A question of horses for courses
Another survey. Another set of figures and tables. Another list of banks and their ranks. Is it of any use to anybody? Some of the banks would like us to believe not, but most would concede that they are useful.
Surveys have a purpose in our business, as indeed they do in any business, giving us a benchmark against which to measure our service providers. It’s all about examining value, considering certain services in a comprehensive manner. More importantly it tells us what other clients are saying about the service quality they are getting and allows us to compare with our own experience.
Europe has become the main focus of attention for global custodians as they see growth prospects there far greater than any other geographical region over the medium term. Based on market research conducted last year, we estimate that cross border equity investment in Europe (with the exception of the UK where investors are already more equity orientated in non domestic markets) will grow by up to 1000% over the next five years.
This marks a period of huge growth for global custodians and it’s very much an open game at present as the banks hustle to position themselves as markets and opportunities develop. It is important therefore that custody clients have as much information as possible to judge the quality of the services on offer.
The results of our eighth annual consultants survey reveal a great deal about the current state of the market. There are the big boys, the few who have reached, through mergers, acquisitions and outright sales wins, the massive size that puts them in a league of their own and there are the smaller players who are still in the race and providing services often to a more targeted audience (see table 1).
The interesting thing is that on service quality the banks pretty much fall into two groups again. The top six places are all taken by smaller players who have managed to provide service of outstanding quality whilst the big names are all grouped together in the bottom half of the table with scores averaging below 5.00 (out of a possible 7 in each of the 23 categories covered in the survey).
Results do vary though from client group to client group as well as between the individual categories covered. Investment managers as a group are very important to custodians as you can’t avoid dealing with them if you are in the business. Also they arguably have the most balanced view of the quality of services provided as they often deal with all the major custodians and many of the minor ones as well giving them a good basis for comparison.
There are different ways in which an investment manager might be treated as a client. Either it might be on a direct basis where the manager himself selects the custodian for some or all of his in-house funds or it might be on an indirect basis where the manager and custodian share a mutual third party client that has selected each of them for their services. In this scenario, the manager obviously has no part in the selection of the custodian but clearly has an influential role based on his own observations of the custodians’ performances. As a client group custodians obviously ignore them at their peril (see table 2).
Nevertheless as a client group their criteria and requirements are unique and as the subsequent survey tables reveal not all custodians cope as well with the divergent client types whilst others positively shine.
Other client groups have different requirements which are better catered for by some custodians rather than others. Pension funds are generally more concerned with the quality and accuracy of regular reporting, whereas insurance companies with huge funds invested through a small number of custodians are often more interested in the quality of systems and their ability to interface with their own(see tables 3 and 4).
There is no one custodian that can achieve the highest rank in all the client groups which goes to show that there is no one custodian geared to providing top quality to all the different requirements that there are.
The same is also true with the individual categories in which these banks were assessed. Some have strengths in technology and their client facing systems - be it their own proprietary technology or their ability to communicate via SWIFT. Others may be better at aspects of client servicing such as processing enquiries or perhaps handling corporate actions or withholding tax reclaims.
Now these differences are important to the custody client. When selecting a custodian the method of communication may be pre-determined by the clients own resources or lack of them. Is it to be via the custodian’s own proprietary system or via SWIFT - or perhaps neither? Whichever route is selected will have an impact on the choice of custodian. One may be superb on SWIFT communication but poor with its own systems. Another may score more highly amongst investment managers but much lower with pension funds.
If corporate actions are a very important selection criteria for a client then a glance at the rankings for this category would reveal that Pictet & Cie. comes top and Citibank in last place. If FX rates and trading expertise were a concern then Credit Suisse Asset Management comes top and JP Morgan Investor Services are at the bottom.
One of the most subjective categories is value for money. This phrase is defined in the survey as being “An assessment of the overall service provided by the custodian, taking in to account (where known) the level of fees charged”. But if a bank scores well in this section does it mean that it offers a very high quality service that clients are prepared to pay for or does it mean that their charges are so ludicrously cheap that even a mediocre service seems good for the money? The answer must vary from bank to bank and according to the overall service levels on offer. But one thing is certain, poor service quality will mean a bank scores badly no matter how competitive the pricing is. In the actual results Pictet and Royal Trust come top of the table with Citibank and Bank of New York in the bottom two positions.
In recognition of the trend to offer clients a broader base of products the survey included new categories this year covering such things as securities lending, risk management, compliance monitoring and performance measurement. It is the argument of the bigger players in the business that provision of these services is where the game is at, coupled with the ability to undertake large outsourcing deals. But at present it would seem from the relatively poor response rates for these categories that the majority of clients are not yet using such services. Only seven banks qualified for the derivatives trading and settlement category and nine for performance measurement. This shows that not everyone is ready for more than core custody.
A final word to those who are still inquisitive. The survey was conducted in December 2000 and January of this year, with 820 responses collected from the 1,200 institutions approached. Approximately 54% of respondents were investment management companies, 20% pension funds or charitable associations, 17% insurance companies and the remainder banks and savings associations. The total value of assets held with the custodians by respondents exceeded $3 trillion, although a large minority declined to reveal the value of their portfolio. To qualify for inclusion in the survey a custodian needed to receive a minimum of 20 responses. No weighting has been applied to the results based on size of assets under custody or any other criteria. Each client’s vote is worth the same.
Richard Hogsflesh is managing director of R&M Consultants in the UK