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Financial Viewpoint Newsletters
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NewslettersJan '11: Are you financially compatible?
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Business and operational management insights for
multi-manager investors, clients and service providers
Newsletter 18
Welcome to the January 2011 newsletter!
Fees are a sensitive topic amongst custodians. Allegations of buying business, unsustainable pricing, margins evaporating from falling interest rates, etc, etc. I sense you are all welling up in great sympathy.
Whilst 2011 will be a tough year for custodians competing aggressively for available opportunities, it may prove a boon for clients with once in a decade custody deals on offer (why is my nose growing!). However, a deeper analysis would also reveal that each custodian has a different business model and pricing structure, which may result in materially different cost outcomes for an investor. This month’s newsletter explores the competitive landscape for 2011 and the issue of financial compatibility with your custodian.
I hope you enjoy the newsletter, and all the very best for 2011.
Best regards
Brett Elvish
Financial Viewpoint
04 1317 6164
brett@financialviewpoint.com.au
Are you financially compatible?
2011 is going to be a competitive year for custodians. For many years, there has been a virtual duopoly with NAS and JP Morgan being the biggest investment administrators of Australian superannuation funds. More recently, after consistent marketing efforts, State Street and BNP Paribas are making headway. And we now have Northern Trust, Citibank and RBC all hoping to make their mark on the growing superannuation segment.
Short term opportunity?
There is no doubt that some “special deals” will be done to secure new business, which will place significant pressure on incumbents to come to the party on price. Whilst incumbent custodians will invariably argue that that pricing is not sustainable, the winner will be clients that choose to renegotiate their arrangements. However, “special deals” are expected to be temporary, and not have a long term impact on custodian service delivery.
Before you shed too many tears for your beloved custodian’s financial welfare, their expansion into various treasury and more recently investment management services is likely to provide a fillip to profitability. Also, when we see interest rates rise, custodian margins will naturally expand.
Looking a bit deeper
Looking beyond temporary opportunities (and once in a decade deals!), investors should try to understand their financial compatibility with their current provider. Just as different superannuation funds have different service requirements and investments; each custodian has a different business model and pricing structure, which may result in materially different cost outcomes for an investor. This will result in some funds and custodians being financially compatible, with the opposite also being true.
If we keep the analysis simple and ignore treasury activities, investment administration activities can be grouped into two broad categories:
- custody services (e.g. safekeeping, transactions settlements, corporate actions, income collection)
- reporting services (e.g. accounting, tax, performance, compliance, unit pricing)
Based on my analysis, the proportion of fees attributable to custody services may range from around 40% to 65% for different custodians, with reporting services therefore ranging from 35% to 60% of costs.
70% price differential!
In practical terms, the ranges mean that at the two extremes, one custodian may charge 70% more for reporting services than another custodian. Consequently, for an investor, costs with different providers could vary materially depending whether requirements are skewed toward custody services or reporting services.
In short, your incumbent custodian is likely to generate plenty of noise about unsustainable pricing, buying business, etc. However, the reality is that beyond “special deals”, the underlying issue may be that you are not financially compatible with your current custodian.
Financial Viewpoint
Financial Viewpoint provides business and operational management advice, research and tools supporting multi-manager investors, clients and service providers, including:
- Strategy and governance advice for funds and businesses, including reviews and opportunity identification
- Advice on management of custodians, transition managers, asset consultants and investment managers
- Tools, systems and research for better management of businesses and funds
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