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.
