As digitalisation continues apace, why is the investor experience in buying open-ended funds still poor?
by Andy Davis
One of the secrets of success for investors, we are told, is patience. That goes twice for anyone who chooses to put their money into open-ended funds, since pretty much everything about the experience will unfold in slow motion.
When I buy or sell open-ended funds (via Undertakings for the Collective Investment in Transferable Securities, otherwise known as UCITS) for my individual savings account or self-invested personal pension, I typically have to wait a day or more to find out the exact price at which my units were dealt and therefore how much the purchase has cost me, or the sale has realised. Sometimes it can take much longer. Imagine going to any other kind of online store and being told that you can pay now, but you won’t find out the price until next Tuesday.
Outdated technologyWhy does it have to be this way? The answer will be familiar to users of virtually all online financial services. The back-end technology that fund managers and administrators use is old and inefficient. In fact, quite a lot of the time, mission-critical, everyday operations like recording purchases and sales of fund units involve keying data into Excel spreadsheets and emailing them to the other organisations that need the information.
As an investor, I can access live, real-time prices for all the individual shares that make up a fund in seconds. But the fund will publish the price of its units only once a day, hence the long wait to find out what price I have paid to invest.
As well as using execution-only online brokers, I also invest via the Moneybox app on my phone (disclosure: I own shares in Moneybox itself as well as being a customer). Moneybox is a fintech company that enables users to invest “little and often” via automated roundups on debit and credit card purchases.
"The funds sector also has archaic technology that requires a lot of manual faffing and workarounds"The spare change is pooled and once a week automatically swept into one of a small range of fund portfolios that Moneybox offers. It’s a clever way to get people started in investing, which is why I bought their shares. But the slick front-end technology, which can collect spare change from my bank account using the automated payments that open banking makes possible, stands in stark contrast to the slow back-end execution and reporting of the investments themselves. If the purchase and settlement element could be as automated as the payments that fund them, the process would be a lot quicker and the cost per transaction would fall significantly.
Micro-investing in something much closer to real time would become economically viable. We live in an era when digital services are becoming faster and more transparent, even financial ones. Look at the high street banks. Once, it took a day or more for money I spent to be deducted from the balance shown in my mobile banking app. Then the app started telling me my balance, as well as how much I had in pending payments that had not yet cleared.
Now, it shows me the balance available after all pending payments have been accounted for – at last, a real-time bank balance. It took the big banks years to get to this point because their legacy technology made it extremely hard to do and they had to invest huge amounts in new tech to make it happen. But they did so because a group of new digital-only banks built on modern technology started providing real-time balances as standard. Thebig banks had no choice but to respond because the market was changing, and they looked out of touch.
What next for the funds sector?The funds sector also has archaic technology that requires a lot of manual faffing and workarounds. But unlike the banks, its ‘value chain’ is fragmented, with asset managers investing the money, transfer agents maintaining the register of investors, custodians ensuring the safekeeping of the underlying assets, and so on. This means that there are lots of organisations with different IT systems that cannot talk to each other properly. The process will only be as good as its weakest link.
Might change be on the way? Margins in the notoriously profitable funds sector are under long-term pressure, making it harder to bear the costs of running old and inefficient systems. But regulation is getting tougher too. For example, the EU’s Packaged Retail and Insurance-based Investment Products regulation is being updated in 2021 and will replace the existing Key Investor Information Documents that UCITS providers must publish for retail investors. The changes will involve a lot more data processing and analysis than the old regime, further increasing pressure on creaking IT systems.
Perhaps at long last a combination of shrinking margins, increasing demands from regulators and changing customer expectations will tip the balance and force the funds sector to invest in better technology that will deliver a faster, cheaper experience. I hope so, but I fear that like the process of buying into a fund, change will be slower than I and other investors would like.
This article was originally published in the June 2021 edition of The Review.
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