Fund distribution

In search of operational excellence : myth or reality?

 Fund distribution
In search of operational excellence : myth or reality?

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 18
COMPETITIVENESS ACROSS FUNDS MARKETS 18

INDUSTRY INITIATIVES AND CONCLUSION: A PUSH TOWARDS EFFICIENCY 19

CONTACTS 20

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

Foreword

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 Société Générale 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. Focus
on 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 industry’s 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

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

 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:

Figure 1 The fund distribution road to operational excellence

1 2
Focus on Self Preservation Reinvent the Business
Model
• How to cut cost and • What is the shape of the
increase processes effi- business portfolio?
ciency ?
• Which long term competi-
• What are the non core tive advantages to build-on • How to implement a
business in order to in the post-crisis era?
refocus resources on core
activities? • How to improve customer
satisfaction to drive loyalty
and sales effectiveness ?
3 4
Reinforce Transform
Risk Management & Operations & Systems
Controls
• How to efficiently control • How to streamline opera-
operational risk on fund tions?
distribution activities?
• Which outsourcing or off
shoring strategy to adopt
regulatory oversight and in order to reduce the cost
compliance strategy? base?
• How to improve business
performance through Sco-
recarding?

• How to maximize benefits

from post merger integra-
tion?
Source: Ineum Consulting

FUND DISTRIBUTION - In search of operational excellence: myth or reality?- 5

The fund distribution road to operational excellence

Focus on self preservation

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.

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

I. Order Management
I.1. Order collection
I.2. Order validation
I.3. Order routing
I.4. Order processing
II. Corporate Actions
II.1. Corporate actions identifications
II.2. Corporate actions handling
II.3. Corporate actions notification to
client
III. Settlement & Clearing
III.1. Settlement
III.2. Reconciliation
IV. Position & Account Management VII. Referential Data
IV.1. Cash position management VII.1. Clients
IV.2. Securities position management VII.2. Funds
IV.3. Holdings management VII.3. Distributors
VII.4. Accounts
V. Portfolio management VIII. Commissions
V.1. Portfolio selection VIII.1. Commission calculation and mana-
V.2. Client account management based on asset gement
allocation model and risk profile VIII.2. Trailer fees calculation and manage-
V.3. Portfolio modeling ment
V.4. Portfolio simulation
VI. Reporting IX. Management & Control
VI.1. Clients reporting IX.1. Regulatory & compliance
VI.2. Others IX.2.Tax paying agent
VI.3. Fund management co. reporting IX.3. Anti-money laundering regulation
VI.4. Tax & legal reporting IX.4. Define and monitor KPI

Managing cost in fund distribution

Fund processing costs
100%

80%

60%

40%

20%

0% Order routing Cash Errors Queries Total cost

Source: Ineum Consulting management & Reconciliation

Key messages
• Market participants who are actively supporting 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. What are their key business priorities, what keeps them up at night? Such knowledge can provide the basis
for 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 isn’t easy.

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

 The fund distribution road to operational excellence
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, dealing
or cash management are less segregated.
This first step towards reorganization of
the 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 “classic”
model. 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 Agent
or Fund Accounting. Once it has been redirected to the Trans-
fer Agent department, we have to ensure that it is processed
before the cut-off time. There is a simultaneous procedure to
record the shareholders data in the register including AML
and KYC reviews and in parallel a partial processing of an
order. Due to this single approach, it is highly effective.
In spite of the impact of this extensive process review, EFA
would 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 can
respond to client constraints. Definitely, our organization is
more client driven.
Could you give us some tips on how costs are efficiently
managed?
We have combined a mass production approach and tailor
made service. For example, we have industrialized our re-
porting capabilities by standardizing as far as possible our
contract note and cash flow reports. Various templates have
been prepared in order to respond to each individual client
request. Other initiatives include: the implementation of a
document management system, an electronic archiving sys-
tem, as well as an Optical Recognition Character platform.
Reconfiguring systems and processes also implies change
management. The virtuous circle of the productivity gains
can 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 change
management is a primary condition to the success of the
project. To sum up, the choice for the client has to be made
between a cheap offer with low quality and a tailored made
offer but with a higher price.
Interview with Etienne Carmon,
Head of International Product Development at CACEIS
Bank Luxembourg
What would you consider as the major
cost 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 in
Hong-Kong from which French, Luxemburg
and Irish domiciled funds are distributed.
Secondly, the business has to be profitable. As such, transfer
FUND DISTRIBUTION -
agent service offerings are not established as a standalone
service 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. This
implies additional recruitment costs to hire resources with lo-
cal knowledge and language skills to provide an advantage
over other competitors.
How profitable is the Transfer Agent business?
It is difficult to be profitable as a transfer agent due to the
huge number of staff, the number of delegated activities to
third parties; as well as cost of change to IT. In cases whe-
re investor services is part of a global service offering, the
cost of running a transfer agent business is compensated by
other services such as custody and fund accounting.
Within the transfer agent, profitability analysis per client is
crucial. Elements to be considered: distribution network,
communication channels, etc.
In the case of CACEIS, standard Transfer Agent services
are combined with value-added activities as part the Prime
TA® offerings.
Interview with Matthieu Pasquier,
Chief Operating Offer Fund Distribution Services at
Société Générale 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 who
are 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.
In search of operational excellence: myth or reality?- 7
The fund distribution road to operational excellence

Reinvent The business model

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.

Figure 3 Business model and challenges ahead

Targeted Client Segments Business

Challenges Organizational Model
& Drivers Model

Key driver: Expanding Operational architecture • Align many different economies, • Client Driven
Marketplace & Investors tax regimes, languages, AML,
business cultures • Process Driven
Global footprint
Centralized or Decentralized • Build common elements and • Mix of Client &
• Global fund manufacturer around operational hub / exper- Process Driven
reuse them across the broad
tise centers markets

Operating model based on 2 • More markets and more distribu-

• Round trip business
locations tors participating with increasing
interfaces

• Local asset manager (one Operating model through one • Ensure that the integration
country such as France, Ger- location such as Luxembourg, of high volume will not mean
many…) Ireland, France, Hong kong automatically more additional
resources

• Focus on added value services

such as cash management,
commission and trailer fees,
customized reporting

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

Figure 4 Fund distribution marketplace

High
GLOBAL DISTRIBUTION
WITH A PRIMARY FOCUS
ON “IN-HOUSE” FUNDS
Breadth of services
GLOBAL DISTRIBUTION
WITH A PRIMARY FOCUS
ON “THIRD-PARTY” FUNDS

LIMITED FUND THIRD PARTY FUND DISTRI-

DISTRIBUTION BUTION WITH A LIMITED
CAPABILITY SCOPE OF SERVICES

Low
In-House Distribution Model Open Archit.
Source: Ineum Consulting

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

 The fund distribution road to operational excellence

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, today’s 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.
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 mature
way. 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 isn’t 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.
Interview with BNP Paribas:
Frank Roden, Head of Client Solutions - Global Fund
• Successful business model innovation can ge-
Services Luxembourg
nerate significant new growth, create new base
Pierre Tarsi, Head of Operations
for competition and change the cost structure.
Alain Faure, Global Fund Services - Product Manager
• 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.

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-

FUND DISTRIBUTION - In search of operational excellence: myth or reality?- 9

The fund distribution road to operational excellence

Reinforce risk management & controls

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.

Figure 5 Managing risk Illustrative risk

3 1 2
4 5
9
Severity

6
8
7

1 2 3 4
Probability

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 can’t be
processed or partially

Source: Ineum Consulting

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 although
preliminary 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 Quality
Management 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.

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

 The fund distribution road to operational excellence

Transform operating & systems

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 excellence
in three ways:

Figure 6 Automation is still a myth in fund distribution

Funds Performance Portefolio

Measurement &
selection Risk analytics construction
INVESTOR

FUND MANAGER
Order Distributors Order Cash
Placement Placement Management

Order
Routing

Order
Order Order
AML control Acknowledge
receipt or reject Processing

Status : Order
Maintain
- confirmed confirmation :
registrar
- Rejected contract note
- cancelled or MT515 or
- Pending XML
message

TRANSFERT AGENT
Commision and
TRANSFER AGENT

cash & security

Reporting trailer fees reconciliation
payment settlement

Trailer fees
calculation

System set up

Negociation
distribution
agrement
ACCOUNTING

Cash and
CUSTODY

NAV
security
FUND

calculation
settlement

Processes where a manual

intervention is required
Source: Ineum Consulting

FUND DISTRIBUTION - In search of operational excellence: myth or reality?- 11

The fund distribution road to operational excellence

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 and
routing 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 average
or 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

Source: Ineum Consulting

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.

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

 The fund distribution road to operational excellence
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.
FUND DISTRIBUTION -
Key messages
• Industrializing processes offer most groups the
potential for significant cost savings. Companies
that 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 on
industrialization 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.
In search of operational excellence: myth or reality?- 13
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-country

to 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

Source: Ineum Consulting

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

 Fund distribution a complex landscape

Various business models in the fund distribution value chain

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 remaining
53,300 funds via routing and / or settlement platform.

Figure 8 Key figures from our research

Service Number of Service Provi- Number of Funds Assets under Management

Provider ders (Bio EUR)
Fund Distribution Support 14 54.973 3,097

Online Fund Supermarket 6 6,000 365

Routing and / 5 53,300 4,836

or Settlement Platform
Total 25 114,273 8,298

Source: Ineum Consulting

• 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.

FUND DISTRIBUTION - In search of operational excellence: myth or reality?- 15

Fund distribution a complex landscape

Figure 9 Fund distribution players 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 Crédit Agricole FR

Fund Distribution Support BNP Paribas FR / LU

Fund Distribution Services RBC Dexia LU

Fund Distribution Services Société Générale LU

Prime TA® CACEIS LU / HK

Source: Ineum Consulting

• 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

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

Source: Ineum Consulting

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.

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

Fund distribution a complex landscape
Fund distribution a complex landscape

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

Source: Ineum Consulting

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

Figure 12 Fund distribution value chain

Source: Ineum Consulting

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.

FUND DISTRIBUTION - In search of operational excellence: myth or reality?- 17

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 industry’s 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 market’s response to these ‘environmental’ developments will hinder higher
STP rates.
• Second, most published statistics on automation are solely focused on the automation of order flow. 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
Société Générale
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 Société Générale, it is not viable to open new offices in multiple global fund distribution locations. It prefers to
rely on the group, or the paying agent’s network, or local partners.

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

 Industry initiatives and conclusion : a push towards efficiency

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 / Objective Useful links for additional

Enter into force information
Fund Processing Pass- EFAMA 2005 FPP is a set of key “operational” in- www.efama.org
port (FPP) formation that fund promoters should
provide on their investment funds in
order to facilitate their trading.
Swift 20022 SWIFT 2012 SWIFT’s ISO 20022 Funds solution www.swift.com
enables greater levels of automation
and risk reduction in replacement of
the ISO 15022 messages
ISSA Working Group Fund Managers, 2007 The working group proposes practical www.issanet.org
Custodian, Distribu- ways of gradually reducing barriers
tor, Transfer Agent, to operational efficiency in pan Euro-
Central Depositary, pean cross-border funds processing.
Messaging
Asian Fund Mainly fund managers 2006 AFAC is a group committed to driving AFAC Regional Contacts
Automation Consortium STP initiative within the Asia Pacific
(AFAC) fund industry by defining a common
STP 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.
Target 2 Securities The European Central 2013 The ECB aims at making Europe a www.ecb.int
(T2S) Bank 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.

Source: Ineum Consulting

FUND DISTRIBUTION - In search of operational excellence: myth or reality?- 19

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 company’s 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,
the Netherlands, Switzerland, United Kingdom and the United States. It is part of Management Consulting Group Plc, listed on
the London Stock Exchange

Contacts

Michel Kabanga KAYEMBE Eric CRABIE

Associate Partner Partner
Investment Funds Advisory Services, Practice Leader Ineum Consulting Luxembourg
Ineum Consulting Luxembourg Mobile : +352 621 32 01 92
Mobile : +352 621 32 01 95 Direct : +352 26 37 74 20
Direct : +352 26 37 74 21 Fax : +352 26 37 74 982
Fax : +352 26 37 74 982 ecrabie@ineum.com
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