By: Mike Huisman, Director of Transfer Agency at UMB Fund Services
In my role leading UMB’s transfer agency, alternatives sponsors call me and say, “Here’s an NDA; let’s talk pricing for this product we’re bringing out.” One reason servicing cost is on their mind is they recognize product sizes are different from years ago, and they aren’t sure what to expect.
Most new products today are far smaller than they were 10 years ago. It used to be common for products to launch with 50,000 investors—and sometimes many more. The transfer agency’s investor servicing business model is built around volume, and many sponsors are aware of that. They understand the economies of scale aren’t the same for a product with 50,000 investors and one with just 10 investors.
Small investor numbers are especially common in the real estate space. Private-placement 1031 exchange products are a good example. Tax rules require that the investors in these products—who have just sold real estate and want to reinvest the proceeds—need to do so within 45 days of their own sale. Sponsors work hard to gather together groups of people in similar situations, including similar timelines. But that’s necessarily going to be a small group of people. For the sponsor, the business focus is to launch one product and move quickly onto the next. The next one may be very similar, but legally it’s a different instrument, with a different investor base.
Let’s take a hypothetical manager who has called me to talk about a real estate product. The trend these days is toward smaller products—but likely it’s also part of a larger strategic plan for the sponsor—either products already in existence or planned or both.
That strategic plan is important when I talk with the manager about pricing, since the cost of transfer agency services depends on volumes.
That’s where bundling comes in. We are sometimes able to apply a stairstep-type pricing structure, in which the sponsor pays $X per investor in the initial product but then a lesser amount of $Y per investor as the volume grows in related products. There may also be a lower $Z level as well.
That structure can be a mutual fit, as closing multiple similar products is fundamental to the manager’s business model. And on our side, the structure brings some sensitivity to the fact supporting a whole system of investor services—call centers, transaction processing, commission payments, investor notifications and more—depends on achieving economies of scale.
Sponsors may recall in past years TA contracts in which discounts were available when higher-efficiency practices were employed. For example, servicing contracts may have been designed to provide discounts when higher-efficiency practices were employed by a sponsor, such as digital account onboarding. Today, pricing anticipates that all parties will adopt processes to maximize efficiencies. And if not, more manual processes could be introduced at an extra fee.
Digital onboarding, which benefits both sponsors and the TA, must be a standard operating procedure. The good news is that has gotten easier, thanks to a variety of new platforms on the market and, on the sponsor side, an investor base that is much more comfortable and familiar with digital account-opening processes.
Other technology that benefits economies of scale—and therefore a transaction processor’s ability to price competitively—includes optical character recognition (OCR) and robotic process automation (RPA). UMB has made significant investments in both these areas to speed up onboarding, freeing our staff members to focus on reviewing exceptions rather than data entry and manual processing.
The bottom line is, as in so many other areas of business, digitalization is making a huge difference. It’s making it possible for us to price transfer agency services in innovative ways, because everyone is on board with maximizing efficiency. So, while the per-investor pricing for a small product is necessarily higher than with a large product, you don’t have to worry so much about sticker shock.
UMB is a national leader in fund administration services for both registered and alternative investments. We offer innovative solutions for servicing your mutual fund, alternative fund, collective fund, registered closed-end fund, exchange-traded fund and more. Our broad array of award-winning fund services includes accounting, administration, tax, investor services, transfer agency, custody, distribution and more. Clients benefit from our stability and our great client service, provided domestically.
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