The transition from paper applications and physical checks to electronic processing through the National Securities Clearing Corporation (NSCC) and wire transfers represented a significant turning point for the mutual fund industry. Alternative/Private Funds seem to be at this inflection point now.
Prior to electronic processing, mutual fund transactions were plagued by inefficiencies. Paper applications required manual review, physical checks needed to be deposited, and all transaction details had to be manually entered into record-keeping systems. This labor-intensive process created numerous opportunities for human error, with industry estimates suggesting error rates as high as 10–15% during the paper era.
The implementation of technology revolutionized the process, enabling standardized electronic trade transmissions and automated settlement. Error rates were reduced to low single digits, while the ability to process transactions via wire transfers further accelerated settlement times from weeks to days or even same-day processing.
This shift resulted in the explosive growth of mutual fund assets under management by removing operational bottlenecks, lag-time and errors, while improving client reporting, operational efficiency and scale.
Perhaps most significantly, the move to electronic processing laid the groundwork for comprehensive performance reporting. With transaction data now captured electronically in standardized formats, firms could more easily track and analyze investment performance. This development coincided with the rise of performance measurement standards, giving investors unprecedented transparency into how their investments were performing against relevant benchmarks.
The digital transformation of mutual fund processing illustrates how technological innovation in back-office operations, while often overlooked, can fundamentally transform an industry by improving efficiency, reducing costs, and enabling new capabilities that enhance the investor experience. A similar digital transformation is underway in the private fund space; driven by API’s, Distributed ledger technology and a whole lot of very smart people throughout the eco-system.