Deadlines Loom Large at Fidelity

Today, Dec 2004 by Bolita, Dan

Automating Remittance in a Mutual Fund Process

Most high-volume remittance processing operations have a lot in common. Envelopes containing checks come in and must be sorted, opened, extracted, scanned, routed, accounts credited and checks deposited. The machines that automate these tasks are impressive. The data operators that perform the requisite manual keying are skilled, and the exceptions are often the biggest obstacle.

Yet from the moment one enters the facility where Fidelity Investments handles much of its mutual fund processing in Covington, Kentucky, there is a sense that these functions are a little farther evolved.

Sitting atop a hill off aptly named Magellan Way, Fidelity Wide Processing (FWP) has the feel of a corporate campus, with well-tended landscaping and well-dressed professionals entering the secure facility. In addition to its remittance operations (largely from mutual funds deposits) the facility houses many affiliated processes. Imaging, exception processing, data entry and even its own print shop and literature distribution warehouse, are all handled locally.

As the largest mutual fund company in the United States, Fidelity Investments provides financial services for its 21 million shareholders. In addition to funds management, Fidelity offers human resources administration and employee benefits services to retirement, pension, health and welfare, payroll, and stock plans.

Time is critical in any remittance operation, as invariably the goal is to get payments to the bank as quickly as possible. For FWR processing take on an even greater urgency due to the additional oversight of the securities and Exchange Commission. Mutual fund companies are mandated to execute trades at the closing price on the day that orders are received. This means that any payment contributions must be processed at that day's quote. Should a remittance be delayed, any fluctuation in the fund's price becomes a liability to the firm.

Under the SEC's Rule 22c-1 of the Investment Company Act (known as the "forward pricing" rule), funds, underwriters and dealers must sell and redeem fund shares at a price based on the current net asset value (NAV) next computed after receipt of an order to buy or redeem. The rule also requires that funds calculate their NAV at least once a day. Most funds, including Fidelity's, calculate NAV when the major U.S. stock exchanges close at 4:00 p.m. Eastern Time.

Under Rule 22c-1, an investor who submits an order before the 4:00 p.m. pricing time must receive that day's price, and an investor who submits an order after the pricing time must receive the next day's price.

"They don't care how we receive it," said Roddell McCullough, Fidelity's senior director, remittance processing. "They only care that once Fidelity takes possession of it we're held to the forward pricing rule; we have to get it processed by 4 o'clock."

Working in the processor's favor is an arsenal of automation equipment. Using OPEX hardware for the bulk of the sorting, opening and extraction, the firm has seen volumes that exceed 25,000 checks daily among the 3.8 million in transactions processed in a six month period.

Equipment such as the OPEX 30 can automatically sort incoming mail before it's opened. By judging the thickness of the envelope, and with the use of automatic MICR and OCR readers, the bulk of the sort is accomplished shortly after the mail arrives, but before it's been opened.

The OPEX 150 with its OCR reader can tell the difference between a document and a check - "whether its forward, backward, upside down or whatever, according to McCullough. It'll twist, turn or whatever it needs to do," he said. "Everything is still in the envelope at this point, we're just sorting it."

Documents sent to the wrong department is a big issue for a company the size of Fidelity. In addition to its mutual fund business, the company handles payroll services, benefits payment processing, and broker/dealer work.

"We try to rely on the customer to use the right envelope," McCullough said, "but they'll think if they've got a 401K and also have a retail account, they can put both transactions in the same envelope. At some point we'll have to separate those. Customers think, "Fidelity is Fidelity," he said. "They'll stuff as much as possible in that envelope and maximize their 37 cents."

Each operator may sort 700 items per hour with automated manual extraction. The operators have to be able to identify many different items. Not only those of Fidelity, but its business partners as well.

"The operators have to know their exceptions," McCullough stressed. "Not only remittance items, but many other form types. This is the most manually intensive part of the process."

FWP is actively looking to move its imaging to the front end, with the adoption of the new OPEX 3600. This integrated scanner performs image capture immediately after envelope extraction and eliminates many of the multiple steps of processing mail. The expectation is that once incoming items are imaged on the front end, document routing can be accomplished electronically.