Investment administration outsourcing to continue says DST International

Cathryn
Wednesday, 28 February 2007 07:35

Rather than maintaining sometimes costly in-house distribution administration, many Australian fund managers should begin to realise there may be little strategic advantage in retaining the service in-house, according to DST International. Speaking in Sydney today at the annual Investment & Technology Conference for the Australian Custodial Services Association, DST International's CEO, Ian Mathieson, outlined that investment platforms of the future would cater to an automated total wealth management environment.

"All asset classes including managed funds, direct shares, cash and fixed income products and to a lesser extent IMAs have become common place in many portfolios, with property being an all-time Australian favourite, he said.

"However superannuation and complementary risk products, such as life insurance, total permanent disability and income protection, as well as cash, bonds, private equity and collectables and valuables also lend themselves to becoming part of the platform offering for advisors and investors. The platforms need to evolve to cater for this broadening of scope.  It's a costly exercise for in-house users."

DST International has charted the trend towards the outsourcing of distribution administration as it has pioneered work with both Custodians and Third Party Administrators in Australia over the past decade.

Mr. Mathieson continued, "Ten years ago we did not have any in-direct clients or Third Party Administration clients and today we service over 100 clients for six major Custodians and Third Party Administrators.

"Whilst our direct license agreements have decreased from 70 to 27, the funds under administration with DSTi, has increased from A$390 billion to A$1.4 trillion. Approximately $900 billion of this is held with Custodians and Third Party Administrators alone*. This takes the market share for outsourcing from around the 65 - 75% mark up to the 75 - 85% level."

"Outsourcing of fund managers back offices has become the more popular option and over time we may well see the same happen in distribution administration."

For DSTi's spokesman, there are a range of factors leading to change including the ongoing costs and commitment to Information Technology, operational management and staffing challenge plus lack of commercial scale for in-house distribution administration. Custodians and Third Party Administrators may also appear more appealing for investors as their independence and lack of soft dollar incentives address the perception of conflict of interest between consumers, financial advisors, fund managers and industry regulators.

Mr. Mathieson believes that platforms are ripe for outsourcing as the Custodians and Third Party Administrators, "already handle multiple product types, price daily, calculate performance and tax calculations, produce reports, execute trades and perform settlement in their custodial role. Importantly as desktop application software for advisors increases in complexity and possibly becomes linked efficiently to the broader market for transaction purposes, current platforms may become outdated and obsolete."

DST International's outcomes for the future for investment platforms include:

 

• Custodians and Third Party Administrators to participate in the pure administration of the investment distribution function
• Existing players to review their pricing models as newcomers work on a "cost plus" transaction basis
• Fees and payments to come under greater transparency and full fee disclosure demanded by investors. "Commission free" platforms to be announced
• Funds under administration through independent outsourcers to outstrip pre-dominantly bank-owned in-house platforms
• Dramatic expansion of outsourced software and advisor desktop software capabilities to co-exist with platforms and link to broader marketplace and
• Possible APRA review of platforms concluding that they are a service offering and not a product.

 

Ends

 

About DST International (DSTi)

With 19 offices and over 1500 professionals to support its growing client base, DST International provides a unique and comprehensive range of investment management and business process management software solutions and related services to 700 clients in 55 countries.

http://www.dstinternational.com/

 

About DST Systems, Inc.

Our parent company, DST Systems, provides sophisticated information processing and computer software services and products that help clients improve productivity, increase efficiencies, and provide higher levels of customer service. DST is organised into two operating segments: Financial Services, and Output Solutions. DST operates one of the most advanced data centres in the world, which provides information-processing services to support the products within each operating segment. These products are further enhanced through the integration of DST's advanced technology and e-commerce solutions.

 

*This figure also includes asset duplication due to the rise of fund-of-fund structures.