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Mutual fund trading tool that meets with DoL demands

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Financial advisors are embracing an array of new tools from asset managers that provide quick, efficient solutions for the back office.

Such tools can help advisors gain more control through using single platforms to complete multiple tasks. Additionally, planners working with retirement accounts may find these tools helpful from a compliance standpoint, particularly given the requirements of the Department of Labor's fiduciary rule.

One such innovation, FundKeeper, consolidates mutual fund trading and is being exclusively provided by U.S. Bancorp and tech firm Envision Financial Systems. Advisors using FundKeeper can, through the single platform, open new accounts, perform automated suitability checks, support level load funds and streamline how advisors communicate about all the mutual fund investments under their purview.

Given the DoL ruling, the release could not come at a better time, said Kelly Lynch, senior vice president for Envision, noting the platform was already in development as the rules were being debated.

"Firms definitely have looked at it as helpful, both on the front end, from the compliance and control perspective, and then the back end to know what they have," Lynch said. "The DoL rule definitely brought it some more attention."

For instance, FundKeeper enables non-self-clearing broker-dealers to process clean shares and commissions, the firms explain. Currently, these broker-dealers rely on the ability to "hand off" money to the fund company - that's not possible with clean shares.

Lynch and Ian Martin, executive vice president at U.S. Bancorp Fund Services, discussed with Money Management Executive how FundKeeper was developed and why fund services will continue to craft ways to help automate tasks for advisors.

An excerpt follows:

Where did the need behind the development of this application come from?
Lynch: In the mutual fund space today, broker-dealers do some mutual fund business with what we call direct to the fund, where they write out a check and fill out an application and send it off to the fund. And there are various reasons that reps like to do that: Maybe this account just doesn't quite fit in brokerage environment, they don't need the other things the brokerage offers, the account size is such that they are not going to be buying individual equities or fixed-income instruments, they aren't going to be doing margin, et cetera.

So the rep will just ship the account off to the fund. And firms are today becoming less comfortable with that, both on the front end, because paper is time-consuming to process and control, and then on the back end it's challenging for the firm to know exactly what they have. Maybe they're getting a variety of data feeds in or not, and the data feeds kind of look different from one fund family to the next, so it's challenging.

That current model means that the rep, the firm and the investor have many points of connection to the many fund families. Investors, if they're in two fund families, get two statements, and reps have to go multiple places to make changes to accounts, the firm has to collect all those different files. So it looks sort of like spaghetti between the firm, the rep, the investor and then the funds.

And what FundKeeper does, is we insert ourselves in the middle of that, between the firm rep investor and then on the other side the fund, and we're a single place where firms, reps and investors can go to access all the funds and they all look similar. I can look them all up on one website, I get one statement, I get one set of tax reports, if I need to change my address I do it one place and it changes me at American Funds and Franklin.

What was the input that went into the overall development of this application?
Martin: Both organizations have been in the mutual fund business, and I think it's important to note that we really identified a significant opportunity to expand into an area that historically hasn't had a lot of technology around it. So these direct at fund positions, we think there's over 10 million, potentially, of these types of positions. And the DoL rule, when you think about the broker-dealers' back offices, how do they really have control over what the registered investment advisors are selling?

We think that was an area that we could improve. And then just the overall registered investment advisor experience as well as the end client, let's get all of this together, and we use the slang better than brokerage experience here for mutual funds.

Was this prodded along by the fiduciary rule or was this developed after the rule was passed?
Martin: The development started prior to the rule going into place. Obviously now that we've launched our first client, it's a bit that certainly helped; it was good timing. And we really piggybacked off their already existing core shareholder accounting system and focused on the technology side, not just with improving the platform.

A key focus of Envision is also the ability to integrate with the broker-dealer, and that's key. Some clients may want the turnkey, but others that we see really want that ability to integrate into their core systems, whether it's compliance systems or front end systems that they're using for the registered investment advisor and client experience. So the technology was, I'd say it wasn't in place but it was improved upon based on existing core technology. And then from a servicing perspective, we've been servicing mutual funds since 1969. So it just felt like that was a great area to focus on.

Is this an attempt to take up the disrupter mantle that so many young fintech companies waive?
Lynch: I think a needed antidote is a good way. These are largely paper-based processes today, and this takes it out of that paper environment. And it is an option that firms didn't have before. And so back to your point about DoL, then the Fiduciary Rule, this was in development prior to that.

The average fund posted a 12.6% annual gain compared to 7.6% for the S&P 500.
November 1

Firms definitely have looked at it as helpful, both on the front end, from the compliance and control perspective, and then the back end to know what they have. The DoL definitely brought it some more attention. And prior to FundKeeper, if a firm said, listen, we can't do this direct fund business anymore, they really had two options, or really a single option. They had to tell reps, you've got to put this all through brokers. And this gives them an automated alternative to that, which they didn't have before.

How do you envision the typical RIA practice taking advantage of this in terms savings on time and cost?
Lynch: I think we could perhaps give some examples, I don't know that I could put exact dollar metrics on them, because those could vary firm to firm and based on what other technology they have in place, but I'll give you two examples.

One example is an IT savings broker-dealer that we spoke with, and today daily they have 185 different files that come into their firm to try and aggregate what business they have. Now that's across other products, but let's ballpark that, a third of that at least a third of that is fees having to do with their mutual funds. And their IT people are having to make sure they get all the feeds, there's data normalization activities. Those don't always work and so the operations people are having to chase around different data anomalies and things. So there is both an IT and an operations savings with that example.

And then I'll give you another example, which is, as a rep leaves a firm, a broker-dealer that we talked to had more than one FTE whose entire job was to go and change rep codes at mutual fund families, one by one by one, because if a rep leaves they might have had business at 10, 12, 14 different fund families. And so there's that savings. But any sort of change like that happens in one place rather than multiple places.

How many firms are signed up now, and what are your growth expectations?
Lynch: As Ian described, the first firm went live a few months ago and we are in active conversations with a number of broker-dealers interested in the platform.

Martin: And we may want to point out that that firm is a conglomerate. We actually look at the number of unique entities that are part of that, and it is over 200.

Is there any advice to this offering in terms of the actual selection of funds?
Lynch: So a couple of things to say about that. So there is not today but there absolutely could be, either with FundKeeper bringing an RIA to the table or with our firm client being able to tell us what funds to make available in what way based on their own research and due diligence.

And then once the broker-dealer has their fund lineup, if they wanted to construct models or wanted us to construct models, the software today does support having model portfolios and doing a rebalance and having an advisory fee, etc.

Can this application serve as a strategy that increases distribution to wither broker-dealers or RIAs?
Lynch: For a client, yes. FundKeeper doesn't have any proprietary product that we're looking to distribute, but our broker-dealer or RIA clients absolutely could use it in that fashion.

Martin: The value-add is that, oftentimes, the situation that the broker-dealer back offices have is they're reacting after the fact. Those investment advisors already sent the application for the trade-in to the fund and then they're reacting after the fact. So by having everything on a system, you can set the parameters, but you can also set it up to review trades prior to execution, should you choose. So it really is a significant improvement for these back offices on the compliance side.

How does this application play with existing systems in brokerages or with RIAs?
Lynch: Envision as the technology, our history in the shareholder record-keeping space, has been that we have really excelled where the needs were very unique and needed customization and integration that, say, some of the other systems that are more retail-focused weren't going to do. So we are very big on integration and have a variety of ways to do that.

So, for example, we have integrated with an existing broker-dealers' front end new account process so that a rep completes a new account, and if it's a FundKeeper account, we get that account via API in an automated way. On the back end, we provide files or APIs that can bring the positions and transaction information into systems that the broker-dealer might have, like their commission system or a client CRM or those sorts of things. We're big on APIs, we exchange images electronically to integrate with image systems at the broker-dealer, and part of our process is to go in and talk to the broker-dealer about what do you do today with new accounts, how do you do transactions, what are you doing for statements, how about suitability? And we say, here's how FundKeeper works today.

We complete with them here's how FundKeeper is going to work for you, which would be any of those integrations and customizations. So we're big on that. We're also happy to do smaller broker-dealers that don't have that sort of existing infrastructure. Our solution will work out of the box with some integration things like the transaction and position filer, those are needed by everything. So those are easy to do. Anybody can use those, but you don't have to have a lot of internal infrastructure to leverage FundKeeper.

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