementations using a full FIX engine with the main adviser client management software systems are limited, if not non-existent.

One organisation which has successfully implemented EMX in this way is Positive Solutions. However, all the excellent work that has been done both by Positive and EMX in putting this together is undermined by the fact that so many fund managers are not able to deliver valuation messages via the EMX system in real time. Having seen the systems demonstrated, it becomes very obvious that many fund managers are clearly not committed to good customer service. You can see a client’s portfolio populated in seconds with responses from life companies and some fund managers, only to have others show that the response will not be available for 12 hours.

On a number of occasions, I have asked EMX to supply a list of exactly which fund managers are not capable of providing a real-time service and the response has always been that the firm’s agreements with fund manager clients preclude it from doing so.

EMX has the potential to deliver significant improvements to the way that fund firms provide information to advisers but only if fund firms start giving good quality of service.

Another essential issue is how the adviser meets their responsibility under the commission disclosure rules after depolarisation. Conduct of business rule 4.3.6(2) deals with the disclosure of renewal and trail commission.

This effectively means that the adviser has to allocate to the client record all amounts of trail commission as part of any fee option they may offer the client. Failure to do so can put at risk the adviser’s right to claim independent status.

This raises the question of the cost of efficiently processing such commission. If fund managers are not able to provide details of commission payments in an electronic format that can be easily imported to an adviser’s client management and accounting software, this is going to cause the adviser considerable expense and could undermine an adviser’s ability to meet regulatory obligations. To me, this makes the need for electronic commission a no-brainer.

Somebody challenged me recently to write a strategy for a fund management group to defend its market position against the headlong advances of the fund supermarkets. This is an interesting test and one that I am kicking around. What I do know is that putting in place fully automated real-time client reporting services and electronic commission payments would be essential within such a strategy.

Fund managers which choose not to make these a priority for delivery are in fact deciding that they are going to pass control of all their new business to supermarkets.

Advisers will be forced to move new and existing customers to environments where their investments can be serviced efficiently and economically.

I was recently speaking at a conference organised by a major third-party administrator in the fund industry. To be fair to the organisation concerned, it has certainly been one of the more forward-thinking in its field in delivering services that can address these shortcomings, yet the take-up of some services by its fund management clients has been limited.

Having presented many of the above issues to delegates, I was pleasantly surprised to find people coming up to me and accepting that thinking needs to change if the fund industry is to stay viable in the retail sector. There does seem to be at least some real appetite for change.

I am looking forward to working with a number of those organisations to make this happen.

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