It is an accepted wisdom of the custody business that size matters. Ask the biggest players why they are big, and they will tell you that, in a market as tough as theirs, you need size to generate economies of scale. When the product becomes a commodity, you have to sell a lot of it to survive.
Talk to a smaller player, however, and the story is very different. Nowadays, any custodian with less than $2trn in assets is classified as small. These players are often dismissed as niche providers, serving only one client segment or operating primarily in their home market. But they all have rather a good story to tell, and the lumbering giants of the business would do well to learn some lessons from them.
Consider, first, the evidence from industry surveys. The results of this year’s annual global custody survey from R&M Consultants show how important it is not to be big. Pictet topped the overall league table for client satisfaction, with Royal Trust in second place and Brown Brothers Harriman third. None has even $1trn in assets. Northern Trust, in fourth place, has $1.5trn under custody.
It’s not as if this is the first time the smaller custodians have won. Pictet, for example, has topped the R&M survey in five out of the seven years it has been running. In fact, it is very rare to find a client survey where a big player does win. Naturally, the larger custodians explain this away by saying that, the more clients you have, the more likely you are to get some poor scores to pull down the average. They will also tell you that they don’t often compete against the specialist players, and that their scores should therefore be compared with their peer group.
It is certainly true that the world’s largest global custodians have very little to choose between them, according to the R&M survey – only 0.17 of a point separates fifth from ninth place. It is also fair to say that, for the very largest global mandates, these big boys will normally dominate the shortlist at the expense of the specialists. But does that mean that their clients should expect to get a lower level of service? Can nothing be done to improve the situation?
Happily, it looks as if the largest custodians are finally waking up to the fact that survey winners do not get high ratings because they are small – they get them because they are focused. They specialise in securities processing, and do not try to cross-sell hundreds of different products. It is this focus that differentiates their service delivery, and leads to higher returns.
Focus is the key word on everyone’s lips at the moment. Custodians appreciate that they must convince their clients of their total commitment to the business through action rather than words – better service and better products. One wise custody director deals with the commitment question by answering it with another question: ‘What do you, the client, see when you look at the way we do business?’ Perception lies in the eyes of the beholder. Survey results suggest that the perception of too many big custodians is one of inadequate service.