What's value added any more?
‘Value added’ has become a catchphrase in the global custody vocabulary. An all-embracing concept, it has been habitually applied to any service offered beyond the traditional core custody offerings of safekeeping and settlement.
However, the concept of what adds value is coming under the microscope as pension funds and fund managers look to extract more value out of their custody relationships. Many of the services once defined as value added – investment administration, fund accounting, performance measurement and regulatory reporting – are now considered to be integral to the core custody offering.
“Clients are pushing the barriers of services providers and are challenging us to do more for them and faster. This is a phenomenon across the custody business,” says Francis Jackson, head of the investor solutions group for Citibank Global Securities Services. As a result, says Jackson, there is far greater demand from clients for value added services, so much so that many of these services are becoming core to the custody offering.
Paul Stillabower, vice president and managing director, RBC Global Services, is not a fan of the value added terminology: “Let’s be clear that it is all of our customers that define what is value added, and each and every customer has different challenges. Customers are all developing at different speeds, have different product requirements, different strengths and weaknesses and different business and skills sets.”
State Street adheres to a similar view. Jeffrey Conway, senior vice president at State Street Investment Manager Solutions, says the larger global custodians’ task is to provide scale to customers. To do that means having “many tools in the toolshed” that can be lined up to provide tailored solutions to clients. “By providing bundled services solutions, we can create scale for the customer and enable them to do things at the pace they need them,” he says.
Custody is an intensely customer-driven business. Custodians’ pension fund and investment manager clients are being driven to demand more value added services by a combination of factors sweeping Europe.
First and foremost is the increasing trend away from the welfare state across Europe. More recently, occupational pension schemes are beginning to shift from defined benefit to defined contribution models. The bear markets show no sign of turning bullish any time soon, so those managing retirement funds are under enormous pressure to improve investment performance. More sophisticated investment strategies on the part of pension funds have opened up more opportunities for custodians to provide the so-called value added part of the equation.
The downturn in the economy cuts both ways, says Stillabower. “The one overarching condition today is the downturn in the economy. Custodians are trying to get more services into their customer base to improve profitability. Of course, customers are also facing difficult market conditions. Competition is becoming more global and investment performance is critical. Every penny counts.”
As a result, he says, clients are more willing to talk about what actually adds value. “A few years ago everyone was making money in the investment industry, so customers bought value added services like investment administration, transfer agency, securities lending and performance analytics to deal with growth issues. Now they are buying those services to improve efficiency and focus on core strengths; and those that bought the services a few years ago are trying to define the value they are receiving today.”
Extracting the value out of value added services is a trend observed elsewhere in the custody industry. “Much of the 1990s was about people focusing on the features of particular custody products, rather than on the benefits,” says Benjie Fraser, managing director at Bank of New York in London. “Often, the cost/benefit relationship wasn’t right. That has changed and custodians now need to talk about benefits, rather than features. If the customer is successful in identifying products that are of benefit, then you will begin to see a better balance between costs and benefits.”
RBC’s Stillabower believes the key to achieving true added value is for the custodian to be as transparent and flexible as possible and to build strong relationships with the customer. “Once a strong relationship has been built, we can jointly determine what adds particular value for customers, and in what priority. Customers want custodians to add value to their business; it is not necessarily about them paying more for these services as they will always pay a fair price if they think value is being added. Custodians need to be able to identify where value is being added and obtain agreement from the customer that value is being added.”
How value is determined is up to the individual custody client, says Jemma Broadgate of Northern Trust. “For a pension fund back office our provision as a core service of individual and consolidated fund manager valuations and transaction information will be of value – saving them time and cost in preparing those reports themselves. Enriching that information still further by delivering it electronically via a customised screen showing how the market has performed and how the performance of the stocks in his pension fund measures up to that adds even more value for that pension fund.”
In meeting customer demands, custodians are extending their reach into clients’ operations. Custodians no longer restrict themselves to back office processing and are developing products and services that take on some of the burden of the middle office. State Street’s asset servicing solutions are employed from trade execution onwards, for example. This includes middle office functions such as handling broker confirmations, product level accounting and increasingly, bundled services for the high net worth end of the market. Into this mix features such as performance measurement, analytics and post-trade compliance are added.
Information is increasingly the name of the game in custody. “Clients are drilling down to a greater level of detail and they are relying on custodians to do that for them,” says Citibank’s Jackson.
All custodians are now required to supply internet-based reporting for assets under their control or the transactions under their control. As Citibank’s pension fund clients get bigger and more aware of their risks, says Jackson, they are asking Citibank to provide aggregation services and are willing to pay a fee for them. “In the US, we have developed a service for multinational pension funds that have centralised administration and asset allocation and investment strategies. Under this system, we provide a single source of information that gives a global view of what every pension fund is doing worldwide. We can aggregate this information from other custodians, delivered to us via Swift messages, and deliver this information to clients in a centralised way. We will bring this service to Europe within the next six to 12 months.”
Leading on from the aggregation service, Citibank is developing a single interface, or portal, for clients who want one interface to all of their businesses – custody, FX and brokerage. The information delivered via this portal will be customised to each user within the organisation so that the chief investment officer, for example, will see performance data and compliance data and the 10 largest traded stocks. He or she won’t see accounting reports and settlement data which is more relevant to the chief administration officer. “Our clients now want us to give them the intelligence and the tools to allow them to make decisions based on better education of the fund’s position. Our Executive Intelligence Portal will be rolled out at the end of the year,” says Jackson.
Northern Trust’s Broadgate agrees that clients want to drill down into their portfolios. The custodian offers Fund Peek Through, which allows a pension fund client to drill down into an investment fund to get a detailed picture of all its holdings therein. This information on index fund assets can be combined with directly held assets so that clients gain a consolidated picture of their exposure to a certain stock – a valuable tool in terms of risk control, says Broadgate.
Citibank is attempting to leapfrog current custody technology and services by applying its solutions to senior management requirements – it is extending the definition of value added far beyond what was accepted only a few years ago. The development of these services has involved substantial capital outlay, but was not done from a standing start as the data elements and the skills in massaging such data were already well established.
State Street’s Conway also identifies a trend for custodians to broaden their involvement with clients, moving into broker and FX information provision, for example.
In July 2001, the bank launched Multi-Bank Global Trading Support Services (Multi-Bank GTSS), an advanced online confirmation matching service. Initially designed for FX transactions, the system will be expanded over time to incorporate other asset classes. The service is available on State Street’s multi-asset e-finance network, Global Link. Launched in 1996, Global Link serves as a central e-finance network offering clients access to a broad array of applications and services across multiple asset classes with full connectivity to global investment managers’ chosen trading destinations, including multiple exchanges, brokers, bank counterparties and other online trading venues.
For RBC’s Stillabower, much remains to be done even in core
services to really add value. “Clients are looking for more integrated straight-through processing services and better information reporting to add value by improving efficiency and lowering cost. For example, clients are now more focussed on which
of their brokers are causing failed trades. Greater efficiency is probably the most significant tangible value added service in today’s environment because it falls right to the bottom line.”