As a concept, master manager custody blazed a new trail for Australia’s institutional investors when it arrived from overseas. It‘s a progressive asset servicing model originated by Richard Ennis, co-founder of US consultancy EnnisKnupp, that aims to break down some of the silos through which investment programs are usually implemented.

The notion that custodians, who serve as safekeepers of assets and data gatherers for institutions and are the only service providers with full visibility over super fund portfolios, also perform tax management, currency hedging and trade execution for their clients, generated a buzz that has so far resulted in broad realisation among custodians that they should at least offer tax optimisation services. But the implementation of the full master manager offering needs work. Lounarda David, Asia- Pacific head of Mercer Sentinel, says the consultant likes the idea but custodians need to answer some big questions before winning its endorsement. Essentially, they need to build out their skill-set and be prepared to take on larger risk liabilities, she says.

This is because the new services compromise custodians’ traditional roles. An advanced master manager service aims to save clients’ trading costs by grouping orders and executing them, which contrasts with their core capabilities of investment facilitation and reporting. “I’d like to see the market separate idea generation from execution completely,” she says. “Is the performance the result of the manager picking the right security, or because it was traded well?” “Clients use custodians to keep everyone honest. If custodians started directing the trades to a panel of brokers, they’re on the hook for the performance of those brokers.”

David asks: which hat will the master manager wear – investor or facilitator – and if they take on investment risk, are they willing to be liable for it? Greg O’Sullivan, head of sales with State Street Investor Services, counters this view by saying that custodians themselves would not execute the transactions: these tasks would be passed to the trading arms of the parent financial institutions. He says most investors are still undecided about whether to buy the service. On one day, they hear from investment managers and brokers who do not want to give up execution – they can source better prices and supply research, they argue – and the next, they receive a pitch from a custodian who says they can perform the same duties as the brokers, and at a lower cost.

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