The evolving world of transfer agency – a Q&A with Justin Hayes

Why is the role of transfer agents so important?

The global financial crisis highlighted the importance of transfer agency by deepening the focus on transparency and regulatory compliance. Transfer agency has greatly evolved over the past 25 years and become incredibly competitive and specialized, with new asset classes entering the arena and existing fund types growing in complexity. Also, investor experience – once an afterthought – is now at the forefront. Some asset managers can handle the TA function in-house, but many prefer to outsource it to third party administrators (TPAs).

How are the transfer agency requirements of asset managers changing?

Transfer agents help asset managers provide good client service while addressing regulatory imperatives. The push for digitization and better data access has been motivated by investor demands and accelerated by the pandemic. Millennial, ‘digital native’ investors are particularly noted for driving such expectations, but investors of all ages expect greater transparency, 24/7 access to information, and even the ability to trade. As a result, the demand for investor portals has grown significantly, particularly with the COVID-related lack of face-to-face customer interaction.

Greater fund complexity is also a factor. Fund managers need to glean insights from investor data and trading patterns, and TA systems must accommodate this two-way flow of information. Some investors, such as those invested in private equity, require greater granularity in their reporting. They want to understand why an investment is going ahead, the particulars behind it, and very detailed holdings reports. And of course, heightened regulatory focus on transparency and money laundering means TA services are constantly under evaluation. Firms must conduct the requisite checks and demonstrate that this has been done and reported properly. All of which comes at a high operational cost in a very competitive industry with increasingly depressed margins.

The long-rumored replacement of transfer agents by technology (such as blockchain) has yet to materialize. How has technology impacted transfer agency?

Transfer agents have struggled to remain profitable in a market with low margins, and we have seen considerable consolidation. However, the transfer agency function is more relevant than ever due to the importance of investor experience and regulatory compliance. While many transfer agents have improved operational processes by using automation and embracing digitization, this highly cost-sensitive sector is notorious for its reluctance to invest in technology or change long-established processes. Lately though, a range of factors – from the ubiquity of online banking and e-commerce to a younger pool of investors, and most recently the pandemic – has tilted the playing field. We are seeing substantive changes, with firms that have moved assertively reaping the benefits.

What major challenges do transfer agents face today?

The three interconnected challenges confronting Transfer Agents are cost, fund complexity, and regulatory compliance. Margin pressure is constant, and it is critical to bring down costs using better technology and operational processes, including straight-through processing (STP), automated reporting tools, and investor portals for seamless two-way information sharing.

Another challenge is fund complexity. The ever-changing fund environment and the rise of hybrid investment products presents an array of operational and reporting challenges. There are huge costs involved to ensure that systems are continually enhanced to cater for fund administration, data flows, and detailed regulatory and investor reporting.

Compliance is the third major challenge. Regulatory compliance is now an industry in itself. Managers are always telling me how they spend the majority of their time checking and rechecking that they are sending out the right reporting. Anti-Money Laundering and Know Your Customer (AML/KYC) variations between jurisdictions add to the complexity. Regulatory requirements around transparency have led to exponential growth in reporting and documentation. There is a huge opportunity for technology to automate compliance processes, saving time and preventing human error. Investor portals play a role, as documentation and reporting can be exchanged on demand in real time, eliminating the need for lengthy calls or meetings to gather information.

How do you see this space evolving in the future? Where do the future opportunities lie?

Transfer agents have traditionally been slow to adopt new technology, remaining reliant on the archaic methods of postal mail and fax. This is changing, however, as TAs embrace investor portals, API interfacing, process automation, and data analytics. I expect this trend to continue, along with a greater reliance on Artificial Intelligence/Machine Learning (AI/ML) and blockchain. The investor experience will remain key, and both types of technologies enhance that. AI/ML facilitates process automation, and blockchain enables investors to deal directly with the fund rather than through a broker/distributor. Both technologies could also reduce the administrative burden around AML/KYC checks. Today, the need to get passports, utility bills and sign-off from compliance officers takes time. This is an area where regulation and technology must work together better.

In conclusion, innovations from the world of online banking, e-commerce, and data analytics offer the promise of a future transfer agency function that is leaner and more customer and investor-focused, while remaining profitable for the fund administrators and transfer agents involved.

About the author

Justin Hayes Global Product Manager for Linedata’s transfer agency solutions. Linedata is a vendor of asset management solutions for the front, middle and back-office, including transfer agency. Justin has been with Linedata for nearly 15 years, having previously worked in fund administration with SEI.