The time when fund administrators did only fund administration is in the distant past, finds Nicholas Pratt, in an introduction to this year's survey of third-party providers, which includes our annual directory.
The function of fund administration is already one of numerous components in the asset servicing offering. But, according to providers in this year’s survey, administrators are under more pressure than ever to develop new products.
As Andre le Roux, head of business development at Maitland, says: “It is clear that the days of one-dimensional fund administrators are over. The TPA [third-party administrator] business needs to provide both depth and breadth of services on the foundation of the volume of data they have on their platforms and the power this gives them.”
One of the main reasons for this pressure is client demand. As Seán Páircéir, director at Brown Brothers Harriman, says: “Our clients are increasingly looking for us to help them streamline their operations, improve efficiencies, and reduce costs. At the same time, they are asking for help to grow their business and enter new markets to distribute their funds, and guidance on navigating and responding to an increasingly complex regulatory and tax environment.”
Regulation looms large and continues to influence the services developed for 2012.
For example, key investor information document reporting services for Ucits IV, new custody requirements under the Alternative Investment Fund Managers Directive, or changes to internal systems as a result of the Foreign Account Tax Compliance Act from the United States.
There is also the challenge of unintended consequences arising from regulation as cited by Marcel Gilbout, executive director, Emea fund administration product at JP Morgan Worldwide Securities Services. “We must be prepared for related impacts on investment funds, such as governments implementing taxation changes, as Italy did in 2011 requiring a new tax calculation in a short timeframe,” he says.
This is echoed by Ian Stephenson, global head of fund services at HSBC Securities Services. “In part, the challenge is the degree of uncertainty created as legislation is debated, redrafted and implementation timelines changed. Providers have to be proactive and on the front foot to avoid unnecessary cost and failure to meet regulatory requirements and timescales,” he says.
Administrators have reacted to the challenging and changing regulatory environment by offering consulting services in an effort to provide managers with some pre-emptive advice. Other services are more generic, inspired by the general increase in reporting requirements and demand for greater transparency. For example, enhanced reporting tools and web-based dashboards.
One consequence of both a more competitive marketplace and a more demanding client base is that the request for proposals (RFPs) process is now much more onerous than it used to be.
Administrators, however, appear to be divided on just how much of an issue it is. For example, Mark Hedderman, group chief operations officer for Custom House, accepts that the demand for detailed answers to RFPs has increased substantially in recent years and completing these is time-consuming. But, they are “just a part of marketing” and the extra costs are absorbed into normal fee structures.
Others, though, are more forthcoming about the challenge presented by the RFP issue. “We carefully evaluate every opportunity before pursuing so that our time and resources are spent on the opportunities best aligned with our strategy,” says Toby Glaysher, head of GFS for Ireland, Luxembourg and the UK at Northern Trust.
Catherine Brady, head of Emea fund services at Citi, says the RFP burden is “leading us to become more selective in the campaigns we take on”. Meanwhile, State Street has spent the past 18 months developing a “global infrastructure to our RFP process that creates efficiencies and streamlines content”, while Societe Generale Securities Services talks of “mutualising efforts” to respond to various RFPs.
The increasing costs of RFPs does relate to the wider issue of cost and competition. As the latter has increased, the former has stayed static despite the increasing expense from regulation. “The TPA’s major challenge is to reduce costs whilst preserving service quality,” says Joe Saliba, deputy chief executive officer at Caceis.
“There is constant pressure from clients and investors to revise fees downwards. At the same time, clients are demanding a broader range of support services, and regulations at a local, European and international level are becoming increasingly complex to implement, both of which drive costs up. Finding the right balance between cost and quality is essential, and although the TPA business has made much progress in this respect, there remains much more to be done.”
The pressure on the traditional TPA business model is undoubtedly fuelling fiercer competition between the providers. And although the pressures are essentially the same for all providers, many firms are now concentrating on establishing unique elements to their service, which will make them more attractive in particular niches.
The bigger players are emphasising their size and global reach, citing the need for global infrastructure, multi-jurisdictional reporting, round-the-clock services and proven track records. The opportunities for well-capitalised, international banks are clear, as can be
seen by the efforts to develop more comprehensive outsourcing services.
But the challenge for these full-service administrators is, as Maitland’s le Roux says, to “convince managers of their bona fides when faced with cheaper, less robust alternatives”, especially at a time when TPAs look less and less willing to continue competing on price in order to win customers. “The battle is fought on service quality, local expertise, and the ability to support the whole value chain rather than price,” says Philippe Ricard, head of asset and fund services at BNP Paribas Securities Services.
Meanwhile, the smaller and domestically-focused players, such as Swedbank, are accentuating their local expertise. Others like Custom House are consciously courting the smaller funds. Custom House launched a Nascent Emerging Manager Fund Product in 2011, a Maltese umbrella fund aimed at start-up managers, and is planning an Americanised version for non-US investors later this year.
But it is not just a competition between large and small providers. According to Philip Masterson, senior vice president at SEI, a complication for several bank-based TPAs is the fact that their business models are under pressure from either balance sheet exposure to European sovereign debt, increasing capital requirements under Basel III or pressure to spin-out trading desks in response to the Volker rule. “As an independent, non-bank TPA we’re able to focus our resources and attention on the areas where managers need the most help without these distractions and without diluting our investments.”
Despite the difference in respective business models, the essential challenge is the same for all TPAs. As Mark Porter, the head of fund services at UBS, says: “The game is pretty much about being able to absorb more complex business at a still profitable level.”
But as providers strive to do more for the same, stresses will inevitably appear. Providers talk optimistically of moving up the value chain but perhaps success will come down to the more prosaic issue of price and the providers that are willing to raise their fees in order to offer a suitable service in these challenging times.
©2012 funds europe