To capture the full benefits of an  outsourcing relationship, there  must be a focused effort by the  industry to repair trust and to  realign service expectations  between fund managers and  custodians. We have the  technology and we have the  desire. But the lack of trust  between parties and unrealistic  service expectations remain as  real roadblocks, writes BRUCE  RUSSELL, a director with  Shoreline, a consultancy for  investment industry businesses.

More funds managers are  outsourcing administration  functions to  custodians, but unfortunately these  arrangements have delivered mixed  success. In many cases the services  do not live up to the promises made  by custodians, and fund manager  expectations, while sometimes  unreasonable, have not been met.  Both sides must act to improve  efficiencies. To see what’s possible,  let’s look at a possible future  scenario.  For example, a fictitious  manager, Global Investment  Management (GIM), manages a  global long/short equities portfolio.  GIM has a successful, trusting  relationship with its custodian,  which is responsible for all backand  middle-office support services.  But since GIM does not run any inhouse  IT systems, it also relies on  the custodian to provide all order  management, administration and  accounting functions.

A 20-page service level  agreement (SLA), drawn  up between GIM and the  custodian, captures the key  service requirements. There are  financial incentives for both  parties to improve the efficiency  of outsourced processes, and the  key performance indicator (KPI)  reporting from the custodian  is independently verified and  benchmarked to industry service  levels.  To achieve this outcome  there are a number of hurdles to  overcome. While the technological  challenges are generally understood  by both parties, Shoreline judges  relationship and service matters  to be of equal significance. The  following outlines our view of the  steps that should be taken to reach  the full potential of an outsourcing  relationship. 

Repair trust between  funds managers and  custodians The lack of trust between  fund managers and custodians  is a persistent undertone in  the industry. Like all difficult  relationships, a history of promising  too much and delivering too little  is the major cause. In a recent  example of this, a new custodian  was appointed on the strength  of their compliance monitoring  capability. Later, the manager learnt  the service was being undertaken  on spreadsheets.  To repair trust, both parties  must take responsibility for the  relationship and in doing so, invest  time and effort into understanding  each party’s offering and  requirements. Fund managers need  to be very specific about the services  they require, and custodians fully  transparent on what they can  deliver. Also, to build trust, a  ‘can do’ attitude by both parties  is necessary. In another example,  a large manager unsuccessfully  attempted to appoint a custodian  three times. In the fourth attempt,  the service provider’s staff was  given direct incentives, and the  relationship began. 

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