A survey of superannuation fund chairs taken at the Conexus Financial Chair Forum, in conjunction with Milestone, earlier this year revealed a disconnection within superannuation. While chairs wanted to spend time on providing advice to members and to improving inhouse investment management, in reality they were being hindered by the time they had to spend on third party servicing, governance and regulation, and internal operational efficiency.
For many the answer to this problem is to make better use of new technology, technology that is only starting to become available to funds.
Part of the problem, according to Enrique Gonzalez, regional product manager, APAC, Milestone Group, is that the entire funds industry has been plagued by endless spreadsheets and cumbersome, inefficient, manual processes from top to bottom.
“While this may suit funds in their infancy, it has created real difficulties in terms of scalability as funds have grown. As volume expands faster than surface area, so too have inefficiencies multiplied at a rate disproportionate to growth in AUM,” he says.
He adds that the solution to these challenges will have to be substantial as mere tweaking around the edges of the business model will not be enough, with the traditional methods of cost cutting – outsourcing and squeezing suppliers – having hard limits that curtail them from delivering the necessary savings.
Part of the issue according to Andrew Pickering, employer director at Equip, is that financial services to a large extent until now managed to dodge the bullet of digital disruption.
As an opportunity, such disruption could help revolutionise their business model, enabling them to refocus time and resources on desired areas, meet regulatory requirements and cut costs.
IT solutions firms such as Milestone are on message with this. “Automation of processes has the potential to dramatically cut costs without – and this is crucial – reducing capacity or harming performance and service levels,” says Gonzales of Milestone. “When done correctly, automation can cut costs while increasing capacity, performance, and service levels. Valuable human resources need to be freed to manage the future instead of working on manually redundant and repetitive tasks.”
There is also benefits for funds wishing to acquire scale as a huge barrier to proposed deals and consolidation is the sheer difficulty of integrating inefficient, idiosyncratic manual processes.
The Australian Institute of Superannuation Trustees, which spent most of its recent CMSF conference extolling the virtues of better digital approaches, is also on message.
David Haynes, executive manager of policy and research at AIST, says that a significant part of the cost structure of funds relates to the receipt and allocation of contributions and technology has the capacity to make an enormous difference streamlining “transaction between funds, between employers and funds, and between funds and governments”.
Haynes is can-do about funds ability to take this on. He believes they have reached a point in their evolution where they have the capacity to think, design and implement technological solutions. This could be social media ability, improved business intelligence tools or the implementation of sophisticated client management systems.
“You will shortly see superannuation funds with the same sort of keen focus on technology solutions that largely drives the banks at the moment,” he says.
Haynes points out the impetus for technological solutions to improve funds business models isn’t coming from the custodians. He says technology providers and administrators are increasingly finding more cost efficient solutions which they are then competing with to sell to their client funds.
An operations officer issue
SS&C Technologies, a global provider of investment and financial software-enabled services, is talking to a number of chief operations officers at funds who are looking to use technology to make better decisions, whether that’s around costs, investments or risk and they tend to want it in one place.
Rhys Octigan, head of Business Development, Australia & New Zealand, SS&C, says: “At the moment funds get data from multiple sources, particularly their outsourced providers; some from custodians, some from administrators, some from fund managers. They are looking to use technology to enable them to have accessibility to all their data in a single point of view they can aggregate, data mine if you like, and on pretty much real time basis.”
Some funds will achieve this by bringing technology inhouse, others might use a cloud based service, some might completely outsource or a combination of all these approaches.
Funds are evolving into more complicated financial houses Octigan observes, however he also reports that almost all funds have said they don’t want big technology shops.
“They’re not looking for a very complicated technology footprint. They’re looking for great solutions from one or two key partners. They are looking for more services and more software as a service type model,” Octigan says.
As part of this process he foresees funds relying less on external consultants to help them set strategic direction and make technology decisions and to bring more of that expertise inhouse.
“They see it as part of their long term planning process,” he says.
Pickering tells how a data management provider used by Equip – essentially a customer intelligence unit – takes the funds data, analyses it at a very high level, and then tells Equip about its demographic.
“They are actually tapped in with our administrator, so when things go on with the administrator they can tell who is doing what. It’s like Google working out what you prefer to buy in the super space. We are using that data and can tell when people have made three or four enquiries a few weeks before retirement, letting us know they are thinking about a change. We can target those customers and see what they are looking for.
“That information is our IP and it’s very, very valuable to us.”
He adds that Equip will definitely be partnering with the right financial technology firm – one that can give the flexibility and control the fund needs.
One barrier in achieving this Promised Land is the way many funds are beholden to their administrator.
Pickering notes that third parties administrators service a number of clients and design their product either to the lowest common denominator or an internal model “and superfunds can do nothing but hang off that”.
He adds that as a lot of superfunds haven’t internalised their administration they are finding this is a road block to providing the flexibility and the technology that customers are now expecting.
Another barrier exists because industry superfunds don’t have a history of technology build jobs, and with the high cost associated with development sole internal build solutions are unlikely. Instead funds are looking to leverage existing relationships, for example with custodians, but are also looking to technology companies.
To this end they are bring expertise inhouse to manage those relationships.
Octigan says that industry expertise hasn’t been brought onto the board, but rather it has entered the next level down with chief investment officers, chief executive and chief operations officers being recruited from accounting firms, asset consultants, and large technology companies.
Another possibility for technological innovation is for funds to share in a spend that will allow them to compete with the banks. This idea was advanced by Peter Lambert, chief executive of Local Government Super, at a recent AIST seminar.
“There is a role for the collective. If we want to white label, the clients of AAS get together and ask half a dozen funds of a similar size, whether they are thinking of the same thing. Funds have to do that, because we do not have the capacity to do those things on our own,” he says.