Should a bundled service still be modus operandi for fund providers?

Michael O’Connor | Investment Client Director

Michael O’Connor is a highly successful Investment Client Director at Target Group with a strong record of setting, developing and delivering operational and commercial strategies. Michael brings a wealth of experience within financial services, including investments, lending and insurance at leading UK retail and outsourcing companies.

Fund providers have had a lot to grapple with since the financial crisis more than ten years ago. Sweeping regulatory changes, the rise of passive investing, a shift in the demographic and technological access means their businesses look vastly different compared to a decade ago.

Part of this change has inevitably fallen on a greater use of outsourced partners as firms looked to streamline costs, create efficiency and focus on those parts of the delivery which they and their chosen partner are good at.  As relationships come up for review, one area now getting greater focus is the holy trinity of transfer agency, fund accounting and custody, which historically has come as a bundled service.

There are multiple factors as to why bundled services may no longer be suitable for fund providers. These range from failing to adequately keep up with regulatory changes such as RDR, MiFID II, CASS, FCA’s asset manager review and the Senior Managers and Certification Regime, to inconsistent servicing of retail investors and failing to engage with orphan clients.

While bundled services have traditionally focused primarily on higher value services such as fund accounting and custody, this may have (or has at times) been to the detriment of other services that are equally as beneficial to customers and vitally important.

With changes to client money rules, transfer agency services have become subjected to greater scrutiny by regulators and with growing digital pressures, providers must focus on developing better client propositions and adding real value.

As part of this, the Financial Conduct Authority (FCA) has put the fair treatment of customers at the heart of what it has been trying to do in recent years. As a result, fund providers need to ensure they are delivering a robust and secure proposition to their customer base, often relying on downstream delivery by their transfer agency providers. This will allow them to ensure a more modern and safer environment as well as enabling the business to create the capacity to re-energise orphan clients and stimulate growth.

So what options do fund providers have to help overcome the issues faced with bundled services? As with nearly all outsourced relationships they can pick and choose which services they take on in-house and which they put out for tender. Should they wish to outsource all aspects of client administration then they needn’t go with one supplier, instead choosing the best partner for each aspect and retaining an element of flexibility.

Choosing an unbundled service may add an extra basis point or two to a fund, and asset managers are right to question this in a world where margins are coming under intense pressure caused by the rise of passive investing and the scrutiny placed on the sector by the FCA.

However, one respondent to the FCA’s recent asset management market study noted “that any savings due to bundling or related to scale were not always passed on to end investors,” showing that not everyone is receiving the perceived benefits of bundled services as it stands at present.

While the potential impact on cost shouldn’t be overlooked, there are significant gains to be had for the fund provider too. Having an unbundled service means they are not tied to one outsourced partner, and thus each aspect of the client administration chain should receive the attention it deserves from its service providers, and, frankly, be easier to subsequently renegotiate in the event of dissatisfaction. If anything unbundling has the capacity to provide a more efficient and seamless service compared to selecting a bundled service from just one provider.

Unbundled services will give fund providers control and flexibility over their proposition, as well as the certainty that they can focus on providing a first rate service for their clients. The pressures asset managers are facing from regulation, the rise of passive investing and losing orphan clients are making businesses sit up and assess relationships. Moving to an unbundled service provider will ultimately win out with clients and help tackle these issues.