Blockchain, artificial intelligence, robotics, automated data entry and data mining are some of the big technological trends set to radically disrupt the way the back-office teams of superannuation funds and their service providers do their jobs in the not-too-distant future.
The onslaught of change confronting investment operations teams is not limited to technology, though. The shift in assets to the deaccumulation phase, mergers, growth in funds under management and unrelenting regulatory changes are forcing industry players to make serious decisions about what to prioritise.
Investment operations refers to all the cogs of the financial services machinery, and covers areas such as the implementation of investment transactions, performance reporting, analytics, fund administration, custodial services and operational due diligence.
At the 20th Conexus Financial Investment Operations Conference, in February, two pioneers of the industry were recognised with a Lifetime Achievement Award. The recipients were Sunsuper chief investment operations officer Lounarda David and NAB Asset Servicing associate director, client relationships, Ravnol ‘Rav’ Gray.
David and Gray spoke to Investment Magazine about the changes they’ve witnessed in the investment operations industry over the first 25 years of compulsory super and shared their predictions for the decades ahead.
Given their track records it would be wise to listen. Both got their start in superannuation investment operations, then a cottage industry, prior to the establishment of the Australian Prudential Regulation Authority (APRA), at a time before smartphones, when most back-office functions were done on paper.
In 1995, the year APRA was established, the total superannuation pool was worth less than $231 billion. Today, the sector is worth roughly 10 times that, regulation is multifold, and funds are under pressure to provide sophisticated digital and mobile services to their members.
Looking ahead, both David and Gray predict the coming 20 years will bring even more change than the previous two decades. “Dealing with regulatory change, while dealing with fund growth, whilst dealing with volatility and technology transformation, and supporting fund members by trying to get fund products to them faster and better to support them in retirement – it is beyond juggling,” David says.
Ongoing technological innovation
The phenomenal growth of the super sector to $2.1 trillion means investment operations teams need to be more proactive and innovative on the back end, so the front office can deliver.
A major component of this is managing greater volumes and varieties of data, at faster velocities.
Growing investment teams need different support from the back office, particularly in relation to data, and the ability to cut and splice it into new, informative formats.
“That means the custodians and administrators need to [have] their systems in real time, so they can cater for all the needs of the analysts,” Gray explains.
Reports from Deloitte and McKinsey & Company predict that automation using artificial intelligence – also known as intelligent automation – might be the next big game changer in terms of process efficiency. Gray sees some potential.
“Clients do appreciate us moving to automation as much as possible…because as soon as you do have human touch you are open to the risk of error,” Gray says.
“But there will always be a level of manual intervention.”
With rationalisation occurring across the industry from the automation, Gray predicts that in 10 years there will be fewer custodians, partly as a result of mergers between providers and players dropping out of the market.
The winners in this consolidation will probably be those custodians that can also assist super funds in meeting another major challenge – retaining members as they transition to the deaccumulation phase.
“How custodians and other providers can assist [as members transition to retirement] will be the biggest thing we need to look at in the next 5 to 10 years,” Gray forecasts.
To provide this assistance, industry players are increasingly relying on and delving into the electronic wizardry of developments such as Blockchain’s distributed ledger technology.
However, it is hard to predict what this will eventually mean.
“It’s a real dark area for a lot of super funds and their back office, because we are not sure how that will affect us,” Gray says.
David agrees that emerging technology will change the way the industry thinks about investment operations models.
The Australian Securities Exchange has flagged it is considering the use of Blockchain as it updates equities settlement and clearing system CHESS. It would be a world-first to embed Blockchain in a critical piece of market infrastructure.
“The phenomenal increase in data flexibility that would come as a result of the ASX using Blockchain technology would transform how super funds think about data, how they store it and how they use it,” David says.
Coinciding with technological evolution is the unrelenting pace of regulatory change.
Funds are readying for the raft of changes to super tax rules effective July 1, 2017, and the implementation of new fee and costs disclosures ushered in by RG 97 from September 1, 2017.
Gray says the changing regulatory environment will continue to exert massive pressure on industry players into the foreseeable future.
“Every year, regulation seems to double and double,” Gray says. “A couple of years ago, it was only APRA but now we are having the Australian Securities and Investments Commission and the Australian Bureau of Statistics asking for information. It seems to be snowballing.”
The sources of regulatory pressure are not confined to Australia; increasingly, regulations from other parts of the world are being imposed on super funds, as their investment reach crosses overseas.
“It is very difficult, particularly when you go through different time zones,” David says.
“The terminology changes [and words] don’t necessarily mean the same thing.”
Luckily for David and Gray, both enjoy a challenge.
“There’s a lot going on in this industry, which is why I like what I’ve done for the past 30 years,” Gray says. “You come in each day and you don’t know what you’re going to be hit with; there are so many changes that just keep you on your toes daily.”