Leakages can be plugged

Funds could return up to 6 per cent more to members if implementation leakage were stopped, but even the latest in-the-Cloud software will not deliver on its promises if not part of a total review of business processes. Ironically, this Cassandra-like warning comes from an IT industry guru, Iain Dunstan, CEO of Bravura Solutions Group, who’s concerned that “well-intentioned people [are] confusing lower returns with costs”. In the past year, a member may have lost 20 per cent of their returns, he says, and these losses may stand at roughly $100,000. So, this is the backdrop against which policy-makers and do-gooders need to look at the efficiency issue. “What’s the best-case scenario with best-STP [Straight Through Processing] saving one dollar a member?” he asks. At this rate, “it’s going to take 100,000 years to get them back to square one”. The implementation-leakage savings of 6 per cent are put forward by Russell Investments expert Chris Briant.

Leakage or slippage is costing up to 25 basis points a year which adds up to 6 per cent over an assumed working life of 40 years, says Briant who is Russell’s director business development Australasia. However, information technology is just one of the solutions, says Dunstan. The bigger picture is a review of total processes, and even more critically, scale and consolidation. Sadly, for smaller funds, Dunstan is convinced that scale will create far greater efficiencies and far lower costs than a single investment in the best IT solution around. “Scale brings true efficiencies because scale players can afford to implement STP [so it] delivers the benefits: the workflow, the optical character recognition, the major savings on the cost/benefit front,” says Dunstan. “It all comes down to the ‘why is wholesale cheaper than retail? Scale.” And another back-office information technology guru, Michael Corcoran, is also somewhat leery of the portrayal of software as the magic silver bullet which will kneecap the baddies and eliminate leakage/slippage costs.

Corcoran, who’s with specialist execution broker ITG as its managing director sales & trading Australia, says ITG’s strength is research on the execution process. “We separate research and trading, which leads to the best value for the customer,” he says. This Best Execution approach challenges the old assumption that the researching broker was the good trading broker.” Corcoran argues that back-office costs can’t be seen in isolation. “Understanding the cost of trading is the first piece of the slippage puzzle,” he says. If there is a silver bullet, says Corcoran, then it’s Transaction Cost Analytics which – as the name implies – teases out every possible cost on every transaction. He cites Richard Coulstock, head of equity dealing at Prudential Asset Management in Singapore, who estimates that the TCA process saved Prudential $30 million in 12 months. The global financial crisis and the Cooper review are forcing closer examination of costs and regulations, says Dr John Bates, founder and general manager of the Apama division of Progress Software.