James [00:00:02] Hello and welcome to this edition of our State of the Street series, where we discuss the power of investment servicing operations to help the world's investment institutions unlock growth and value. Today, we're talking about the role of transfer agency in cross border fund distribution. I'm James Redgrave, Vice President of Global Thought Leadership and Editorial at State Street. And I'm joined by Joern Tobias, Global Head of Investor Services Product Management at State Street. Joern, thank you for joining me.
Joern [00:00:27] Thank you for having me.
James [00:00:28] So how are asset managers and other cross border investment institutions distribution strategies evolving? For example, how are they evolving into new markets and regions and what's the role of the transfer agent in this?
Joern [00:00:40] Yes, thank you, cross border investment institutions have constantly focused on adapting their distribution strategies that is an ongoing and has been an ongoing process, driver side, global economic situation, investor demand and behaviors, product evolution, diversification and changes within the regulatory landscape. So State Street Transfer Agency supports its clients towards such objective, leveraging several aspects of our services. Number one: global positioning, so State Street has established a mature follow-the-sun model across regions, which has existed for more than 15 years. So we have plenty of experience with several offices in APACF and North America also supporting the LATAM markets. Number two: required expertise, the combination of cross border product expertise, combined with local teams on the ground providing the local savoir faire, addressing crucial elements like appropriate language coverage and the understanding of local practices and cultures. Equally important is to continuously update this model by understanding developments on the ground in these markets. Next: single and common technology, the technology framework, which provides a common and consistent infrastructure and workflow management across regions, allowing for the local service unit to access the same information real time and therefore able to provide superior investor service experience. Next: distributor support, distributors require an effective, seamless and intuitive operating model, offering a wide range of platform connectivity options, fully integrated with infrastructure, allowing for the highest degree of STP transactions. For example, certain markets retain a strong historical fax practices while other markets are in the process of banning faxes completely. This is where a proposition like our digital portal can offer an alternative solution to address both challenges. And finally, time to market, our clients also need to onboard new distributors within short time frames and demand smooth onboarding experiences. And this is where we are well established with our operating model to address these needs.
James [00:03:09] Thanks, Joern, that's a good introduction, so talk a little bit about regulation. So the TA business is a heavily regulated one, especially with regard to AML and KYC requirements. So what should institutional investors be demanding of their TAs in this area?
Joern [00:03:23] So by definition regulation has always been the core element impacting transfer agency from the outset. Within the global custodian business transfer agency is an interaction point for investors and distributors on behalf of their clients. Therefore, the human interaction and expertise of individuals is the key to a superior service experience. For this reason, institutional investors require expertise and AML / KYC, effective responsiveness, strong partnerships, and the ability to complete an investor onboarding effectively. Scale and depth of expertise are also essential in addressing the demands of clients and the distributor community in a constantly changing regulatory environment. That's why globally, State Street has created a unified team of more than 1,000 professionals solely dedicated to transfer agency for the cross-border markets. Another important consideration is that it's key to an effective strategy that the expertise is not only sitting within TA operation units, but being complemented by specialists within the TA support and control functions, and that there are experts in compliance, risk management and change management that are solely dedicated to TA. In addition, the expertise must be available in distribution support satellites in the various regions outside of Europe. It is important that local teams can articulate the particularities of the Irish and Luxembourg's regulatory framework to local players. Finally, regulation and compliance is a highly specialized area, which means that workforce training and education are also essential. State Street has also developed a strong TA curriculum and dedicated training academy over many years. The goal is to maintain and strengthen deep level of expertise across the entire TA professional footprint and ensure constant alignment to the most up to date regulatory framework. Our dedicated to compliance team will ensure that any regulatory changes are understood and effectively embedded in our business practices. All these measures should address the ever-evolving regulatory landscape.
James [00:05:46] Moving on now to the fee pressure that the industry is facing at the moment, how does that affect institutions' cross border models, and what will the impact be on the market for transfer agents particularly?
Joern [00:05:56] Yes, I think in general, it's fair to state that fee pressure is impacting all players of the industry at all different ends of the value chain. So it does impact State Street, our clients and their clients. The industry has been driven by customization in the past, but in order to be successful today, this is no longer the norm. The new imperative is to standardize, simplify, rationalize where possible, and our ultimate goal is to provide solutions that are flexible but within standards to our clients. As a result, complexity will only have the right to exist, where it adds ultimate value to the outcome and is the real differentiator. In this context, this means the ability to provide a digital experience with self-service capabilities, offering real-time access to information. This will lead to a leaner operating model combined with lower costs, but at the same time give a state of the art user experience. We believe in addition, this will enable faster decision making across the whole value chain for all stakeholders. Finally, it's important that we, as a provider of bundled services, help our customers to concentrate on their core strength while we deal with the rest. State Street as a trusted partner is helping its clients to achieve this goal by becoming an extension of our clients' businesses.
James [00:07:25] And how will the democratization of alternative vehicles, for example, ELTIF, change the distribution strategies of your clients and what will TAs have to do to adapt to these changes?
Joern [00:07:34] So in general, UCITS has been a great success for Investment fund Industry for more than 20 years. Luxembourg and Ireland have significantly benefited from it and have become market leader in the Cross Border Fund Distribution. Alternative vehicles were targeted to specific audiences and markets but now, clearly it's changing. We are seeing the emergence of new regulation allowing for products like ELTIFs to be accessible by a more retail client base. As the old distinctions become more blurry, service providers with multi-asset businesses need to combine their expertise in servicing alternatives with the scale and breadth of their traditional mutual fund TA service. Asset Managers now need the ability to benefit from the existing mutual fund distribution support model with all the embedded connectivity into the distribution universe for their semi-liquid fund product portfolio at the same time, and providers like us need to be able to leverage existing capabilities. Despite our ability to cater for complexity in the semi-liquid fund product space, asset managers also always need to keep in mind the capabilities of their distributors to handle this on their end. Therefore, product design needs to consider the complete value chain of distribution and not only focus on the transfer agent, capital and portfolio management needs. We believe that the democratization of alternative fund types could modify investor behavior and open up new distribution opportunities, finally leading to a convergence of alternative and traditional fund businesses.
James [00:09:19] That's very interesting, I'd like to finish now by talking a little bit about sort of emerging technologies and their role in the future of TA. So how do you anticipate Digital Assets, Distributed Ledger Technology, Tokenization and similar innovations will transform the cross border fund distribution landscape? And what specific opportunities and challenges do these technologies present to clients and their TAs?
Joern [00:09:39] So clearly, at State Street, we consider blockchain technology and the digital asset ecosystem as a potential catalyst for transformational change to our industry. But we acknowledge that at the same time, the traditional TA business will continue to exist for an undetermined period. Any infrastructure will need to support both businesses in parallel, allowing for a consistent look and feel at common interfaces to the investor, the distributor and the investment manager. Furthermore, digitalization will change the interaction with investors and will provide investment managers the opportunity to directly engage by bypassing distributors, and hence we see the emergence of more B2C models in the future. Tokenization will also allow for the democratization of investment vehicles, blurring the lines between alternative private fund types and liquid fund types, and providing semi-institutional and retail investors access to hybrids on one single platform to ensure consistent (digital) user experience. Due to the generic nature of DLT enabled infrastructures, we also anticipate horizontal and vertical integration to ensure a seamless investor and distributor experience, as tokenization will not stop at the fund legal entity level. Finally, all fund flow data points need to be consistently captured on a normalized data basis across digitally and traditionally distributed funds to allow for insightful distribution support analytics. All these challenges are out there, but still, there's a high probability that DLT, tokenization and blockchain will have a fundamental impact on our industry.
James [00:11:39] Thank you very much. This has been a really interesting conversation. Thank you for joining me.
Joern [00:11:43] Thank you for having me.
James [00:11:45] And thanks for listening, so listen to this and other editions of State of the Street by visiting us at statestreet.com.
