Small superannuation funds should expect significantly higher custody costs in the next few years as custodians leave the market, a leading consultant has warned.

Drew Vaughan, director of Dymond, Foulds and Vaughan, believes that eight players in the Australian market (NAB Asset Servicing, J.P. Morgan, BNP Paribas, State Street, Citigroup, Northern Trust, HSBC Bank, BNY Mellon) is too many and is leading to higher than usual price competition.

As custodians leave the market, he says the small price differential between what a small fund pays to its custodian and what funds as big as AustralianSuper and UniSuper pay will widen over the next two years.

“Not all eight custodians can survive profitably in this market,” said Vaughan. “There will come a point in time, that some will either exit or become so unprofitable that they will not continue.”

The move is exacerbated by a diminishing number of funds as mergers take place, but also by NAB Asset Servicing holding around a third of the market share leaving the other seven to fight over the remainder.

“There are a lot of very small super funds around and many of these are getting the advantages of the scale a fund like AustralianSuper brings to the marketplace and any custodians operation,” said Vaughan.  “In a couple of years time, you will see a lot more pressure on custody fees with small funds receiving a significant increase in costs for services.”

He envisaged that in this situation larger funds would still retain the fee rates they currently pay, reflecting a custodian’s preference for a few large clients rather than many small clients.

Vaughan not only predicted such a growing price differential for custodial services, but a gulf between the in-house capabilities of large and small funds.

He said large funds would not only become more demanding of their custodians but could also afford to pay for unique one-off services and that in time “they will accelerate away from the smaller funds who cannot do that, who cannot afford information or the right people”.

Vaughan is speaking on the ideal investment operations model at the 18th annual Investment Administration Conference in Sydney on February 18. He is speaking alongside Lounarda David, investment operations manager from Sunsuper and Peter Rowe, chief operating officer of Vision Super. The conference is chaired by Leigh Sales of ABC’s 7.30 program.

To register for the conference at the early bird rate of $750 go to before December 15.


Join the discussion