Since the financial crisis, data has become a more lucrative piece of the asset servicing offering. But delivery models vary and the custodian banks, the giants of this business, face competition, finds Nicholas Pratt.
The core elements of the asset servicing business – custody, fund administration and transfer agency – are highly commoditised and make it hard for providers to differentiate their service. Consequently, there has been a search for “value-added” services that custodian banks can use to drive revenues.
Tirdad Shojaie, a partner at the global financial services practice of Kurt Salmon, a management consultancy, says: “Asset servicers are struggling to articulate the value they bring. It has always been a challenge to come up with new products and be able to charge a premium.”
Data is proving to be a valuable commodity. Since the financial crisis there has been an ever-greater demand for data to inform risk management, whether it’s the level of volatility in markets, or the sudden change in the credit rating of a counterparty.
For the custodians sitting at the top of the asset servicing mountain, there is competition from smaller investment services providers and, of course, specialist data firms.
“We are not merely an administrator and custody agent but a manager of data,” says Barry O’Rourke, managing director of fund administration services at SEI.
One of the first products SEI developed was a “dashboard” that allows clients to view all fund records in one web-based portal and to extract that data for customised reporting or for their own internal analysis.
The dashboard is provided as part of the standard administration service, whereas some of the more complex services – such as risk analytics and reporting – are often more customised and provided for an additional fee. “In the past, it may have been the case that these services were optional add-ons but as the market has evolved, they are now a necessity,” says O’Rourke.
The custodian banks have been busy boosting their data offering, too.
BNY Mellon has developed a software platform, Eagle PACE, to provide a data warehousing capability. Clients are increasingly concerned about managing their data, says Dan Wywoda, global head of product management at BNY Mellon’s asset servicing business.
“A lot of clients have come to the same conclusion that as we provide their custody, administration and transfer agency services we are sitting on a lot of data that could be used for their own product development and investment strategy,” says Wywoda.
In this sense, custodians hope to take advantage of the “big data” zeitgeist. Although asset servicers may face competition in these areas from data management companies, Wywoda says the advantage of a custodian is that it is the official holder of an investors’ data.
“This puts us in a different position and we do not have to go through the data scrubbing process that would be the case if the data were provided by third parties,” he says.
In the past, this would seem to work well. But the classic model of an asset manager using a single provider to act as global custodian and fund administrator for all of its funds is not always the case now.
Post-crisis, many larger asset managers are using multiple providers, in some cases to manage concentration risk, and this has created a challenge for asset servicers to provide data services where they are not the first-hand holder of all certified fund data.
State Street, a large custody bank and asset manager, has established a new business unit within its Global Services division called State Street Global Exchange. It offers performance, risk and trade cost analytics as well as electronic trading capabilities. The service also provides a consolidated reporting service by aggregating data held in State Street’s various businesses as well as taking in third-party data for clients even if State Street does not have the custody or administration mandate.
“There is a dependency on third-party data sources so we need to get the data collected in a very efficient way and then clean, normalise and analyse it,” says Jörg Ambrosius, managing director, State Street Global Services in Germany. In order to help achieve this, in 2011 State Street acquired Complementa, a Switzerland-based company that specialised in the pensions sector.
“They come from a different perspective and run their analytics based on third-party data sources. We acquired their technology and business intelligence,” he says.
Given State Street’s investment in a new business unit and acquisitions of specialist vendors, Ambrosius is expecting the interest in data management to grow exponentially and believes technology will be critical to meeting this demand.
“This is an area where we will be able to add value and where quality really matters. This is not a pure cost play.”
Of all the reporting and data-related services available, regulatory reporting has become the one of the biggest growth areas for asset servicers, most recently Key Investor Information Documents (Kiids) for Ucits funds, and Solvency II reporting for insurance companies.
A newer development is the interest in tax reporting for European managers distributing funds across borders in Europe, says Etienne Deniau, head of business development at Societe Generale Securities Services (SGSS). “We are doing more cross-border tax reports than NAVs [net asset values] at the moment.”
Another new development, says Deniau, is the provision of liquidity reporting, especially for fixed income funds where there is less trading of the securities than is the case with equities.
In some instances, asset servicers are providing these services on a stand-alone basis and excluding the custody and administration mandates although the overwhelming preference is to offer a suite of services including custody and administration, says Deniau.
“It takes much more work to get the same level of revenue from a stand-alone arrangement to new non-custody or administration clients rather than a suite of services to existing custody and administration clients."
He adds: “It is expensive to set up the interfaces and it is easier if we already have the data. There are also the connectivity issues. With each new client there can be a new set of rules, especially when you are dealing with hedge funds.”
SEB, a Nordic bank, currently provides a range of investor services but through separate parts of the organisation. For example, collateral services are provided by the bank, and regulatory reporting services are provided by the asset servicing arm for Luxembourg-based funds when SEB acts as the management company to run an umbrella fund.
“We will be providing more reports that asset managers can use for risk, compliance, tax and corporate governance,” says Göran Fors, global head, GTS Banks at SEB. “Whether that information is also useful for investment decisions, remains to be seen. I do not see custodians moving to the area of giving investment advice.”
Of more relevance is the internal economics of offering these services. For example, does it make economic sense to offer a regulatory reporting service when the asset servicer is not performing custody and administration?
For some, such as Deniau, these stand-alone services offer the opportunity to start new relationships that might eventually blossom to full custody and administration roles as part of the expanded mandate.
For others, such as O’Rourke, such an approach does not make economic sense unless the custody and fund administration mandates are already part of the business.
But for asset managers, does it make sense to pick and choose which service providers to obtain these ancillary services from rather than simply using their existing custodian and administrator?
As Fors says, it is better to consolidate processes from an efficiency perspective but he also expects some competition from specialist data providers from other sectors.
For example, Shojaie mentions two firms, Broadridge, an investor communications provider, and Pneuron, a data management software provider, that are moving into this area. There are many more firms that have the capability to provide competition to existing asset servicers.
“Long-term, the larger asset servicing firms may well dominate but short-term, there may be some opportunities for asset managers to see what is on offer from other sectors,” says Shojaie.
©2013 funds europe