Study Fund Distribution

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Fund distributionIn search of operational excellence : myth or reality?


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Fund distributionIn search of operational excellence : myth or reality?

FUND DISTRIBUTION - In search of operational excellence: myth or reality?- 3

CONTENTS

FOREWORD 03

THE FUND DISTRIBUTION ROAD TO OPERATIONAL EXCELLENCE 05

FOCUS ON SELF PRESERVATION 06

REINVENT THE BUSINESS MODEL 08

REINFORCE RISK MANAGEMENT & CONTROLS 10

TRANSFORM OPERATIONS & SYSTEMS 11

FUND DISTRIBUTION A COMPLEX LANDSCAPE 14

DISTRIBUTION MODELS AND DISTRIBUTION CHANNELS: FROM MULTI JURISDICTION,

MULTI-COUNTRY TO MULTI-CHANNEL 14

VARIOUS BUSINESS MODELS IN THE FUND DISTRIBUTION VALUE CHAIN 15

FUND DISTRIBUTION SUPPORT IS GROWING IN SIGNIFICANCE ACROSS 17

VIEWPOINTS ON AUTOMATION FROM INDUSTRY PARTICIPANTS 18

STILL A LONG WAY TO STANDARDIZATION 18COMPETITIVENESS ACROSS FUNDS MARKETS 18

INDUSTRY INITIATIVES AND CONCLUSION: A PUSH TOWARDS EFFICIENCY 19

CONTACTS 20


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Foreword

4 - FUND DISTRIBUTION - In search of operational excellence: myth or reality?

Acknowledgments

First and foremost, we would like to thank the following custodian and fund administration institutions for contributing to

our current research by sharing their thoughts and expertise with us: BNP Paribas, CACEIS Investors Services, EFA,

IFDS, and RBC Dexia and Socit Gnrale Securities Services.

Within Ineum, our special thanks go to all the members of our Investor Services practice department. Finally, grateful

thanks go to Mike Mathias and the editorial team.

The views and opinions expressed herein are those of the authors and interviewees and do not necessarily represent the

views and opinions of Ineum Consulting firm.

Foreword

In this report we present a framework that is designed to enable organizations to achieve operational excellence. Focuson self preservation, reshape your business model, reinforce risk management, and transform operations: these steps

have become the most important management challenges. We also explain why this approach is needed in the current

environment, and provide examples of how it has been applied by some market participants who actively support fund

distribution. Many aspects of the fund distribution industrys transformation remain unclear, and tremendous uncertainty

surrounds even the most basic questions: how to cut costs, which competitive advantage to build, how to efficiently control

operational risk, how to streamline operations, etc.

At the same time, automation and standardization are necessary and valuable when three conditions are met. First focus

on self preservation: which non core business should be exited to refocus on core activities? Second, reshape your busi-

ness model to increase client retention. Third reinforce risk management and controls.

Our research conducted in April 2009, revealed that:

Market participants who actively support fund distribution tend to look at their customers from the perspective of their

own business model. Rarely have they tried to gain a full understanding of the constraints and dynamics of their key

customers business models.

Although reducing cost is necessary, it will not be sufficient to help executives to thrive sustainably in the years to

come. What is needed is to do business differently;

Successful business model innovation can generate significant new growth, create a new base for competition and

change the cost structure;

The industrialization of processes offer most groups the potential for significant cost savings.

Despite the number of initiatives supported by the industry, operational excellence in fund distribution has not been achie-

ved by all the players. It is our hope that this report will serve as catalyst for change.

Michel Kabanga KAYEMBE

Investment Funds Advisory Services, Practice Leader


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The fund distribution road to operational excellence


The quest for operational excellence in fund distribution has gained momentum over the last decade. In May 2009, the

European Fund Asset Management Association (EFAMA) reported that much has been achieved in the fund processing

of cross border trades, but more can be done. Setting higher standards within the distribution value chain would help, but

few service providers have demonstrated the ability to achieve operational excellence. So, what do we mean by operatio-

nal excellence in the context of fund distribution?

We present four steps for moving towards operational excellence. The figure below illustrates the four phases:

Focus on Self Preservation Reinvent the Business

Model

Reinforce

Risk Management &

Controls

Transform

Operations & Systems

How to cut cost and

increase processes effi-

ciency ?

What are the non corebusiness in order to

refocus resources on core

activities?

What is the shape of the

business portfolio?

Which long term competi-

tive advantages to build-onin the post-crisis era?

How to improve customer

satisfaction to drive loyalty

and sales effectiveness ?

How to efficiently control

operational risk on fund

distribution activities?

How to implement aregulatory oversight and

compliance strategy?

How to streamline opera-

tions?

Which outsourcing or off

shoring strategy to adoptin order to reduce the cost

base?

How to improve business

performance through Sco-

recarding?

How to maximize benefits

from post merger integra-tion?

Figure 1 The fund distribution road to operational excellence

Source: Ineum Consulting

1 2 3 4


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I. Order Management IV. Position & Account Management VII. Referential Data

I.1. Order collectionI.2. Order validationI.3. Order routingI.4. Order processing

IV.1. Cash position managementIV.2. Securities position managementIV.3. Holdings management

VII.1. ClientsVII.2. FundsVII.3. DistributorsVII.4. Accounts

II. Corporate Actions V. Portfolio management VIII. Commissions

II.1. Corporate actions identificationsII.2. Corporate actions handlingII.3. Corporate actions notification to

client

V.1. Portfolio selectionV.2. Client account management based on asset

allocation model and risk profileV.3. Portfolio modelingV.4. Portfolio simulation

VIII.1. Commission calculation and mana-gement

VIII.2. Trailer fees calculation and manage-ment

III. Settlement & Clearing VI. Reporting IX. Management & Control

III.1. SettlementIII.2. Reconciliation

VI.1. Clients reportingVI.2. OthersVI.3. Fund management co. reportingVI.4. Tax & legal reporting

IX.1. Regulatory & complianceIX.2.Tax paying agentIX.3. Anti-money laundering regulationIX.4. Define and monitor KPI

A clear sense of the organizations core needs will enable the non core activities to be identified. A firm can now start

analyzing where it can cut costs significantly.

Focus on self preservation

Figure 2 Core and non core activities & managing cost in fund distribution


0%

20%

40%

60%

80%

100%

Order routing Cashmanagement

Errors Queries& Reconciliation

Total cost

Managing cost in fund distributionFund processing costs

Key messages

Market participants who are actively supporting fund distribution tend to look at their customers from the perspective of theirown business model. Rarely have they tried to gain a full understanding of the constraints and dynamics of their key customers

business models. What are their key business priorities, what keeps them up at night? Such knowledge can provide the basisfor developing offerings that meet specific customer needs, and can help to create value for customers.

Major players have embarked on programs to reduce costs. Although this traditional approach is necessary, it will not be

sufficient to help executives to thrive sustainably in the years to come.

What is needed is to do business differently. But reinventing business models isnt easy.


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Interview with Marc Vanmansart,

Head of Client Services at EFA

Could you describe some of the core

processes within your organization?The operational model of EFA is unique.Compared to a classic Transfer Agent,our processes such as registration, dealingor cash management are less segregated.This first step towards reorganization ofthe main TA functions will be followed by a

more precise review of the processes.Indeed, a clear division or an industrial split such as regis-tration or dealing is much less present than in the classicmodel. As we are active mainly in Luxembourg with few offi-ces abroad, we have chosen not to be organized by country.Incoming orders processing is one of our core processes.Each order is allocated to a department, e.g. Transfer Agentor Fund Accounting. Once it has been redirected to the Trans-

fer Agent department, we have to ensure that it is processedbefore the cut-off time. There is a simultaneous procedure torecord the shareholders data in the register including AMLand KYC reviews and in parallel a partial processing of anorder. Due to this single approach, it is highly effective.In spite of the impact of this extensive process review, EFAwould define its organization as rationalized rather than in-dustrialized. For instance, the client does not have to com-ply with the predetermined process, meaning that EFA canrespond to client constraints. Definitely, our organization ismore client driven.

Could you give us some tips on how costs are efficientlymanaged?We have combined a mass production approach and tailormade service. For example, we have industrialized our re-porting capabilities by standardizing as far as possible ourcontract note and cash flow reports. Various templates havebeen prepared in order to respond to each individual clientrequest. Other initiatives include: the implementation of adocument management system, an electronic archiving sys-tem, as well as an Optical Recognition Character platform.Reconfiguring systems and processes also implies changemanagement. The virtuous circle of the productivity gainscan be described as follows: reorganization of the proces-ses, selection of IT packages adapted to the new organi-sation, and change management. The success of changemanagement is a primary condition to the success of theproject. To sum up, the choice for the client has to be made

between a cheap offer with low quality and a tailored madeoffer but with a higher price.

Interview with Etienne Carmon,Head of International Product Development at CACEIS

Bank Luxembourg

What would you consider as the majorcost drivers within fund distribution?The first constraint is defined by the as-set manager in terms of number of coun-tries in which their funds will be distributed.

For example, CACEIS opened an office inHong-Kong from which French, Luxemburgand Irish domiciled funds are distributed.

Secondly, the business has to be profitable. As such, transfer

agent service offerings are not established as a standaloneservice but bundled with fund accounting or custody.Third, the nature of customer demand is a key cost driver.For example, some clients have to be served locally. Thisimplies additional recruitment costs to hire resources with lo-cal knowledge and language skills to provide an advantageover other competitors.

How profitable is the Transfer Agent business?It is difficult to be profitable as a transfer agent due to thehuge number of staff, the number of delegated activities tothird parties; as well as cost of change to IT. In cases whe-re investor services is part of a global service offering, thecost of running a transfer agent business is compensated byother services such as custody and fund accounting.Within the transfer agent, profitability analysis per client iscrucial. Elements to be considered: distribution network,communication channels, etc.In the case of CACEIS, standard Transfer Agent servicesare combined with value-added activities as part the Prime

TA offerings.

Interview with Matthieu Pasquier,Chief Operating Offer Fund Distribution Services at

Socit Gnrale Securities Services (Fund Distribution

Services)

What would you consider as the major

cost drivers within fund distribution?

Profitability from fund distribution is being

squeezed from two directions: 1) cost in-

crease due to global asset managers whoare becoming more demanding, and 2) pri-

ce reduction due to increase in competition.

For example, SGSS has used the on-boarding process to

cope with the huge number of demands expressed by major

clients. To name a few: BCP procedures, Key Performance

Indicators (KPI) and integrated risk management. This was

achieved in two years and reflects the most demanding stan-

dards.

Once the on-boarding process has been completed, additio-

nal complex requirements are formulated which go beyond

traditional services. For example, the facility to handle a

daily cash settlement process. This implies an effective mi-tigation of counterparty risk for the Transfer Agent.

How profitable is the Transfer Agent business?

For SGSS, the transfer agent business must be profitable.

Our approach is to manage costs efficiently and to develop

value-added services. The custody and fund accounting ac-

tivities are much more mature in terms of customer services

than the transfer agent. However, the transfer agent function

has now moved from a simple back-office to provide more

complex and technical services including legal aspects. The-

se value-added activities will compensate output pressure

on production costs and price reductions being demanded

by the client. SGSS provides its added value through: repor-

ting, distribution support and customer services.


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Once executives have secure access to long-term resources, the challenges are to understand the drivers of change affec-ting the fund distribution industry redesign the future business model; and determine the type of clients needed to compete

effectively with other service providers.

Reinvent The business model

Targeted Client Segments

& DriversBusiness

ModelChallenges

Key driver: ExpandingMarketplace & Investors

Global fund manufacturer

Round trip business

Local asset manager (onecountry such as France, Ger-

many)

Organizational Model

Operational architecture

Global footprint

Centralized or Decentralized

around operational hub / exper-

tise centers

Operating model based on 2

locations

Operating model through one

location such as Luxembourg,

Ireland, France, Hong kong

Align many different economies,

tax regimes, languages, AML,

business cultures

Build common elements and

reuse them across the broad

markets

More markets and more distribu-

tors participating with increasing

interfaces

Ensure that the integration

of high volume will not mean

automatically more additional

resources

Focus on added value services

such as cash management,

commission and trailer fees,customized reporting

Client Driven

Process Driven

Mix of Client &

Process Driven

Figure 3 Business model and challenges ahead

Source: Interviews conducted by Ineum Consulting with BNP Paribas, CACEIS, EFA, IFDS, RBC Dexia, Socit Gnrale Securities Services

GLOBAL DISTRIBUTION

WITH A PRIMARY FOCUS

ON IN-HOUSE FUNDS

GLOBAL DISTRIBUTION

WITH A PRIMARY FOCUS

ON THIRD-PARTY FUNDS

LIMITED FUND

DISTRIBUTION

CAPABILITY

THIRD PARTY FUND DISTRI-

BUTION WITH A LIMITED

SCOPE OF SERVICES

Figure 4 Fund distribution marketplace


Breadthofservic

es

Distribution Model

High

Low

In-House Open Archit.


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Interview with Thomas Bruno,Vice President & Head of Transfer Agency at IFDS

What is your current business mo-

del?Global distribution brings with it common

challenges across an extremely diverse

and expanding marketplace. Just as Eu-

rope has to work to align many different

economies, tax regimes, languages and

business cultures, so to must the global

Asset Manager and its service partners work to harmonize

many demands within one framework.

The challenge to our market is to build common elements

and reuse them widely all markets. This is especially chal-

lenging as these common elements often must be simple in

form and configuration to be useful in many places often

resulting in a tool that satisfies only a portion of the need and

results in cumbersome manual workarounds.

To that end, todays models are a mix of standardized and

customized processes with numerous interfaces between

systems. Our focus must remain two-fold: 1) continue to

streamline and obtain scale for core activity, 2) align the cus-

tom elements in ways that allow them to become configura-

tions of a single model, not redundant versions with comple-

tely unique elements.

Interview with BNP Paribas:Frank Roden, Head of Client Solutions - Global Fund

Services Luxembourg

Pierre Tarsi, Head of Operations

Alain Faure, Global Fund Services - Product Manager

What is your current business model?

The business model is defined by the targeted segment, de-

pending of the type of activities.

Currently BPSS supports 3 different models:

For Global asset managers: operating model is suppor-

ted by the fund distribution (team everywhere)

For round trip business: operating model based on 2

countries (subset of the 1st model)

For French fund manager: operating model through

Luxembourg

The current organization is very process oriented: this model

has been proved efficient and secure; the risks are reaso-

nably managed. The weaknesses of this model are: 1) the

risk of loss of our knowledge and, 2) the fact that the people

may not have an overview of the process. Therefore, the

challenge lies in the management of people. The objective

is to have a flexible staff that can be switched from one task

to another and help them to support the stress in a matureway. So investment in training is important. It is also a way

to motivate staff and to retain them. If staff are stable and

collaborative, the knowledge stays inside the firm and BPSS

is able to achieve two main objectives: higher quality and

risk mitigation.

The key value of the business is to shape the behaviour to

give the right example. A lot of initiatives are organized such

as breakfast meeting to share feelings and point of view.

Key messages Business model innovation requires market

players to fundamentally revisit how they opera-

te and their capabilities to create value for their

customers. It isnt about mere restructuring. It

is a cross-functional redesign, a fundamental

change in what is sold and to whom; and how

the value gets delivered.

Fund distribution is still, for the most part, a glo-

bal business and supporting in-house versus

third parties products.

Successful business model innovation can ge-

nerate significant new growth, create new base

for competition and change the cost structure.

Given the risk involved in radically redesigning

the way value is delivered to the customer, and

considering all the structural change, it is es-

sential to have a sound risk management and

control function.


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Figure 5 Managing risk


In an uncertain world, risk management will be viewed not as a constraint but as a new way of thinking about productivity.

This is a crucial component to strengthen the level of control, increase awareness of regulatory oversight and comply with

local rules such as AML procedures in Asia.

Reinforce risk management & controls

Nbr. Major Risks identified Criticality Impact

1 Capacity to absorb additional volume (new business) High Execution delay, financial loss, increase in staff

2 IT risk : interface with distributors High Capacity to trade and accept order

3 Update of static database High Order will not be transmitted on time

4 Capacity to collect prices (NAV) High Order processing

5 Missing shareholders data High AML risk Subscription / Redemption cant be

processed or partially

1 2

5

8

7

9

4

3

6

1 2 3 4

Illustrative risk

Probability

Interview with Etienne Carmon,Head of International Product Development at CACEIS

Bank Luxembourg

What is your perception with regard to investor protec-

tion, and reputational risks for cross-border funds distri-

bution?

All legal and regulatory matters are treated seriously due

to the high reputational risk of our transfer agent business.

For example within CACEIS, we perform in Luxembourg the

validation and controls of AML / KYC procedures althoughpreliminary works are executed locally in countries such as

in Hong Kong.

Interview with Marc Vanmansart,Head of Client Services at EFA

How operational risks are mitigated (Managing claims

and errors)?

Managing claims and errors is an integral part of the Quality

and Improvement process. The objective is to mitigate or

reduce operational risks. For this purpose, a dedicated com-mittee has been created. The goal of this committee is to

analyze the main reasons for dissatisfaction, to identify the

sources of quality failures and to take the relevant measu-

res. This workshop has to manage the global and recurrent

issues affecting the quality of the service provided by EFA

Registre.

The capabilities of this committee are the following:

Assessment and follow-up of the quality level: the analysis

of the data are made upon various sources such as qua-

lity indicators, reports provided by the Customer Service

& Quality Management, technical hitches, Total QualityManagement meetings (TQM) with our clients and reports

made by our Management.

Assessment of the relevance and the efficiency of flows

and procedures: this assessment is based on the failures

quoted above.

Initiation of actions or projects in order to improve proce-

dures or systems or any structural component of the offer

provided by EFA Registre.

At the same time, EFA offered to its clients the possibility to

follow-up the operational risks relating to TA and fund dis-

tribution activity, with scoreboards. These scoreboards are

made with a predetermined frequency and a series of quali-

tative and quantitative indicators.

Severity


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The next step is to determine how to streamline operations. For example, outsourcing or offshoring strategy to adopt, and

how to improve business performance. Many of the more traditional tools of process improvement are entirely appropriate.

Lean Management or Six Sigma methodology can be applied to the unique requirement of delivering operational excellencein three ways:

Transform operating & systems

Order

Placement

Distributors Order

Placement

OrderRouting

Fundsselection

PerformanceMeasurement &Risk analytics

Portefolio

construction

Cash

Management

Orderreceipt

AML control

OrderAcknowledge

or reject

OrderProcessing

ReportingCommision and

trailer feespayment

reconciliationcash & security

settlement

Maintainregistrar

Status :

- confirmed

- Rejected

- cancelled

- Pending

Order

confirmation :

contract note

or MT515 or

XMLmessage

Trailer fees

calculation

System set up

Negociationdistributionagrement

Cash andsecurity

settlement

NAVcalculation

INVESTOR

TRANSFER

AGENT

FUND

ACCOUNTING

FUND

MANA

GER

TRANSFERTAGENT

CUSTODY

Processes where a manual

intervention is required

Figure 6 Automation is still a myth in fund distribution



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Interview with Olivier Portenseigne,Head of Shareholder Services at RBC Dexia

How to streamline operations?

IT industrialization: industrialization begins with the imple-mentation of a common platform for all our entities. The main

objective is to reduce the maintenance and development

costs. RBC Dexia has selected the option to develop an in-

house system. Thus the time to market for all additional de-

velopments is minimized. This also means that nearly any

type of requirement can be implemented regardless of the

country of distribution. Additionally, we have various initiati-

ves aiming at standardizing all incoming messages in terms

of content and format. In terms of communication channels,

we are in favour of using SWIFT messages or web access

to increase the automation rate. One additional constraint is

the type of operating model implemented by the client. I.e.whether transfer agent service offering is delivered as an

unbundled service or integrated with Fund Accounting and

Custody. The first option usually brings more constraints in

terms of interfaces.

In terms of organization, we tend to retain staff for the long

term. This is reflected in the quality of service delivered to

our clients and the level of knowledge gained by our em-

ployees. RBC Dexia has set up a TA Academy that delivers

training courses on various topics such as internal proces-

ses. We are also promoting our employees by rotating can-

didates from production site to new position such as busi-

ness analyst.

Process efficiency is measured using Lean Management or

Six Sigma methodology. This is a unique opportunity to bring

to the same table people from production as well as busi-

ness analysts. It is also a way to identify non value added

activities.

Interview with BNP Paribas:Frank Roden, Head of Client Solutions Global Fund

Services Luxembourg

Pierre Tarsi, Head of Operations

Alain Faure, Global Fund Services Product Manager

One of the most important challenges of operations is to de-

liver efficient processes. BPSS promotes STP solutions for

fund promoters and distributors. Several solutions are pro-

posed to capture the order and to standardize and automate

the flow.

Connectivity team has been set up in order to find win win

solutions with the client i.e. increase the STP rate and de-

crease the fees per transaction. STP solutions increase the

volume of orders processed. The solution proposed depends

on the size and the platform used by a distributor. For exam-

ple, the SWIFT solution can be used by a distributor proces-

sing large volumes and capable of paying for connectivity to

the SWIFT network. In addition a desk dedicated to secure

STP flows within Operational teams has been deployed. The

aim of this STP Desk is to anticipate or/and solve opera-

tional problems. This service addresses the communication

between the client, the IT team (IT is responsible of the mo-nitoring of the system) and the operational team. If the pro-

blem is corrected at the beginning of the process, the quality

of the process is improved resulting in increased efficiency.

Key challenges

GLOBAL ASSET MANAGERS HAVE A HUGE NUMBER OF DISTRIBUTORS

Define a unique point of access for distributors: access to numerous TAs via an aggregator for consolidating androuting order, handle multiple reconciliations,

CONSOLIDATE INFORMATION

Centralise shareholder register and related fund positions

TRAILER FEE CALCULATION

Calculation of trailer fees based on shareholders and distributor positions using different methods (daily averageor month-end holdings), production of the reports and transmission to distributors, support high level of distribution

hierarchy, .

TAX HANDLING

Calculation of national tax regimes (such as Irish tax, European Savings Directive, German Tax, ), producing tax

reporting for shareholders

REPORTING

Various reports: contract note, statement, NAV confirmation, forecast report, performance and to be produced in

different languages and formats



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The other challenge is to ensure that the integration of high

volumes does not mean automatically additional staff. The

solution is a combination of an STP solution and improved

processes using Lean Six Sigma.

In the future, the objective is to meet client requirements,

improve the efficiency but also to develop new services, new

solutions, and in fact new ways of doing our jobs!

The culture of the company has changed. BPSS wants a

flexible work force to address their client needs and to pro-

vide timely responses to client requests. The staff should be

trained to develop and improve the level of knowledge of the

transfer agent environment and the possible impact of each

action on the operations.

This knowledge enable than to quickly correct any error and

thereby to avoid operational issues. This is the main ob-

jective. Improved staff involvement is motivational. Thanks

to Lean Six Sigma methodology, people can participate in

continuous improvement through workshops.

BPSS considers its staff as a real asset participating to the

growth of the firm.

A well educated work force is key to deliver efficient pro-

cess. The philosophy is kill the risk. The margin on the tran-

sactions is so small that any risk should be erased. Mitigate

the operational risk limits the loss and increase the level of

quality.

Key messages

Industrializing processes offer most groups the

potential for significant cost savings. Companiesthat industrialize their processes can compete

on efficiency and quality by pulling these ele-

ments:

Measurement and benchmarking of key ope-

rational performance indicators along the fund

distribution value chain. Indicators include em-

ployee productivity per function such as dea-

ling, register maintenance, order processing,

cash management, etc.

Reduction of complexity through streamli-

ned of operations: companies competing onindustrialization across countries will share

platforms across different markets: US, Asia,

Europe, etc.

Differentiation of value chain activities: 1) as

either core or non core, 2) and as either local-

ly (such local transfer agent) or sharable within

the group (such as global transfer agent)

Managing claims and errors: this requires that

claims and errors are segmented by amount

and process complexity, accelerate settle-

ment, implement effective controls.

Reconfiguring operations and systems also

imply organizational change to tackle the com-

plexity of the fund distribution landscape.


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Fund distribution a complex landscape


The trend towards open architecture has greatly increased the complexity of the distribution chain particularly for

those companies that support the fund manufacturers.

Distribution models and distribution channels: from multi jurisdiction, multi-countryto multi-channel

Key attributes in fund distribution

Simplicity in fund distribution is not a panacea. Transactions tend to be processed efficiently when subscription orders

are placed by investors purchasing fund shares from manager and fund distributor who belong to the same group.

Complexity increases when clients subscribe to third party funds, especially when the domicile of the fund differs from

the country of distribution. Executing and settling orders will increase the complexity.

Ineum Consulting has conducted a survey in April 2009 based on a filtered sample of 25 leading service providers active

in fund distribution with total assets of EUR 8,298 Bio. The research revealed that the fund distribution players could be

clustered into 3 groups: fund distribution support including fund distribution platform, on-line fund supermarket and routing

& settlement platform.


Figure 7 The complexity of fund distribution


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The fund distribution marketplace

Funds distribution support offers support services to fund promoter and fund distributor. The scope of their services

range from negotiation of distribution agreements, order capture and centralization, trailer fees calculation and pay-

ment, till reporting delivery.

On-line fund supermarket provides access to a wide range of mutual funds from different fund manufacturer. The pri-

mary attribute of a fund supermarket is simplicity.

Routing and / or settlement platform usually acts as a central hub between the custodian banks who are responsible

for the maintenance of the cash accounts and transfer agents who maintain the shareholder register.

Key findings from our research

More than 114,000 funds are distributed on a worldwide basis. Out of which: 54,973 funds are allocated via fund distri-

bution support and their dedicated platforms, 6,000 funds via on-line fund supermarket technology and the remaining53,300 funds via routing and / or settlement platform.

Various business models in the fund distribution value chain

Service

Provider

Number of Service Provi-

ders

Number of Funds Assets under Management

(Bio EUR)

Fund Distribution Support 14 54.973 3,097

Online Fund Supermarket 6 6,000 365

Routing and /or Settlement Platform

5 53,300 4,836

Total 25 114,273 8,298


Figure 8 Keyfigures from our research

In terms of assets size, the fund distribution support and their dedicated platforms are the most appealing structure

managing EUR 3,097 Billion.

On-line fund supermarket has captured EUR 365 Million which represents the smallest portion of the fund distribution

market share.

Routing and / or settlement platform manage the biggest portion of the assets that are currently distributed, with a total

volume of EUR 4,836 Billion.

Market players and their respective operating centres

Fund administrators and (mainly) transfer agents are helping fund manufacturers to extend their channels of distribu-

tion from France, Luxembourg, Italy / Spain and United Kingdom as revealed in our research.

On-line fund supermarket platform have been in operations in United Kingdom and United States for many years and

recently to emerge in France and Germany. Cofunds, Fundnetwork, Hargreaves Lansdown and Skandia / Selestia

share 80% of the on-line fund supermarket in United Kingdom.


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Figure 9 Fund distribution players and main operating center

Some of the most popular order routing and / or settlement platforms available on the market include FundSettle, Info-

mediary, Monte Titoli and Vestima. Those platforms operate from different locations and mainly in countries that have

strong expertise in cross-border fund distribution such as Luxembourg.


Figure 10 On-line fund supermarket parent companies and main operating center

Fund Distribution Support Group Main Operating Center

All Funds Bank (AFB) Intesa Sanpaolo / Santander ES / IT

Attra DZ Bank LU

Axeltis Natixis FR / UK

Fund Channel Crdit Agricole FR

Fund Distribution Support BNP Paribas FR / LU

Fund Distribution Services RBC Dexia LU

Fund Distribution Services Socit Gnrale LU

Prime TA CACEIS LU / HK

Key findings from our research: market players in the distribution value chain

At first glance, fund distribution support and their dedicated platforms appear to interact with all the players in the distribu-

tion value chain. A closer look at the interactions allows us to identify different operating models which underpin complexity

and inefficiency.

On-line Fund Supermarket Group Main Operating Center

Cofunds IFDS / Threadneedle / Jupiter / Prudential UK

Cortal Consors BNP Paribas FR

Fundquest BNP Paribas FR/US

FundsNetwork Fidelity UK

Hargreaves Lansdown Hargreaves Lansdown UK

Metzler fund Xchange Metzler DE

Skandia / Selestia Old Mutual Group UK


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Figure 11 Routing and / or settlement platform parent companies and main operating centre

Platform Routing Platform Settlement Platform Group Main Operating Center

FundSettle v v Euroclear BE/LU

Infomediary v - Brown Brothers Harriman LU / UK / US

Monte Titoli v v London Stock Exchange Group IT

Vestima v v Clearstream LU


Figure 12 Fund distribution value chain

Fund distribution support is growing in significance across the distribution value chain

Key findings from our research: market players in the distribution value chain

At first glance, fund distribution support and their dedicated platforms appear to interact with all the players in the

distribution value chain. A closer look at the interactions allows us to identify different operating models which underpin

complexity and inefficiency.

Among the operating models encountered on the market, service provider such as Axeltis, All Fund Bank (AFB), Prime

TA or Fund Channel provide interim services such as service bureau to fund manufacturers and distributors to solve

the spaghetti junction of fees arrangement, distribution agreements, capturing in different formats to Transfer Agents

until the settlement of cash and securities. Contacts with custodian banks are established to collect the position sta-

tements.

Unlike fund distribution support with their dedicated platforms, on-line fund supermarkets as well as routing and / or

settlement platforms have relatively low interaction with fund manufacturers.



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Viewpoints on automation from industry participants


According to industry practitioners, 50% of the transactions processed worldwide still required manual intervention. In the

distribution value chain, operational excellence reflects the capability of the industry to embrace full end-to-end straight-

through processing (STP),from fund registration to transaction processing cycle.

Still a long way to standardization

Several market players have maintained that operational excellence remain a challenge to the fund distribution industry.

Accepting the necessity of trade-offs to cope with innovation, comments IFDS

Standardization or automation, as measured by STP rates, remains in the 40 60% range for most Funds and Distributors.

Two important points should be noted when discussing a numeric measure of our industrys success with STP.

Luxembourg is a valuable domicile for cross-border fund products due to its attractive regulatory regime. Two examples

would be side pockets and gating. The markets response to these environmental developments will hinder higher

STP rates.

Second, most published statistics on automation are solely focused on the automation of orderflow. I.e. the trans-

mission, receipt, booking and confirmation of the actual trade instruction. What still remains to be measured and

discussed are other elements of the trade life cycle such as settlement, reconciliation, and commission.

The impact of non standardization implies flexibility and frequent organizational changes, comments RBC Dexia

Competitiveness across funds markets

Rather than being considered as competitors, Luxembourg and Ireland have developed different capabilities while respon-

ding to different requirements.

Luxembourg and Ireland still remain the most attractive fund centres, reports BNP Paribas

Ireland should not be regarded as a competitor to Luxembourg. It is an attractive offshore location for US and UK funds,and is now well-known for its expertise in the alternative world. Luxembourg on the other hands retains the top spot with

respect to the number of distribution agreements signed per years. The culture and the multilingual environment reinforce

the attractiveness of Luxembourg. Both places must work in harmony to retain that position in the European fund distribution

industry.

France is a major place for fund distribution using the most secure networks but with more constraints, comments

Socit Gnrale

The French fund distribution structure differs from that of Luxembourg. In the French model, the process involves the settle-

ment of subscription or redemption through Euroclear. French managers tend to sell French funds outside France. Luxem-

bourg appears to fit their requirements. It is a leader in fund distribution and able to bypass the constraints of the local CSD

and distributes their funds worldwide. On the other hand, the French market has the advantage of secure settlement, i.e.

applying the delivery versus payment rules (DVP).

Distributing investment funds in as many markets as possible remains a key requirement from fund managers,

comments BNP Paribas

The selection of the world location depends on where the opportunities are aligned with BPSS strategy. Therefore, the

Singapore office is now being used as fund distribution base and Hong Kong will be next. However, Korea and India have

not satisfied the criteria for new distribution offices. BPSS believes it is clear that Asia has strong potential for development

especially as a large part of the fund distributed comes from Luxembourg platform.

For Socit Gnrale, it is not viable to open new offices in multiple global fund distribution locations. It prefers to

rely on the group, or the paying agents network, or local partners.


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Industry initiatives and conclusion : a push towards effi ciency


Industry initiatives and conclusion: a push towards efficiency

The fund distribution industry remains highly fragmented and complex. Several ongoing initiatives should normally improve

the cross-border processing of funds orders. Some of the developments supported by the industry include: Fund Proces-sing Passport, usage of the SWIFT ISO 20022 messages, or specific initiatives led on a regional level such as the Asian

Fund Automation Consortium. The European Central Bank has been embarking in a challenging journey to resolve the

complexity of the fragmented fund settlement issues through Target 2 Securities program.

Despite the number of initiatives supported by the industry, operational excellence in fund distribution has not been achie-

ved by all the players.


Figure 13

Initiative Sponsor Released date /

Enter into force

Objective Useful links for additional

information

Fund Processing Pass-

port (FPP)

EFAMA 2005 FPP is a set of key operational in-

formation that fund promoters shouldprovide on their investment funds in

order to facilitate their trading.

www.efama.org

Swift 20022 SWIFT 2012 SWIFTs ISO 20022 Funds solution

enables greater levels of automation

and risk reduction in replacement of

the ISO 15022 messages

www.swift.com

ISSA Working Group Fund Managers,

Custodian, Distribu-

tor, Transfer Agent,

Central Depositary,

Messaging

2007 The working group proposes practical

ways of gradually reducing barriers

to operational efficiency in pan Euro-

pean cross-border funds processing.

www.issanet.org

Asian Fund

Automation Consortium

(AFAC)

Mainly fund managers 2006 AFAC is a group committed to driving

STP initiative within the Asia Pacific

fund industry by defining a commonSTP strategy for each country, taking

advantage of different technological

platforms already available promotes

automation and recommends the use

of the SWIFTNet Funds ISO20022

compliant messages.

AFAC Regional Contacts

Target 2 Securities

(T2S)

The European Central

Bank

2013 The ECB aims at making Europe a

better place to invest and trade with

multiple CSD by providing a single IT

platform enabling settlement of secu-

rities and fund shares in Europe.

www.ecb.int


20/20

Contacts

Michel Kabanga KAYEMBE

Associate Partner

Investment Funds Advisory Services, Practice Leader

Ineum Consulting Luxembourg

Mobile : +352 621 32 01 95

Direct : +352 26 37 74 21

Fax : +352 26 37 74 982

[email protected]

41 Zone dActivit Am Bann

Eric CRABIE

Partner

Ineum Consulting Luxembourg

Mobile : +352 621 32 01 92

Direct : +352 26 37 74 20

Fax : +352 26 37 74 982

[email protected]

41 Zone dActivit Am Bann

L-3372 Leudelange

About Ineum Consulting

Ineum Consulting is a strategy, organisation and information systems consulting company. Ineum Consulting, objectively helps

its clients make strategic, operational and technological decisions.

The companys range of services, based on its in-depth knowledge of its clients businesses and ability to implement specific so-

lutions, is a unique asset. Ineum Consulting has 1,300 employees in Algeria, Australia, France, Belgium, Morocco, Luxembourg,

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the London Stock Exchange

Study Fund Distribution

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