There are significant inefficiencies in the investment fund industry that need addressing.
A study by Deloitte highlighted that fund distribution is particularly ripe for change, summarising it as a “mixture of bilateral links, aggregator platforms, and processing service providers… while documents and data dissemination are channelled through multiple information distributors or resellers”. The study estimated that distribution costs could be cut by some 70%.
In today’s Mifid II environment, any reduction in expenses is welcomed but cost-cutting is only part of the picture.
Digitalisation means a vibrant fund industry
Currently, the fund industry is experiencing the first stages of a digital transformation. The ultimate aims of which are not only to eliminate costly inefficiencies but also to future-proof the industry. Central to both of these are data, data quality and, importantly, information flows and exchange between all stakeholders.
Digitalisation will unleash growth and make the fund industry more dynamic. For industry players, it creates the conditions needed for products and services innovation, streamlines the fund supply and fund distribution chains and offers a strategic and real-time overview of them. For end investors, it both enriches and simplifies the investing experience.
It brings fund producers and fund buyers closer together.
Maxime Aerts, Chief operating officer (Fundsquare)
In short, it brings fund producers and fund buyers closer together, creating a virtuous circle in which producers can better fulfil buyer expectations, while strengthening cost competitiveness.
Reaching this point will not be a revolutionary process, rather it will be incremental. So what are some of the prerequisites and steps that will lead us there?
Building an interoperable ecosystem
In the short to medium term, solutions that best serve the industry must above all respond to existing systems and ecosystems. Complete industry-wide digitalisation will not occur at once and therefore, the need for hybrid models exists as legacy methods and systems are replaced.
Key to these models, and beyond, is standardisation of data and information, as well as resolving the issue of interoperability.
Interoperability is more than having existing systems communicate with one another. To build a truly interoperable ecosystem, innovative cooperation and competition between stakeholders is required.
Covering both technical and data standards.
This level of cooperation implies, at the most basic level, that stakeholders have a common goal. Any such interoperability should be not just for their own individual, silo-dismantling, cost-savings needs but rather for enhancing the entire investor journey throughout the buying cycle, for the benefit of the industry as a whole.
Cooperation can also benefit the industry by creating a space for standardisation, covering both technical and data standards.
There is a number of standardisation initiatives ongoing but, so far, none has really reached the point at which it is being taken up by the market as a whole.
Data sharing and information exchange have begun
As mentioned, interoperability and standardisation are part of an incremental process. Over time, fund industry players will find that existing incentives for persisting with their legacy systems and low levels of standardisation will become less important. The need for real-time exchange, control and oversight will become increasingly obvious.
One step that industry players are taking now is to focus on efficient data sharing and the use of open APIs, or Application Programming Interfaces. These are off-the-shelf software solutions that allow them to leverage the existing data on their legacy systems. ProgrammableWeb, the API news and information site, logged more than 19,000 APIs as of January 2018, with the fastest-growing categories being financial and data APIs.
Using APIs is a quick win for the industry as they open up, in a dynamic way, the wealth of data that each actor has available. Until recently, access to this data was through outdated methods that could be best summarised as “we are sending you this data in a file every business day at 10p.m. – you have no other choice”. APIs enable data sharing in the fund industry to move from batches to a call and get system.
We are now approaching the beginnings of real-time efficiency.
Another promising field is DaaS or Data as a Service. As information sharing becomes ubiquitous in the industry, big data analytics and science will come to the fore and DaaS has potential to help all players in the fund distribution chain tailor their streams to meet their specific needs and strategies.
Neither APIs nor DaaS are revolutionary in themselves. Over the past few years, they have proved to be successful drivers of growth in other industries.
We are now approaching the beginnings of real-time efficiency, oversight and understanding of a complex process. Fund industry actors can take full advantage of data sharing and exploitation to insert themselves at the heart of the investor relationship, with all the promise of further innovation and new revenue streams this entails.