High not-in-good-order rates on client applications continue to frustrate advisors, and in extreme cases, cause them to lose business. It's understandable, given that the processing of a multi-million-dollar ticket is too often delayed by something as simple as an absent signature or an unchecked box.
Recent advances in straight-through processing have helped. According to the Securities Industry Association, STP is "the seamless integration of systems and processes to automate the trade process from end-to-end execution, confirmation and settlement -- without the need for manual intervention or the re-keying of data."
Simply put, more paper means more mistakes, and STP supporters say automating the process will reduce time and expense across the industry. Broker/dealers, wirehouses and mutual fund companies all have made significant gains by implementing straight-through processing.
"The mutual fund industry has made huge strides in STP within the past two years," says Babu Sonti, director of technology with Cincinnati-based Summit Investment Partners. "Typically there is a three-step process to trade settlement: the pre-trade requirements, the trade itself and then the post-trade process. The industry has been good with the pre-trade and trade portions of the process for about six or seven years. It's the back-office post-trade process -- the communication with the clearing company -- that's really improved recently."
According to Sonti, the larger firms were always on the cutting edge; it was smaller firms that lacked the IT staff to implement STP. This is no longer the case.
"The biggest benefit -- and this benefit includes independent advisors -- is that trade errors are minimized," he says. "With STP, there is a 98 percent chance that the trade will be executed correctly. With the manual paper tickets, the percentage is only 50 percent, which drives up costs significantly. The trade mistake has to be corrected, phone calls are made and time is wasted. This doesn't happen once the process is automated."
The National Association for Variable Annuities announced its own STP initiative in February, and hopes it will combat widely publicized problems within the industry. The organization's goals include the creation of standards for a paper-free process, regulatory approval of the process and assisting in implementing STP standards. NAVA believes uniform procedures will help the industry deliver clearer information about the product's benefits.
"Boomers are coming of age, and there will be a massive shift in assets," says Pamela Schutz, NAVA chairperson and executive vice president with Genworth Financial. "Boomers are now largely on their own; there really are no more guaranteed income streams. The insurance industry, specifically with annuities, is the only resource that offers income for life; they pool both investment risk and longevity risk."
According to Schutz, there are three major obstacles to getting information on the benefits of annuities to advisors and the public. The first is a negative perception of the product that exists in some segments of the population. The second is, from an operational standpoint, the ease of business factor is low. The last obstacle is a lack of a common voice to speak for annuities within the financial services industry.
According to Schutz, the initiative will address these and a number of other key areas, including:
- Suitability -- minimum standards for suitability procedures, and provisions for pre-selection of appropriate annuity products and features.
- Electronic forms -- standards that incorporate the use of electronic forms with an electronic signature at point-of-sale for ease of use.
- Privacy -- standards for the safekeeping of non-public information, including encryption of electronic transmissions.
- Records management -- standards for robust record keeping and the requirement for clear audit capability of all records to ensure full compliance with all applicable requirements.
"The benefits include reducing the order processing cycle and improving the cost structures," she says. "But it will also help in addressing suitability and regulatory concerns, and not-in-good-order rates will go down. It's a huge step for the industry and a pilot program will be launched later this year."
Some advisors question whether the high level of regulatory scrutiny directed at the annuity industry will prevent meaningful STP implementation. But Sonti doesn't see a problem.
"Is it possible for the annuity industry to achieve straight-through processing? Absolutely," he says. "Some disagree and cite the difficult regulatory environment as a reason, but the compliance and regulatory environment are really driving adoption. The transparent nature of the process is something regulators want to see."
From a regulatory standpoint, he says, STP makes life much easier. Sonti is able to show regulators a log of every trade, and each one is time stamped. Most STP vendors adhere to and include current regulations within their product offerings.
"For firms that are thinking of implementing straight-through processing, it's best to use a phased approach," he says. "Do it first by security type, then by a broker or advisor, then by custodian if need be and so on. It might seem like a big job, but the return on investment typically occurs within the first year of implementation."