April 2013

THIRD-PARTY ADMINISTRATION: The challenges ahead

looking glassSenior executives at third-party administrators surveyed tell Funds Europe about competition and challenges.

ALTER DOMUS
Laurent Vanderweyen, CEO Alter Domus
What are the main characteristics of competition in the business ?
Within our industry both our private equity and our real estate clients require a quality of service and depth of expertise that we can offer to serve their complex requirements. However, as fund structures and the legislative and regulatory environments become even more complex the ability of a service provider to operate across a wide spectrum of countries and services is becoming increasingly important.

What are your clients’ most common demands?
Finding the right balance between cost and quality is essential. They are looking for guidance on navigating and responding to an increasingly complex regulatory and tax environment.

How is your business responding to the pressure on profit margins?
We are focusing on the high-quality of service we deliver to our clients while working on operational efficiencies to minimise pricing pressure.

What are the major challenges facing the business going forward?
The main challenge for our industry is to remain competitive and understand the needs and expectations of asset managers, while keeping in mind that they have limited resources to allocate to the new regulatory burden.

APEX
Peter Hughes – Global Managing Director/Founder
What are the main characteristics of competition in the business ?
New fund managers have a greater expectation of their service providers to shoulder regulatory burdens, assist with transparency, complete a wider range of tasks and at the same time offer cost savings and operational efficiencies.

What are your clients’ most common demands?
Costs, good local regulatory expertise and increased technology based services.

How is your business responding to the pressure on profit margins?
Increased use of technology allows Apex to provide straight-through services which generates cost savings for clients and scalability for us. Apex has invested substantially in its technology services including order management and portfolio management systems, hosting, broker network and real-time reporting.

BBH
Seán Páircéir, Partner, Brown Brothers Harriman
What are the main characteristics of competition in the business?
Significant expense to comply with the new regulatory environment; discipline around client segment selection; changes in market infrastructure, like T2S, OTC derivatives processing in Europe and the US.

What are your clients’ most common demands?
Assistance with reporting requirements – increasingly detailed, globally accessible reporting for both our direct clients and their clients.  Assistance with understanding and managing the impact of new regulations on their business.  Support for alternative investment products and ETFs.

How is your business responding to the pressure on profit margins?
BBH has been working to review its cost of service through automation, productivity, outsourcing and expanding in lower cost locations.   We continue to make significant investments in technology in order to achieve greater efficiencies.    

What are the major challenges facing the business going forward?
Low interest rates; uncertainty in financial markets; monitoring and ensuring compliance with new regulations

BNP Paribas Securities Services
Philippe Ricard, Head of Assets and Fund Services    
What are the main characteristics of competition in the business ?
Custodians’ size and capacity to support their clients on a global scale is a key component of competition. Time-to-market challenges to cope with new regulation, operational risk and collateral sourcing have also become key areas of differentiation, playing to the strength of those who have proven fund administration capability and extensive asset optimisation services around collateral management and securities lending.

What are your clients’ most common demands?
Clients are demanding support for regulation – in terms of how it will affect their business, what they need to do to ensure their business is ready and how we are prepared to support it. Clients are also looking to access collateral quicker and more efficiently. We are also noticing increasing requests to service alternatives – real estate, private equity and hedge funds.

How is your business responding to the pressure on profit margins?
BNP Paribas has been investing in and extending its geographic presence to boost economies of scale in its global infrastructure and technology. It is also increasingly utilising and developing regional centres of excellence for data processing in different time zones alongside a consistent focus on operating costs whilst leveraging revenue generating activity.

What are the major challenges facing the business going forward?
Regulation is not only changing the way custodians operate but it is impacting clients infrastructure, distribution network’s and legal frameworks. This will lead to even stronger partnerships with clients, increased liability pressures on custodians and long-term consolidation of players in the market.

BNY MELLON ASSET SERVICING
Hani Kablawi, Head of EMEA Asset Servicing

What are the main characteristics of competition in the business ?
Regulatory developments play a pivotal role in shaping the market in which players operate. Clients are looking for direction. They want more market insight and shared experiences on specific regulations that will impact their operating model. Critical to all this rests on the strength and stability of their provider.  

What are your clients’ most common demands?
Businesses are looking for avenues to expand, to distribute their services and raise and retain their assets globally. They want to optimise technology to deliver an efficient model while maintaining minimum costs. To maintain their brand and reputation, their agent must adhere to compliance requirements and support them with risk management.

How is your business responding to the pressure on profit margins?
2012 saw a continued increase in the number of new business RFPs [requests for proposals] and due diligence questionnaires completed. Each new business opportunity is reviewed and assessed before progression, and while the due diligence documents have used up RFP team resources, the total volume of RFPs does not have a direct impact on profit margins.

What are the major challenges facing the business going forward?
The major challenges facing the TPA in 2013 will continue to be the increasingly onerous regulatory environment. The cost of doing business will inevitably increase given new requirements for enhanced transparency and risk management.

CACEIS
Pierre Cimino, Member of CACEIS Executive Committee
What are the main characteristics of competition in the business ?
Price is among the competition factors for the asset servicing industry, however the range of additional services such as added-value services concerning risk management, and the ability to service clients across all markets where they operate, are clients’ key selection criteria.

What are your clients’ most common demands?
Driven by regulation and investor security needs, services linked to risk management, collateral management, OTC derivatives clearing and investment reporting are in demand. Driven by cost control and investment optimisation initiatives, services such as middle-office outsourcing, securities lending and foreign exchange hedging are often requested.

How is your business responding to the pressure on profit margins?
We aim to use fee re-negotiations as another opportunity to generate sales of new, value-added products to existing clients, which serves to maintain our profitability. Tightly-controlled costs are also central to our philosophy but we do not seek out low-cost outsourcing solutions to achieve this.

What are the major challenges facing the business going forward?
Regulation and its implementation is the major challenge for asset servicing in 2013.  There has long been talk of a regulatory avalanche or tsunami, but the drawn-out nature of these regulations mean that companies’ human resources must be dedicated to monitoring and implementing regulatory developments for an extended period of time.  Devoting extensive human and financial resources to regulatory issues will have an impact on the asset servicing industry’s ability to invest in operational improvements and new product development – essential factors in the industry’s ability to maintain profit margins.  

CITI
Catherine Brady, Head of EMEA Fund Services
What are the main characteristics of competition in the business ?
A small number of players in the market are aiming to consolidate, resulting in price decay and profit and loss pressure for everyone.

What are your clients’ most common demands?
Risk-based solutions that bring improved business visibility through a reduced cost base are important. It is about access, insight and expertise.

How is your business responding to the pressure on profit margins?
We continue to bring our network and experts closer to our clients through improved technology platforms and data/risk management solutions in order to reflect the changing needs of our clients’ and the new market environment.

What are the major challenges facing the business going forward?
It is a time to redefine the risk perspective as regulatory change comes to fruition. Operational alpha is paramount for managers as they look to achieve a sustainable business model through best-fit partnerships that bring high technology and data-driven, solutions.  

CUSTOM HOUSE
Mark Hedderman, CEO
What are the main characteristics of competition in the business ?
The main challenge for the independent administrator is to remain competitive in the face of increasing consolidation of responsibilities that have arisen as a result of economic and regulatory pressures.  We have to aggressively display our added value on top of the traditional services we offered.

What are your clients’ most common demands?
As the central collection point for the data relating to the funds activities, clients are turning to the administrator to provide solutions for all of the new regulatory reporting requirements that impact their business as well as the fund itself.

How is your business responding to the pressure on profit margins?
We are launching new services, specifically in the US, that we hope will broaden our revenue stream and reduce our exposure to some of the pressures on our existing businesses. As always, automation and the realignment of our overall cost base are the strategic focuses.

What are the major challenges facing the business going forward?
The administration business is undergoing a complete overhaul in terms of what the clients are demanding and this is occurring at a time of reduced margins and increased competition. Clients are expecting more from the administrator and the original product that was fund administration is now completely different and you therefore have to redesign your operating model and its capabilities. The challenges on independent administrators are more severe as the increased regulatory burdens on managers and funds is leading a return to a more consolidated service model option and therefore the challenge of displaying true added value is even greater.

DEUTSCHE BANK
Mike Hughes, Managing Director,  Global Head, Alternative Fund Services
What are the main characteristics of competition in the business ?
Competition is driven by staying ahead of the curve in terms of client satisfaction, new product launches and enhancements to technology platforms as clients require more bespoke reporting tools. Regulatory reporting solutions are also an area of focus. The fund administration business has fundamentally changed over the years, particularly in Europe, to a model of bundled services to address the growing number of services required by managers.

What are your clients’ most common demands?
Value-added services such as customised portfolio reporting, regulatory reporting solutions and collateral management; basic back office services have been commoditised and expectations are ever higher that fund administrators and service providers will offer increasingly sophisticated and customised reporting and analytic tools.

How is your business responding to the pressure on profit margins?
Our synergy within the bank takes some pressure off the topic of profit margins but we do watch and manage our bottom line very closely since our industry is still quite volatile and can change drastically quarter by quarter.

What are the major challenges facing the business going forward?
Our main challenge during 2013 will be the continuing need to stay ahead of the curve in terms of new regulatory obligations for our clients. Understanding what development efforts can be initiated in advance of final rulemaking and what will require flexibility once rules take effect will be key in providing clients with timely, well designed products.

HSBC Securities Services
Ian Stephenson, Global Head of Fund Services
What are the main characteristics of competition in the business ?
Large middle office and fund administration mandates continue to come to market from clients who currently have these activities outsourced to a TPA. Increased regulation is influencing the choice of provider with investment in regulatory compliance and capital strength becoming increasingly important differentiators.

What are your clients’ most common demands?
Clients continue to seek increased depth and flexibility of data provision – for internal management purposes but also driven by regulation, for example, Solvency II. Transparency has become more important and as a result there is increased demand for independent valuation and reporting. Security of assets and investor protection are ongoing requirements.

What are the major challenges facing the business going forward?
There are several, notably the impact of regulation. The degree of uncertainty created as legislation is debated, redrafted and implementation timelines change, exacerbates this. Providers must be proactive in order to respond to regulatory changes in required timelines. The cost of change is significant and for smaller providers may be prohibitive.

IPES
Justin Partington, Commercial Director
What are the main characteristics of competition in the business ?
Highly competitive market for new mandates and also retaining business as more fund managers go to tender rather than appointing the incumbent. Technology is an increasing focus in pitch situations. Bifurcation on pricing - it is either the main criteria or not that important at all.   Independents TPAs are winning more than their fair share of business over banks.

What are your clients’ most common demands?
Assistance with reporting, particularly customised investor reporting;  growing demands around assistance to prepare for regulation, both in terms of information and practical support – especially Dodd Frank and AIFMD;  real-time access to data.

How is your business responding to the pressure on profit margins?
By focusing on operational efficiency, while delivering service to a high standard. Client retention is vital. Ongoing investment in our technological systems to carry out work with increasing efficiency. Developing our people to ensure they have the skills and to retain talent in the industry. There is a cost attached to staff turnover but we have a low attrition rate.

What are the major challenges facing the business going forward?
Regulation, with AIFMD coming into play and US legislation such as Dodd Frank and FATCA also making an impact, will be a big challenge to fund managers and service providers. There is a competitive fundraising market and investors will remain focused on returns. But they also want to ensure that their chosen fund mangers are compliant. It will be interesting to see the extent to which cost of new regulation gets passed on to investors.

JP MORGAN WORLDWIDE SECURITIES SERVICES
Marcel Guibout, Executive Director, EMEA Fund Administration Product Head
What are the main characteristics of competition in the business ?
We compete on the ability to offer a high quality, comprehensive range of services to multiple fund types. Provider selection is increasingly driven by the ability to support the client’s end-to-end needs and to provide services that add to distribution opportunities.

What are your clients’ most common demands?
Clients frequently seek our help with regulatory change and providing services to help fund distribution. We provide leadership and where possible, common solutions, but we also run regular events like roundtables where we and our clients engage collectively on these issues.

What are the major challenges facing the business going forward?
The volume, complexity and speed of regulatory change will continue to be a challenge over the next few years, with much effort involved across the board to support new requirements. Importantly though, there are many opportunities as the landscape changes.

MAITLAND
Andre le Roux, head of business development
What are the main characteristics of competition in the business ?
The institutionalisation of the hedge fund industry together with fee compression.

What are your clients’ most common demands?
More rigorous, detailed and transparent reporting. This is being driven by investor demand and regulatory oversight.

How is your business responding to the pressure on profit margins?
To date, the nature of our model which presents the client with an integrated solution, in addition to the maturity of our platform, has allowed us to be immune to cost pressures. Where we are asked to compete on price it is at the lower levels of the fund size spectrum and this affords us the ability to ‘select’ our clients.

What are the major challenges facing the business going forward?
We see continued consolidation, thus competition for acquisition targets. As an acquirer, the expectation of price is often unrealistic. From an operational perspective the ability to roll out value added services and “move up the value chain” is the industry’s biggest challenge. It is clear that the days of one-dimensional fund administrators are over. The TPA 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.

NORTHERN TRUST
Toby Glaysher, head of global fund service, Emea
What are the main characteristics of competition in the business ?
The industry is faced with the common challenge of doing “more for the same” for their clients, having to deal with increasing complexity and regulation which require much investment in technology, infrastructure and people. The chief area of competition is how to manage this cost effectively as an administrator as well as for your clients supporting their changing requirements.

What are your clients’ most common demands?
Regulatory requirements continue to drive demand for real-time, granular information as clients increasingly focus on risk management, transparency and governance.

How is your business responding to the pressure on profit margins?
Northern Trust has responded to these pressures by focusing above all on service, and on providing solutions that empower our fund manager clients to realise investment opportunities and grow their business. Resulting areas of development have included adding new capabilities to the European fund administration market, particularly in the area of middle-office capabilities and regulatory support solutions.

What are the major challenges facing the business going forward?
Dealing with the growth and complexity of regulation. We work closely with our clients to review the implications and assess the strategic opportunities that regulations bring.  The investment in technology, systems and expertise required to support the various new regulatory requirements is significant, with some of the costs anticipated to be borne by the end investor at some stage.

RBC INVESTOR SERVICES
David Dibben – Head, Global Fund Products
What are the main characteristics of competition in the business ?
The economic environment, with more regulation across financial services, results in increased servicing costs and downward pressure on fees. TPAs face clients’ calls to reduce service costs while maintaining quality, but must respond to regulatory changes that create additional cost and reporting requirements.

What are your clients’ most common demands?
Incoming regulatory changes place demands on clients in terms of altered responsibilities, reporting and costs to ensure compliance.

How is your business responding to the pressure on profit margins?
Cost models have not generally been impacted by new business. Tighter margins, in combination with increased regulatory responsibilities, burdens and provider costs, are the main drivers of any discussion around costs. Generally we see market participants focusing on STP processing in all areas of the value chain to improve efficiency.

What are the major challenges facing the business going forward?
Delivering the new regulation-compliant services, such as AIFMD and operational set-ups for FATCA. Cost management will remain key, the cost-sensitive market will drive products focused on quality and efficiency as well as making optimal investments to provide key services that meet clients’ needs.

SEB
Ann-Charlotte Lawyer, Managing Director
What are the main characteristics of competition in the business ?
Competition is brisk and the price pressure on larger mandates is continuing to be high. Demands to service complex structures in an increasingly complex regulatory environment is raising cost for the asset servicing industry at the same time as asset managers are facing pressure on their fees. Cross-border servicing strategies are increasingly topical.

What are your clients’ most common demands?
Increasing emphasis is put on initial due diligence and operative risk as well as on the capacity to integrate complex investment techniques. TA services should enhance the investor’s experience of the funds. Our impression is that small and medium sized clients increasingly are looking to retreat to a pure investment management position.

How is your business responding to the pressure on profit margins?
We are increasingly focusing on share-of-wallet clients, where the administration is only one part of the services the clients would buy from our group. Standalone administration clients are less in focus. Scale is the most important driver of profitability and the hurdle for “too small” is rising.

What are the major challenges facing the business going forward?
Handling the complexity brought by regulation and its ensuing monitoring and reporting requirements together with the clients’ increasingly complex demands in a secure and cost efficient manner.

SEI
Philip Masterson, Senior Vice President
What are the main characteristics of competition in the business ?
Added value: the TPA is expected to complete high quality back-office servicing, but in order to differentiate managers are searching for business partners who can provide additional services.

How is your business responding to the pressure on profit margins?
We continue to implement automating manual tasks to provide robust services.

SOCIETE GENERALE SECURITIES SERVICES
Pascal BERICHEL. Global Head of Fund Operations

What are the main characteristics of competition in the business ?
While pressure on prices remains high, clients are more demanding in the service quality area, which is becoming a key differentiator. Competition also stands on a comprehensive product range, and above all the needed agility to cope with market opportunities and ever-changing regulations.

What are your clients’ most common demands?
Whatever the solutions or services required by our clients, flexibility and aggressive time-to-market are the key capabilities to be demonstrated. More in-depth, the commonly shared requirements are linked to regulatory constraints (transparency, risk management, reporting) and distribution support, notably through tax issue expertise on a global basis.

How is your business responding to the pressure on profit margins?
Improving the operational efficiency in the industry is key, which we are addressing mainly through a continuous development of centres of expertise backed with local presence to ensure client proximity. Lowering costs through standardisation needs to be kept at the appropriate level, in order to meet client-specific requirements. The challenge is finding the right balance between a one-fits-all approach and tailor-made solutions.

What are the major challenges facing the business going forward?
Though regulations are part of the TPA’s DNA, legal constraints will remain a major challenge in the year(s) to come. Uncertain timelines, unstable legislations, local specificities are all requiring multi-skilled experts and fast-evolving platforms.

SILICA
Michael Prentice, CEO
What are the main characteristics of competition in the business ?
Competition is global and the demands on service excellence and the ability to adapt to
market and jurisdictional changes are fast becoming a key differentiator. The likes of RDR [in the UK] and increased regulatory change continue to put pressure on price, which in turn puts pressure on cost – ultimately the TPA is expected to do more and more whilst containing costs to remain competitive.

 

What are your clients’ most common demands?
Customers are demanding service excellence from their service providers – zero errors and fast turn around on enhancements and change requests to their service model. It’s all about customer experience.

How is your business responding to the pressure on profit margins?
Silica is investing heavily in STP, automated rules engines, advanced workflow, a LEAN approach to eliminate waste within the administration environment and the use of AGILE to deliver faster turnaround times on projects.

What are the major challenges facing the business going forward?
The biggest challenge facing third-party administrators is going to be the ability to implement the ever increasing amount of regulatory changes and compliance oversight required by the various regulatory and statutory bodies whilst still being able to deliver an advanced service at competitive rates with any sort of margin.

 

STATE STREET
William Slattery, Head of State Street Global Services EMEA
What are the main characteristics of competition in the business ?
The industry is seeing huge changes that challenge many long-held assumptions and demand a new model for the future. So, while cost is a critical part of the equation, investors want to partner with organisations that truly understand their long-term objectives and are committed to a relationship based on trust and innovation.

What are your clients’ most common demands?
Clients are looking at outsourcing more of the value chain as they contend with complexity and cost pressures. They also want advanced risk tools that give them more insight into their investments and allow them to deliver on their growing data management and reporting requirements, and we are well placed to support these requirements.

How is your business responding to the pressure on profit margins?
First, we’re focused on enhancing our overall efficiency as an organisation. Our business operations and IT transformation programme is streamlining our operating model and driving technology innovation including private cloud.

Second, we’re bringing together our expertise, resources and insights into integrated solutions that represent truly added value for our clients.

What are the major challenges facing the business going forward?
The major challenges stem from continued market uncertainty and complexity, including ongoing regulatory reform. At the same time, costs are being scrutinised like never before. The gap between winners
and losers will widen, and the current period is an opportunity for organisations to differentiate themselves by being innovative and delivering what investors need.

 

SWEDBANK
Aet Rätsepp, Head of Fund Services
What are the main characteristics of competition in the business ?
The custody and depositary business has a tough but stable level of competition in the Nordics. The fund administration business is growing as the regulatory environment for fund management companies is tightening and more players look to outsource their back-office tasks such as fund administration and transfer agency.

What are your clients’ most common demands?
Outsourcing of fund administration and transfer agency together with more wholesale packaged solutions such as fund infrastructure within Luxembourg-based Sicav’s.

How is your business responding to the pressure on profit margins?
As the profit margins are tightening on pure custody products, we see increased revenue potential on new products such as Sicav solutions to asset managers who want to focus on sales and investments.

What are the major challenges facing the business going forward?
The ever-changing regulatory environment is challenging for all players in the market. However, it also creates new business opportunities for those that act swiftly and come up with creative solutions that suit the clients’ demands.

UBS
Mark Porter, Global Head of Fund Services
What are the main characteristics of competition in the business ?
Competitive success factors for TPA service providers include maintaining exceptional client service through the deployment of leading edge technology, new services to complement client demands, and assisting clients through regulatory navigation.

 

What are your clients’ most common demands?
Investors and regulators continue to drive greater transparency and real-time information from the industry service providers in order to improve governance and allow for more timely decision-making. This results in customised reporting, technology connectivity, and advanced risk management solutions.

How is your business responding to the pressure on profit margins?
We firmly believe in a healthy pressure on pricing across all parts of the value chain, to enable investors to achieve sustainable returns. All industry participants must therefore continue to evolve their efficiency and automation programs to achieve this. Our business continues to achieve productivity improvements to balance this competitive pricing and profitability pressure.

What are the major challenges facing the business going forward?
TPAs, along with the rest of the financial industry, are faced with a period of regulatory change which threatens to disrupt industry dynamics and investor behaviour. These additional demands provide an opportunity for firms with global scale and industry coverage to deepen relationships and add greater value to clients and investors.

©2013 funds europe