“It’s always been competitive,” Jond says, and remains so irrespective of how many services a custodian can spruik. “I can remember deals 15 years ago that we fought aggressively for.”
This shows when tenders are put to the market. It is “never clear” which custodian will win until a fund makes its final decision, Vaughan says. “That is the sign of a really competitive market.”
Custodians must be able to accommodate demands from different clients, Jond says. “There are many bespoke requirements in tenders. Some funds want a ring-fenced data warehouse; others want tailored interfaces. You need an infrastructure that is robust and efficient but with enough flexibility to tweak services.”
Vaughan rates Australia as one of the most hard-fought custody markets in the world. It has fewer assets and funds than the US and European markets, but requires custodians to manage complex assets, many of which are based offshore, and provide detailed reporting. Australian tax law is complex and requires global custodians to develop new accounting systems.
In their attempts to win clients from NAB and J.P. Morgan, State Street and Northern Trust have been “very aggressive” in their pricing of custody services, says Roger Fishwick, London-based director of Thomas Murray, a custody consultant.
State Street will earn a minimum of $25 million in its five-year contract with Sunsuper. “That’s getting pretty low,” says an experienced custodian who requested anonymity. However a former employee of the US bank says: “State Street does not go into any deal that it thinks it can’t make money out of.”
In the past, custodians have attempted to win mandates by providing services more cheaply than competitors. “There will be certain pieces of business that custodians will go after very aggressively because long-term partnerships can be very lucrative,” Edwards says. “We can create margin and value across multiple product lines rather than just one.” Custodians may be willing to cut a cheap deal to win a cornerstone client.
“If you’re going to build a business and want some key clients to anchor it, maybe it’s worth giving up a bit of income,” O’Callaghan says, adding that such offers can help funds reduce costs. “Sometimes you get made an offer that you can’t refuse,” he says.