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Out-sourcing transfer agency services

Is out-sourcing transfer agency services simply a fad of the 1990s or is it here to stay? This question has sparked extensive debate and has elicited many different responses. Whether to out-source transfer agency services introduces many issues. They include: cost, experience, ancillary services, technology, an ever-changing regulatory environment, capacity planning, disaster recovery, staffing, as well as management philosophy and strategy. This article outlines key considerations for each of these issues.

* Start-Up Costs: Start-up costs are a significant factor for both a new fund group developing its transfer agency function and for an existing group considering taking on this function internally. Hiring and training staff, procuring a facility that can accommodate growth as well as securing and maintaining a system that can adequately support the fund group's technical requirements are just a few of the issues that must be confronted. Another consideration is whether an internal operation can attain the economies of scale enjoyed by a larger third-party operation. If savings can not be realized, out-sourcing may be the best choice.

* Experience: Available expertise in both setting up and running a transfer agency operation is a key factor in deciding whether to out-source. Transfer agents continually have to risk financial exposure, meet service level requirements, and address regulatory issues. Errors are costly and not always forgiven. Service turnaround times, lost or stolen securities, TIN certification, IRS and state tax reporting, check and wire fraud, account authorization, and active participation in ICI and NICSA committee projects are just some of the areas where experience counts. If the necessary experience is not available internally, a third party provider may be preferable.

* Ancillary Services: Fund groups generally require, in addition to form supplies and an annual audit, proxy, fulfillment, bank, printing and telemarketing services. Although each of these services can be obtained separately, purchasing them through one provider can be cheaper and produce better quality.

For example, significant annual savings may be realized by out-sourcing to a third-party provider who already contracts for a complete audit of operations. Out-sourcing to a provider who can offer fulfillment services along with transfer agency services affords a double advantage: consolidated sales reporting capability and the benefits of economies of scale. In addition, money movements, ACH, Fed wire activity, and check drafts can be processed inexpensively if the third party transfer agent also provides integrated banking services. Many ancillary services become economical only when they are provided repeatedly.

* Technology: The cost of technology is significant and second only to the cost of staffing. Moreover, the pace of technological development shows no signs of slowing. Core transfer agency services are no longer sufficient. Shareholders now demand immediate access to information and the ability to make adjustments to their accounts instantaneously.

This access can be attained via the Internet or an audio response system. Document imaging is another advanced technology through which information can be made available immediately. Electronic commerce is in its infancy. Technological advances, such as voice recognition systems, are on the horizon. Creating and maintaining the technological infrastructure that shareholders expect is expensive. Year 2000 issues exacerbate the problem.

* Regulatory Compliance: Changes in compliance requirements consume valuable time and resources. Support staff, legal counsel, systems personnel, trainers and procedure writers must all ensure that the changes are properly communicated and adopted. Forms must be revised, prospectuses and marketing material must be rewritten, and shareholder communications must be quickly updated. Today, the financial services industry is confronted with changing rules for IRA/Roth accounts and capital gains, and is faced with the likelihood that Statements of Average Cost and individual shareholder performance reporting will be required by law. The aging of our population, the explosion in Internet usage, and the movement towards consolidation of entire industries -- such as banking, securities, and insurance -- are likely to produce even more regulation. This will produce yet more significant costs.

* Capacity Planning and Disaster Recovery: The cycles of seasonal activity, now compounded by global instability in the securities marketplace, and unanticipated disasters are events which can impede shareholder servicing efforts. Capacity planning may include training existing staff to handle volume fluctuations and unanticipated occurrences, as well as hiring additional staff as needed. However, the current low level of national unemployment is likely to frustrate recruitment efforts. An organization's existing facilities also may not accommodate fluctuating staff needs.

Potential service interruptions also pose a threat to efficient business operations. These interruptions may include crippling snow or rain storms, electrical outages, or disruptions in telephone service. Fires and floods are also possible. Disaster recovery planning is key to surviving both catastrophic events and minor service interruptions.

Such planning should include the lining up of an alternate site. The expense of securing an alternate site and maintaining emergency support systems may be prohibitive.

* Staffing: Hiring, training, and retaining a staff is a challenge for most organizations. Hiring and training are also costly, particularly when conducted on a small scale. For example, the cost to advertise open positions is based on the size of the advertisement, not on the number of people hired. Therefore, ten new employees can be hired for the same cost in advertising as hiring one new employee. Sustaining effective training programs, with experienced instructors and structured courses can also be very expensive.

* Management Philosophy and Strategy: No organization has the luxury of unlimited resources and every organization faces the challenge of determining how to best use its limited resources. For some fund groups, management philosophy dictates that only conducting transfer agency functions in-house offers sufficient control over these services. However, establishing good communication with the third party provider may mitigate control issues. For example, frequent telephone or video conferences with the provider can ensure that any potential problems are resolved quickly and efficiently.

Management philosophy and strategy vary from fund group to fund group. Ultimately, only an individual fund group's management can determine whether out-sourcing is most consistent with the organization's objectives.