The evolution of transfer agents and sub accounting providers seems a bit like a Cinderella story. Historically, they performed the very necessary but low-profile task of maintaining records pertaining to the ownership of securities managed by asset managers and sold directly to investors and through intermediaries. Today though, transfer agents in particular have taken on a glossier finish, that of enabling asset managers to focus on their own value-added priorities.
What’s the magic driving this makeover? In short, the need of asset managers for granular timely data, combined with compressed margins, has thrust transfer agents into the limelight. Transfer agents manage exorbitant amounts of data and perform precision-oriented functions that require a thorough knowledge of, and adherence to, compliance and security requirements. And asset managers now realize that a global transfer agent with a modern digital architecture can be a cost-saving, speed-enhancing game changer.
Asset managers are in a tough spot. They are not only struggling to differentiate themselves within an increasingly complex, competitive and volatile industry, but they’re also feeling pressure from investors who want lower fees and higher returns. This is in addition to changing investor behavior, expanding globalization, evolving regulatory standards, exploding amounts and types of data, and the need for fraud prevention and risk mitigation.
Investing used to be all about price, the net asset value, and performance, but now it’s much harder to achieve those differentiators. At the macro-level, industry consolidation in the United States has posed several interconnected challenges for asset managers. Data management systems are convoluted, with disparate and sometimes outdated systems patched together. These inefficiencies make it difficult for asset managers to mine data for value. Moreover, there just isn’t enough time for analyzing T+1 data on batch files, because responding to the market in real time while creating products that attract investors is of paramount importance.
With consolidation, competition also has become tighter, so U.S. asset managers are realizing that leveraging service providers to harness the speed and efficiency of digital technologies can help them regain the time they need for “product innovation and delivering better returns.”1 To save time and cost, some asset managers are outsourcing transfer agent operations to third parties who can streamline the service. Others are requiring that clients pay fees to stay on their fund platforms or move to brokerage accounts, where intermediaries will manage those data-centric tasks through sub accounting processes.
Although Europe, the Middle East and Africa (EMEA) have not seen quite as much consolidation, asset managers in the region recognize the need for advanced technology to drive growth and handle the influx of new and different types of data.2 Additionally, in EMEA, fund structures have followed the globalization trend, with various fund types distributed across multiple borders, all of which have different reporting and regulatory standards. This complexity means having a modern, digitized transfer agent can provide differentiation, as well as act as an extension of the asset manager’s brand.
Globally, the changes and resulting challenges that asset managers face filter down to investment trends, as well. Specifically, there has been a blurring of lines between types of investing. Traditional asset managers are delving into exchange traded funds (ETFs) to capture their efficiencies over traditional funds, and into alternatives to offer their investor new products. Alternative managers are diversifying and looking at traditional fund structures; and each type of product has different workflow structures. In addition, hedge funds are becoming more retail-like, as they’re being offered to more investors with a lower initial minimum investment required, which results in more complex structures. Meanwhile, with Millennials and Gen Z becoming the majority of investors, the interest in ESG investing is not going anywhere, despite newly established regulatory requirements, such as the Sustainable Finance Disclosure Regulations (SFDR) and some recent ESG fund outflows.3 With these new and more complex products coming to market more quickly, asset managers need a transfer agent that can support them with integrated and compatible technology.
The financial services industry came later to the “digital ball” than other industries. But once digitization began trickling into asset management, the need for it swelled to a deluge. And those firms that don’t transform their data platforms to analyze granular, real-time data will be unable to extract value from today’s complex market. As the pivotal informational link in the investment cycle, transfer agents work to ensure financial firms and their clients know exactly how much their investments are worth at all times. With digitization spreading across the financial industry, the transfer agent’s data on trends, flows, and investor behavior is invaluable to asset managers for making informed investment decisions.
Moreover, while the COVID-19 pandemic certainly accelerated the move toward digitization, the younger generations already were much more comfortable with online self-service than Gen X or Boomers are; however, Millennials and Gen Z also demand faster, better digital interfaces. Oddly enough, the online capabilities an investor or intermediary encounters can be a significant attraction for the older generations too: Accessing accounts through a digital portal with high-quality fraud prevention can result in a sense of security that could woo them over to self-service via online portals. In addition, with recent supply chain issues and the COVID pandemic, digital access to statements and tax forms have become even more paramount.
Fraud prevention is just one aspect of risk management, though. With the trend toward digitization, an increasing acceptance of digital assets, and the digital nature of how investors and advisors open accounts and execute trades, today’s asset managers must have robust digital anti-money laundering (AML) and know-your-customer (KYC) processes. With increasing globalization, asset managers must manage cross-border investments, and those in EMEA especially feel the pressure from navigating different regulatory standards and interpretations (e.g., AML).
To focus more on product development and revenue generation, many asset managers are outsourcing some back-office and middle-office functions. Consequently, modern, digitized transfer agents with robust fraud prevention, a streamlined digital experience, and interoperable technology are “the essential attire” for asset managers
Every asset manager is on its own journey towards digitization, but there are several pioneering capabilities to seek out in a transfer agency.
The future is mobile, digital, and data-driven—with the incorporation of machine learning and AI into financial data processes and workflows, as well as the mainstreaming of digital assets and use of distributed ledger technology (DLT) all on the horizon. The modern transfer agent that embraces digital technologies won’t just simplify valuable processes for asset managers; it also will deliver the tools needed to help enhance investor satisfaction, strengthen investor confidence and support asset managers’ current and future growth. Thus, these transfer agents will become vital to asset managers’ operational and growth strategies.