The impact of choosing the wrong custodian to safeguard a scheme 's assets could obviously be colossal, so the best advice is get it right first time". Finding the right one is not a simple task though; certainly, few investors have the skills or knowledge to perform a search unaided. While the request for proposal process helps concentrate a search on the most suitable candidates, it still takes someone with the requisite market knowledge to find just the right custodian, at something close to the right price.

As a result, institutional consultants are being kept busy helping pension schemes make the right decision. "There's a big difference between a UK clearing bank and a US trust bank in terms of the service and protection they'll provide," says Simon Murray at consultant Murray Thomas in London. "We are able to give the client a clearer idea of the level of on-going service they can expect and how to monitor that service."

The key benefit that a consultant provides is in overseeing the selection process through to a conclusion. From the consultant's point of view, it should have sufficient expertise to create a database on each custodian, and a tried and trusted selection methodology, saving the client time as well as money.

According to former Ernst & Young consultant John Dallas, now running his own firm called CSIM, schemes that use a consultant in the custodian selection process are also dramatically reducing their risks: "A good consultant will take the appropriate steps to ensure client confidentiality and provide protection over intellectual property rights. It will ensure adequate coverage of the functional and technical requirements using a customised RFP document. And the client will benefit from professional assistance in the final selection and contract negotiation."

During the selection process, a good consultant should also demonstrate its fee analysis models and custodian evaluation models (for quantitatively deciding which is the best custodian for a client). These, it is felt, are critical in benchmarking custodian abilities generally and in respect of a particular client.

An initial review of client priorities will allow the consultant to establish the correct mix of selection criteria. According to Murray: "You want your assets to be safe, you want good service, good reporting and a good price, probably in that order. But some clients will have different priorities. So we then have to evaluate what effect an emphasis on price is going to have on the security of assets and the level of reporting. This is a serious issue because many US trust banks are strong in some areas but very weak in others."

David Taplin at Towers Perrin in Melbourne comments: "There are few custodians that have anything close to a full range of services. If they do offer the right mix of services, they are often not of the right quality or have constraints that prevent the client using them the way it might need to - this further reduces the universe."

The extent of global M&A activity creates a further threat to the continuity of service. "Given the consolidation in the business, finding a custodian that is going to be fully committed to the client long term is a problem," says Murray. "That does not mean we would necessarily steer clear of a custodian who is a takeover target, because in some cases it can be beneficial."

Taplin's experience is that the client can often come off second best: "Although I am a strong believer in market forces, these can be manipulated. If you take the case of a Barings client, it has now gone from Barings to Barclays to Morgan Stanley to Chase in less than three years. That has the feel of being like a product on the shelf up for sale to the highest bidder."

The consultancy route does allow for a greater number of options to be weighed and some unforeseen solutions to be found. As an example, Towers Perrin recently constructed a relationship between a global custodian and a domestic custodian in the Netherlands that allowed the client to access its preferred domestic custodian with the best global custodian for that client, without a fee increase and while retaining the appropriate risk controls. "This is very unusual as custodians generally only want to work with their preferred global or domestic custodian," says Taplin.

In essence, then, using a consultant should provide a higher degree of certainty over the quality of the outcome. But Taplin admits it is possible to overstate the case: "I should say there are just a few consultants that can do this and we recognise only a dozen people (as against firms) around the world with any competencies in this field. There are few people out there with the knowledge in detail of the 30 major custodians - most know the custodian they worked for or the one or two that they have been close to as an asset consultant or actuary. This is changing but will be the case for many years given the low base on which most will start.""

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