Consultants and custodians
Although a few investment consultants in Europe are positioning themselves to provide advice on choosing, appointing and evaluating custodians, the market for such services is very much in its infancy. Despite more complex market conditions generated by the growth in cross-border investments following the birth of Euroland, European institutional investors are remaining conservative in the ways in which they evaluate and appoint custodians.
Several recent studies put forward by consultants have noted a trend towards the increasing use of third party custodians. Nonetheless, progress is slow.
In terms of the use of third party consultants by pension funds, the UK is one of the European leaders: a survey late last year showed that just under half the UK pension funds surveyed used a third party custodian. But most are running their own selection processes, according to Geoff Singleton, a consultant with Hymans Robertson in Glasgow. “We do offer global custodian advisory services, “ he says, “but there is not a great demand. Manager searches are much more in demand.”
Hymans Robertson offers a three-tier service, evaluating: ownership and commitment to the custodian business; competence; and the range of added-value services provided. Singleton noted that there is a growing interest in sub-custodial networks, in the ways in which the sub-custodians are selected and the network is maintained.
The market for custodian advisory services is one that Hymans Robertson is observing, but Singleton is wary of expecting too much.
Towers Perrin is one of the few consultancies to make the investment in developing a global practice in custody consultancy. The offering has been part of Towers Perrin for 10 years now. While previously it was part of the actuarial practice, for the past two years it has been a global practice in its own right, says Christine Larmer, custody consultant with Towers Perrin.
The firm has a two-member client liaison team in London as well as a research team in Melbourne that maintains an extensive database of custodians throughout the world. The database is founded on a 2,000 question survey regularly conducted in the industry, which allows Towers Perrin to evaluate custodial services against 300 criteria, including services, networks, corporate structure, internal controls and fees.
So far, Towers Perrin has been concentrating on developing its client base in the UK and the Netherlands and Belgium, the markets that are the most open to the use of third party custodians, according to Larmer. In addition, these markets have few local providers. “In the Netherlands, two or three local providers have been in the market, but as pension funds start looking to Euroland, they will have to see whether the local custodians are good enough, and whether they can provide all the necessary services,” she says. “In the UK there are hardly and local providers left.”
That there is growing interest in the Netherlands for custodian consultancy is confirmed by Fritz Bosch, director of consultancy at Bureau Bosch in Nuenen. Nonetheless, the concentration remains on the search for asset managers. However, as more and more money is being externally managed, the demands on custodians by Dutch pensions funds are increasing. Agreeing with Larmer, he says that there is a limited number of top names with a local presence, including Citibank, Mees Pierson, Kas-Associatie and ABN AMRO-Mellon. “There are only a select number of organisations with sufficient IT. Dutch funds can spread the risk by looking throughout Europe,” he says.
The interlinked nature of the financial services industry in the larger European markets, particularly Germany and France, has meant that there is little demand for advisory services related to custodians. In many cases, fund management and custodial services are provided by the same group, and unlike the UK, there is no requirement to use third party custodians.
In Germany, for example, the use of consultants to appoint investment managers has been “very limited,” according to Nigel Kresswell of Heissman IPC. Fewer than 10% of the funds have used consultancies. The hausbank ethos has continued to dominate the market, and most custodians are chosen because they are related to the bank used.
But things are beginning to change, Kresswell notes. “The use of consultants to find investment managers is on the increase, and a growth in interest in using consultants to find custodians will go hand in hand with that development,” he says. “There is also a trend to appoint global custodians and Germany will follow that trend.” However, he remains cautious. “We are definitely hoping that demand for this service will improve, but it will need time.” The Austrian market is structured similarly to German, Kresswell observes. However, there is more emphasis on external funding, so it has the potential to take off slightly more quickly.
The potential for change, albeit slowly, is also evident in other European markets. In Portugal, for example, “fund management is owned by the banks, which have their own custodians. So when you choose your fund manager, you also get a custodian,” says Bernie Thomas, consulting actuary at Watson Wyatt in Lisbon.
“From a consulting point of view, we don’t get too involved in custodian issues, except to advice that there might be a conflict of interest. The large multinationals appreciate that.” he says. During the manager selection process Watson Wyatt asks several key questions in relation to the custodial services offered. Thomas expects that the market for broader consultancy services will grow within the next five years. “It is not a major issue at the moment, but as the Portuguese market broadens, consultancy issues will become more important.”