January 29, 2017

Will You Get Your Money Back, On Time?

I put before you the case of a DIY investor who attempted to redeem some of his investments with a certain fund house and encountered unexpected obstacles. The purpose of this post is to make you think about the nature of investment risk, beyond its more conventional framework.  It is also intended to nudge fund houses to reconsider some of the choices that they make, related to servicing their investors.

Before I give you the facts of what happened, let me share some thoughts on the fund house in question.  Based on my experience and understanding, its website is one of the best in the industry in terms of the scope and manner of transaction execution, reporting, and overall user experience.  I am told that the websites of many fund houses noticeably slow down when heavy traffic comes their way, typically between 2.30 pm and 3 pm.  Not so in the case of this fund house, or so it seems.  And while the quality of investor servicing across nearly all fund houses leaves a lot to be desired, I have heard people rate the team employed by this fund house as above average.

Here, then, are the facts in brief:

Last Friday, around 1 pm, the investor proceeded to redeem investments under two schemes, via the fund house’s website.  While he was able to execute the transaction for one scheme, he couldn’t do so for the second scheme.  He encountered the error message shown below.

image1

Below the error message was an email address and a toll-free number to reach the investor servicing team.  Right away, he sent the fund house an email with a screenshot of the error message, and highlighted his urgency to do the transaction the same day.  He got an automated reply with a reference number to quote for future use.  He then called up the toll-free number, hoping to quote this reference number and resolve the issue. 

After holding the line for about 7 minutes or so, waiting to be put through to someone from the investor servicing team, his call got disconnected.  He tried two more times, and faced exactly the same result. 

Then around 2 pm, he decided to log in to the website once more and try and execute the transaction again.  He made two attempts: but both times, the transaction failed and he got the same error message.  That is when he decided to give up and instead wait for someone to call him back before the 3 pm deadline to effect the redemption that day. No one did.

But he was still determined to raise the issue with the fund house, on the same day.  So he tried calling around 3.30 pm, and this time managed to get connected to someone from the investor servicing team.  In his words, it was a strange conversation.  The person couldn’t find the reference number that he quoted or trace his email.   And while that person heard what he had to say, he made no commitment that his request for redemption would be accepted.  All he kept on saying was that the investor would get an “email revert” from them soon. 

That “email revert” finally came the next day i.e. on Saturday but once again, without any commitment that his request for redemption would be accepted.  In addition, over Friday and Saturday, the investor received calls from three different people, each claiming to be part of the investor servicing team, and each wanting to know from the investor the details of what exactly had happened.  According to the investor, he tried to tell them that all the details were available on the email he had sent.  But for some reason, they insisted on him narrating the entire sequence of events.

At the time of writing this post, the investor has no idea if his redemption request will be honoured and, if so, by when.  Instead of relying on this fund house, he has already made alternative arrangements for the funds that he needs.  Regardless of what the fund house decides, he is likely to redeem all his other investments with this fund house, as soon as possible.

So what should one make of all of this?

I spoke to a few industry insiders and most of them were quick to point out that the failure of the transaction was an anomaly and that one shouldn’t read too much into that.  Quite frankly, I have a problem with such an observation.  Sure, events like these may have been rare but they demand close analysis.  And to me, at least, it seems that the industry has been lucky that such events haven’t happened more frequently.  In the present instance, despite the credentials of the fund house, I can see significant, fundamental areas of concern.

Firstly, the error message wasn’t triggered by server overload.  It happened because of an error in either the investor database or the programming logic, which makes it a far more serious issue. 

Secondly, the text of the error message indicates that it would have appeared irrespective of whether the failed transaction was a purchase or a redemption.  Furthermore, the remedial action suggested by the fund house is the same for investors who are making purchases as well as investors who are redeeming.  This reflects a lack of understanding on the part of the fund house that failed purchases and redemptions have very different implications for investors and require different priority of attention.  A failed purchase is rarely more than just an opportunity loss.  A failed redemption, on the other hand, can have far more severe consequences for the investor. 

Thirdly, the fact that it is left to the investor to reach out to the fund house is deplorable.  Thanks to technological advances, it is possible for the fund house to receive an alert in the event of a failed transaction.  The fund house can then quickly and pro-actively reach out to the investor and resolve the issue.  Needless to say, this would spare the investor much grief and hassle.  In the course of researching for this piece, I was given to understand that there are a few fund houses that have such a mechanism in place.  What puzzles me, then, is why something like that has not been adopted across the industry.  In fact, given that most fund houses don’t even have a dedicated number for access in the event of online transaction failure makes me suspect that the reason may lie somewhere between complacency and callousness.

Fourthly, the experience of trying to reach out to the investor servicing team suggests that the telephone lines were programmed to get disconnected around the 7 minute mark.  This inference is based on the fact that each time, just before the call was disconnected, the investor heard a pre-recorded voice say “bye bye”. 

Fifthly, from the actual interactions (for the sake of brevity, I’ve kept out the specifics of what transpired) it is clear that the team was poorly prepared to deal with the situation on hand.  This makes one question the kind of training that they have had.

Alongside all of this, I wonder what the fund house expects the investor to do till it formally conveys its verdict.  If this were to happen in a debt scheme (where the proceeds are expected to come the next day), what is the investor expected to do if the fund house fails to honour his transaction?  If this were to happen in an equity scheme (where the markets can cause prices to go up or down) is he expected to twiddle his thumbs and wait, or is he expected to take some action on his own?  From its side, the fund house has not committed itself to either a course of action or to a deadline.

Last, but not the least, this episode also makes me think about supposed innovations introduced by fund houses such as “instant redemption” or the issuance of ATM cards to make cash withdrawals.  I know of investors who, taken in by what fund houses have pitched them, use liquid funds as a near substitute for a savings account.  Personally, I am wary of testing the limits of what is possible and I advise investors to keep a margin of an extra day when planning a redemption.  At the very least, I recommend being diversified across fund houses.

Special thanks to Robin Jehangir for his inputs.

Update (30 January 2017): The fund house formally responded to the investor today through an email which I can only describe as bizarre, blunt and unapologetic.  There was no admission of their own fault which led to the failure of the transaction.  There was no acknowledgment of the urgency expressed by the investor to make the redemption on Friday.  In short, the request for effecting the redemption on Friday was not honoured and no apology was offered to the investor for the inconvenience.  Fortunately, as mentioned in the post, the investor had made alternative arrangements for the funds that he needed.

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