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Magazine Issues » September 2014

GLOBAL CUSTODY ANALYSIS: Totting up the bill

Calculating feesCustody banks still face business pressures as asset management clients continue to push down on custody-related fees. Nick Fitzpatrick puts the fee issue into perspective. 

When a fund manager and custodian go out for dinner, who pays? Maybe the size of each other’s client assets should be the deciding factor. 

Assets under custody run into the trillions; rarely do fund management assets get anywhere near so high.  

Yet if revenue at BNY Mellon and State Street – the industry’s two largest asset manager/custody banks – are anything to go by, asset managers wring much more profit from their client assets than do custodians.  

Both the custody banks and fund managers earn higher fees when markets rise and investor activity picks up, which has happened. Fees for asset managers have been sailing away and the industry is seen to have recovered. Custody banking, meanwhile, is chugging along,  with custodians still under revenue pressure.

In 2013 BNY Mellon, generated $3.9 billion in asset servicing fees – this, essentially, off the back of an asset pool of $27.6 trillion of assets under custody and administration at year-end.

In its asset management business, meanwhile, despite having assets under management of $1.6 trillion – some $26 trillion lower than assets under custody – BNY Mellon generated fees of $3.4 billion, or very nearly as high as the asset servicing fee.

Total fees in BNY Mellon’s investment services business, including  clearing, were $6.8 billion, meaning the investment management division generated fees equal to 50% of the investment services business despite assets 1600% smaller.

At State Street, its core fee revenue, which is made up of asset servicing and asset management, increased 10% in 2013.

Servicing fee revenue for 2013 increased 9% compared to 2012, while management fee revenue increased 11%. In numbers, servicing fee revenue was $4.8 billion and management fee revenue was $1.1 billion

Though the margin between the two business lines is wider than at BNY Mellon, the gulf between assets under custody in 2013 ($27.4 trillion), and assets under management ($2.35 trillion) is huge – and it must be remembered that State Street’s asset management division contains a lot of lower fee, passive investment business.

Asset managers are a part of the custody banks’ constituency that is resisting fee increases. Custodians hope to increase fees because of regulatory change that makes their depositary businesses more risky due to increased liability they must shoulder for assets lost in cases like fraud. 

If BNY and State Street reflect differences in revenues across the industry, maybe fund managers should pay for dinner.

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