Sleeping With The Enemy

The ancient Chinese curse “May you live in interesting times” probably has a disturbingly familiar ring to most CIOs these days. Though the supernatural has nothing to do with it – notwithstanding the technical wizardry that daily transforms their corner of the business world – CIOs have certainly chosen a career path that qualifies as “interesting”, at the bare minimum.

As standard-bearers for technology, service, strategy and change, CIOs must deftly navigate the white water of rapidly changing business conditions. Adding even more zest to their life are the seemingly endless rounds of mergers and acquisitions. And then there’s the business of e-business – transforming virtually every industry. IDC Canada predicts that 18 cents of every IT dollar will be spent on the Internet by 2004, leading to the creation of a large diversity of service provider/channel business models.

One such model is helping create even more “interesting times” for the CIO. Competition has never been fiercer, yet “coopetition” – linking up with competitors to conduct business – is all the rage. And the financial services sector is certainly not immune from this trend, as Mackenzie Financial Corporation’s CIO, Steve Pozgaj, will attest.

Founded in 1967 as a small, private investment advisory with one mutual fund, Mackenzie Financial Corp., headquartered in Toronto, has grown to become a publicly owned, multidimensional financial services company with more than 60 mutual funds and more than $30 billion under administration. Its core business is the management of mutual funds on behalf of investors throughout North America. To achieve this, it operates through a network of financial advisors and independent broker dealers.

Since he joined the firm in 1994, Pozgaj has witnessed its expansion from 400 people to its current complement of approximately 1,400. He’s also watched it outgrow its headquarters building and has provided technology to support the change.

“Our growth has caused all sorts of realignment in the business, in terms of how it structures the process of being a mutual fund company,” he remarks. “This in turn has driven similar kinds of alignment changes within the IT structure to enable us to deliver our function as best we can to the business. That’s why I think that how we align the two parts of organization is a critical consideration.”

Waiting for Godot

Like most components of the financial service sector, the investment industry is experiencing tremendous transformation. Increasingly, the business environment is affected by global influences where firms are serviced by integrated banking, insurance and securities conglomerates that operate across borders. Technology is driving market innovation and facilitating the creation of more sophisticated financial products, trading techniques and strategies. What’s more, competition from alternative trading systems is becoming a catalyst for market restructuring.

Yet unlike banks and brokerages, the mutual fund business segment is still re-defining itself, and its unique business conditions make jumping on the e-business bandwagon in a useful and appropriate manner challenging. Pozgaj remains philosophical on the subject.

“We came to the conclusion that we had to have a Web strategy. That doesn’t mean we have to be on the Web. It means we have to decide whether to be there and not just not be there because we haven’t decided,” he explains. “We perceive ourselves as still too small to take advantage of business-to-business (B2B) e-commerce, and yet we can’t participate in business-to-consumer (B2C) by definition because our business model is a channel model. We sell through financial advisors and independent broker dealers – not directly to the unit-holder customer. It’s the business reality, and because of it we have been quite slow in terms of any kind of significant major-league presence on the Web.”

Understanding Who the Customer Is

Successful businesses on the Web tend to fall squarely into one of two camps: high-volume, high-demand B2C e-commerce, or B2B – including electronic bazaars and marketplaces. Pozgaj says that he’s explored the B2B route, (e.g. the possibility of electronically purchasing company supplies) but because of low volumes, the savings just don’t appear to be there.

At the same time, the company has determined that although it has a significant obligation to ensure that its funds perform well for the unit holder, its customers are also the independent broker dealers and financial advisors who work on behalf of the unit-holders.

“We stepped back and decided if we’re really in this with the financial advisors, we should see how we can best assist their business,” he remarks.

Today’s investors are more sophisticated and knowledgeable than ever before. They actively seek information and education about their investments. And as the emphasis shifts from trade execution to asset management and financial planning, regulators are establishing tighter standards to ensure the appropriate training and conduct of investment advisors and other registrants. Meeting these standards and undertaking the training and education of investment advisors have fallen squarely on the shoulders of investment dealers. This is no easy feat considering the myriad of available mutual fund product offerings.

“The one thing we did understand in terms of supporting the channel is that education is a big factor,” Pozgaj notes.

To that end, an important component of Mackenzie Financial’s Web site is the award-winning Mackenzie University, a Web-based, password-protected compendium of material designed to be used by financial advisors. It features everything from articles by leading-edge Canadian and worldwide authorities on topics such as taxation, off-shore investing, and financial-plan building, to news stories and event listings.

It’s a useful and important information resource but Pozgaj points out that it’s still not directly affecting how dealers and financial advisors transact business or manage their clients. One of the key holdups is the fact that in creating financial plans for their clients, independent financial advisors select freely from a broad spectrum of mutual fund products. If each of the investment companies selling these products created a proprietary Web site independently, dealers and financial advisors would be inundated with additional work. There’s also concern that using the Web to provide unit holders with the opportunity to directly manipulate their mutual fund holdings would ultimately lead to them bypassing their financial advisors – a form of channel conflict. Pozgaj has definite opinions on the subject.

Channel conflict or channel choice?

“We’re struggling – and I think the industry as a whole is struggling – with the issue of channel conflict,” he notes. ” I heard this at a seminar and I believe it: channel conflict is a state of mind. The Web is really about consumer choice.”

He notes, by way of example, that although banks were originally concerned that ATMs would create channel conflict because they cut into branch business, what they really provided was additional channel choice for customers.

“So what’s to say that if we were to offer consumers of mutual funds simple account access – the ability to look at the status of their accounts over the Web and to switch funds because their advisors suggested it or because the funds haven’t been performing well – that we would be engaged in channel conflict? These functions are not a value-add function of the advisor.”

Pozgaj points out that because of the enormous and varied spectrum of available mutual fund products, consumers rely more than ever on their financial advisors’ experience to prepare financial plans and determine appropriate investment funds for them.

“One might well argue that what we would be offering the consumer is channel choice. Our inability to resolve this issue has really held us back from offering the kind of killer Web site that we’d want to have,” he concludes.

Joining forces

As an alternative, Mackenzie Financial, acknowledging the tremendous value-add provided by financial advisors to unit-holder customers, has determined that serving the needs of financial advisors is paramount to providing best value to unit-holder clients. To that end it joined forces through FundSERV ( see sidebar below) with three of its fiercest competitors – Trimark (now AIM Funds Management Inc.), AGF, and Fidelity – to jointly devise FUNDportal. This on-line service provides financial advisors – through the dealers, who are critically involved with them for compliance and properly vetting the financial advisors’ activities – with a common interface point for their entire book of reference.

Pozgaj says that although the application does not offer any type of consolidation, the system still provides a quantum leap forward because with a simple click of the mouse, financial advisors can access one screen for each of the mutual fund companies with whom they conduct business. “We’ve cut down the workload of financial advisors dramatically with this,” he points out. “At the same time, we’ve increased the service to dealers because we can now provide them with data about account reconciliations and other functionality that can still be developed, like enhanced EFT facilities for bulk payments.”

Because independent financial advisors need the ability to access all fund companies in a common manner, the founding four mutual fund companies that developed the working model for the system are anxious to open it up for the participation of other fund companies. For Mackenzie Financial or any other mutual fund company to participate in FUNDportal, all that is required technologically is to be able to link the firm’s back-office systems with FundSERV’s common front-end interface.

Pozgaj says that the roots of this initiative started four years ago when he and Brian Deegan, then CIO of Trimark (now with AIM), discussed the possibility of this kind of collaborative effort. It took a while for the idea to work its way to the higher ranks where it received the necessary executive approval and propulsion.

The first phase of the initiative, FUNDcom ( see sidebar) has already been launched. Pozgaj says that the FUNDportal effort is designed to eventually provide financial advisors not only with transaction capability but potentially also a wealth of informational material about funds and industry.

Clearly this is a collaboration whose time has come. Defined in September 1999, the initiative moved swiftly to a demo for participating fund company presidents by April 2000. A demo for dealers quickly followed, and by September the project team received resounding approval from the five dealers involved with the pilot to advance the initiative.

“There’s a simple but very elegant model that PricewaterhouseCoopers uses to communicate how a business evolves in e-space,” Pozgaj explains. “It starts with a brochure-ware informational stick-in-the-sand presence and then evolves into the integration of business partners like suppliers and customers doing business together.

“The third phase of the evolution is one of industry transformation. It’s this step that I think the leading-edge companies are already starting to target by asking the question, ‘How do we change this industry model to make it work better?’ I see these kinds of initiatives as the answer to that question.”

Pozgaj says that his company has already passed through most of the traditional exercises in business evolution, such as squeezing excess costs out of the business. “Mackenzie has been a leader in dropping its management expense ratios over the past four years in a consistent year-over-year basis. We’ve pulled a lot of costs out of the system; I think the issue now is to really try to make the whole business model more effective as we strive to compete in a world where, increasingly, we’re seeing different elements enter the financial-services offering picture,” he stresses.

Ironically, the CIO began this exploration commenting on the importance of ensuring that the IT delivery function aligns with the business of the corporation and ended up commenting on the need for a transformed business model for the industry. It’s not surprising or contradictory in the least. In these interesting and complex times, deep-thinking CIOs may need to move sideways and reinvent the industry to propel their own organizations ahead.

About FundSERV and FUNDcom

Established in 1992, FundSERV is a Toronto-based communications firm that oversees transactions between more than 180 brokers and 12 major fund companies across Canada. With more than 650 members and 3,000 funds on-line, it is the leading network services provider to this country’s investment fund industry.

Cooperatively owned and operated by both fund manufacturers and distributors, its goals are to:

• provide the foundation for a fully automated investment-fund environment;

• help members to maximize the benefits of their investment in technology;

• promote efficiencies at every stage of the administrative process;

• reduce members’ dependence on temporary staff to handle seasonal increases in order volume; and,

• support and assist in the development of industry standards to realize these goals.

Over the years, FundSERV has lead the development of one of the world’s most efficient investment-fund transaction-processing systems.

FUNDcom is a new service that provides a common Web-based inquiry system across multiple fund manufacturers. It is expected to eventually replace the current single-manufacturer inquiry process, with its attendant user name, password and navigation complexity. Using the system, a single sign-on will enable inquiries against all participating fund manufacturers using standardized screens and returning standardized responses.

FUNDcom is a three-way joint venture: FundSERV provides the infrastructure investment, companies deliver the content, and dealers manage the access.

The first phase of the FUNDcom application development provides secure on-line access to client holdings and related information and the last 18 months’ transaction data. To avoid compromising the integrity of distributors’ back-office records and compliance obligations, only account inquiry information is available. The service does not permit order entry or file transfer over the Internet.

FUNDcom is the first productivity enhancement to be built on FundSERV’s new IDentity security platform, the umbrella under which the core technologies necessary for secure electronic information exchange are delivered.

Pat Atkinson is a freelance writer specializing in information technology management. She is based in Oakville, Ont.

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