It’s not primarily a matter of cost. In Australia’s near-saturated custodian marketplace, superannuation funds have hit the spotlight on custodians’ primary service offerings and relationship engagement as they go out to tender. Jo Townsend, general manager of investments at REST Industry Super, says the fund felt it was “appropriate to go back to basics” in the selection of a new custodian. “We were looking very much for a partnership arrangement, rather than just a service provider. Obviously with custody, risk management and internal control frameworks are extremely important, so we needed to be satisfied around those.”
On the sunny side of the street
For what culminated in a couple of years’ worth of investigation and due diligence, the $20-billion-plus fund switched in mid- 2011 from JP Morgan Worldwide Securities Services to State Street, terminating an 18-year relationship. The criteria were both qualitative and quantitative in nature, and the quality of the people managing the account was a crucial point for the fund, says Townsend, pictured below right.
Like REST, QSuper joined State Street’s client base in March last year, having ended its 12-year relationship with NAB Asset Servicing. Michael Cottier, chief financial officer at QSuper, says handing over its $32 billion worth of global investment assets was an in-depth six-month review process. “The main reasons for State Street’s appointment include the quality, breadth and depth of services, advanced technology, and global capability,” he says.
According to Cottier, State Street is helping the fund to post-cost relationships and services build its offering, with the fund focused on delivering more and improved services to its members.
In relation to technology, Townsend says a commitment to innovation, technology and research and development figured high on REST’s list. “It’s very much a sector where differentiation is difficult, because a lot of the services are relatively generic and one of the challenges of doing a custody transition is to actually do an apples-with-apples comparison.”
Consulting on custody
Custody consultant Drew Vaughan, principal at Dymond, Foulds and Vaughan, says super funds are better informed and more experienced than they were five years ago; they have been through custodian evolution and are savvy about the regulatory environment. “All of those factors are feeding through to create a more knowledgeable group of people in the super industry. So the standards and expectations of clients have increased significantly, in my view, in the last few years.”
Roger Fishwick, director of analytical and product development for the UK at consultants Thomas Murray, says funds are looking for a large range of services. “With the pressure on funds to be as cost efficient as possible, together with the increasing regulatory/reporting burden on them, their appetite to buy in services rather than do them inhouse can only increase.”
Consultants to the space, such as Vaughn and Fishwick, are highly utilised during the tender process. Their influence on which company a super fund considers is, arguably, significant, being well acquainted as they are with the intricacies of custodian businesses. “Our role is to advise those investors about custodians who are in the marketplace, and the strengths and weaknesses of those custodians, and then to assist the client through the process of doing a request for tender, which would go out to potential custodians,” says Vaughan.
He believes a very high proportion of funds going through a review will utilise the services of a consultant. “It’s very rare for a client to hand over responsibility to the consultant. More commonly, the client is seeking to be actively involved but, depending on the resources the client has inhouse, would indicate how much active involvement they would seek to have,” he says.
The wish list
That there’s an increased focus on service and risk management is evident from REST’s approach, and it factored into its future plan of engagement with the custodian. In particular, it was important to establish upfront a governance framework to ensure that, at different levels, appropriate people were engaged in addressing any issues that may arise. “From a governance and a review process, we’ve got a formal system in place, where we have monthly service reviews. We have quarterly KPI reviews, so actually reviewing service deliverables against predetermined timeframes,” says Townsend.
The fund has also formed a steering committee, which involves the CEOs of both REST and State Street. “Any issues that exist within the day-to-day may be elevated to that level, but the whole idea of that forum is to do more of organisational-level strategic work,” she explains, adding that a concerted effort was made to put frameworks in place to allow them to do this. “…The danger with custody relationships is that you get so embroiled in what you have to deal with on a dayto- day basis that you’re actually not taking account what you need to do in the future.”
There is also a clear emphasis on service provision and relationships. Given the relationship is likely to last five to 10 years, both parties are seeking a long-term model – and a partnership, which involves trust and clarity going in. “You’ve really got to make sure that you understand what each service being offered by the different providers actually involves, and just make sure that you do actually really understand what you’re going to get,” says Townsend.
However, ensuring the custodian can meet the fundamental custodial and administrative services is the key, says Vaughan (pictured above right). “If you don’t get the operations right, the best relationship, the best pricing doesn’t matter.” This means ensuring the custodian can meet the service requirements – namely, what Vaughan calls the first two tiers of service. “There is a primary service the custodian fulfils, which is the safekeeping, settlement and income collection, and valuation of assets,” says Vaughan. The secondary part covers provision of accounting, pricing and compliance monitoring-type services. The third ancillary service involves one-off ad-hoc-type services, such as securities lending. “From my perspective, a client does not have to use the same custodian as they would choose for their securities lending service. They may seek to do that, there may even be competitive reasons put forward why that would be advantageous… but it’s by no means a requirement that that third level of services be linked.”
Peter Katz, client relationship director for Australasia at Thomas Murray, echoes the sentiment, saying many Australian super funds are very sophisticated investors, expanding beyond the more traditional asset classes, and their needs are changing. Beyond basic custody and settlement, they want compliance checking, accounting, regulatory and other reporting, as well as administrative support for alternative investments. “In addition, they’re seeking responsive and proactive client service from staff knowledgeable about the client, his priorities and range of investment,” says Katz.
Tailored to fit
Generally, consultants are similarly highlighting a growing trend towards funds seeking more customised custodian offerings. While some funds are contractually obliged to put out a tender periodically, others are seeking value-add service, from global reach to private equity. “The super funds appear to be reaching further out to where they’re putting their investments and they’re needing more specialised coverage in those areas,” notes Philip Beresford, principal at consultancy Picotaur Solutions (pictured right).
He believes funds are seeking more than just a service, realising the need “to dig a little bit deeper”. “Because the custodians open the funds up to a reasonable amount of risk if they’re not doing things appropriately,” he says. By way of example, he notes that a fair percentage of custodians still use Excel for a number of functions, then hide it from the end user. While it’s not a deal breaker, he says funds have to query how quickly a custodian can respond to new requests.
Reason to change
That funds are increasingly tuned to where best value and opportunity lie is not surprising given the global nature of the marketplace. As Townsend argues, there’s a marked difference between entities with global platforms and those with regional platforms that are “put together”. “Theoretically we liked the model of having a global operating platform. And so I think now there is more of a move across the board towards the global operating environment,” she says.
With funds investing more overseas due to less opportunity domestically, Beresford says funds have to start looking at their risk profile differently, querying how well a custodian will deliver on that. “Because of that, they’re more interested in what services these firms can offer for them overseas,” he says.
With the diversity of investment and service requirements for super funds, it’s crucial that the custodian they use keeps abreast of best practice globally, according to Fishwick. “The custodian should not just be reacting to new needs in Australia as they develop, but should be leveraging developments for clients worldwide. A good example of this is look-through for pooled funds, which is a new requirement in Australia for super funds, but has been under development in Europe for some time to help insurance companies meet the new EU Solvency II reporting requirements,” he says. However, while Vaughan acknowledges the need for global accessibility, he says domestic custodians such as National Australia Custodian Services (NACS) have been successful in partnering with offshore entities (in NACS’ case, BNY Mellon) to manage settlement services in those markets. “If you’ve got global scale and global experience, you should be able to argue that you’ve got better pricing available, because you’ve got that global scale,” he says. “And you should be able to bring the best of services from anywhere in the world to the Australian marketplace.