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Transfer Agency Outsourcing Gives Boost

Some fund companies are turning to outsourcing their transfer agent service, saying doing so is more economical than doing it in house.

American Century of Kansas City, Mo. announced Nov.15 that it had out-sourced its transfer agency services to DST, also of Kansas City. DST is one of the major providers of transfer agent services in the country.

American Century had been using a proprietary system and had reached a point when it had to choose between upgrading its systems or going to a firm that specializes in maintaining the systems, said Chris Doyle, a spokesperson for American Century. It chose to outsource and it moved 2.5 million shareholder accounts to DST systems.

American Century had built its system from scratch, according to Doyle. He declined to disclose the original investment, the cost of maintaining it and the savings in outsourcing.

"We felt, however, that now is the time for us to go to a different platform rather than try to maintain the old platform." The conversion was "transparent" from the standpoint of shareholders, Doyle said.

Another reason for the change is that American Century has a strategic business partnership with J.P. Morgan, said Doyle. J.P. Morgan owns a 45 percent equity stake in American Century, which also uses the DST system.

"This [move] is about focus and flexibility," he said. It will allow American Century to focus on its core investment management business and gives it flexibility.

"DST is always upgrading its systems, be it different type share-classes or what have you," he said. "So it gives us the potential to do a lot of different things." The company would have made the move earlier but waited to be sure that technological problems associated with Y2K were resolved, Doyle said.

It is not primarily a question of monetary savings, said July Bartels Smith of American Century.

"In the short-term it's not so much immediate cost savings as it is avoiding costs for adding these customer services. If we had to add a new service on our proprietary system, it would cost us, whereas DST may already have that service."

Other companies, meanwhile, are venturing into the transfer agent services business. Quantitative Advisors of Lincoln, Mass. recently announced that FundResource, Quantitative Advisors' subsidiary, is negotiating with eight to ten fund companies to provide transfer agency services. Quantitative Advisors has done its own transfer agency for fifteen years but for the first time is venturing into providing the service to other companies.

Quantitative Advisors is a small complex with under $300 million in assets, said Heather Dondis, marketing director of the company. A lot of the assets had been captive assets, from clients of the broker/dealer, she said. About a year ago, the firm created a distribution and marketing team to raise the visibility of the funds, she said. The team's focus was to investigate how technology could better serve shareholders and brokers.

When a company has less than $1 billion in assets, it can not use all of the products and services offered by the large transfer agency firms so it is too expensive, said Dondis.

"Smaller mutual funds pay disproportionately high fees, [to existing transfer agents, for transfer agency services] sometimes fifty basis points, because of fee minimums," said Fred Marius, president of Quantitative Advisors. Quantitative Advisors will aim at small companies (defined as those with under $1 billion in assets) and will assess a flat, all-inclusive fee based on a percentage of assets and on the complex's size, the way it sells, and various other criteria.

Quantitative Advisors has just begun offering other companies transfer agency services in response to requests from other companies, said Dondis.