Custody and Operations

The world of custody has come a long way over the past two decades. Custodians, as their name implies, were originally limited to providing safekeeping services for certificates of holdings but have, over time, moved into the provision of various other services such as settlement, accounting, performance measurement, securities lending, and transition management, to name a few. While some of these are fairly standard across the industry, the quality of the service provided can, and does, vary in others.

Efficient custody and operations can have a material impact on pension fund costs yet yery few advisers have significant hands-on experience in this field and trustees often have their hands full with other pressing investment and benefits issues.

Choosing the Most Appropriate Custodian

Historically, the time and effort devoted to the selection of a custodian has often been significantly less than that devoted to the selection of a Scheme’s asset managers, particularly as the custody industry has consolidated around a small number of large global organisations.

A poor choice of custodian, however, can not only result on a drain on your resources and time but also higher costs and at the extreme, a potential loss of assets. As changes to Custodial arrangements are relatively infrequent , it is important to ensure that the right terms are achieved and service levels defined at the outset. Understanding the hidden pitfalls is the first step to ensuring the right choice is made.

Managing your on-going relationship

Every relationship requires some degree of time and commitment from both sides in order to function smoothly. Although many investors believe that once defined, Custodial services effectively look after themselves, it is important to monitor the level of service received against defined measures of success. Knowing what constitutes best practice, particularly in the areas of custody agreements and stocklending, and what is expected from both sides is important to ensuring the relationship proceeds smoothly.

Custody Fee Reviews

While getting a good service is one aspect, paying the right price for it is another. Understanding the custodian revenue model is key to understanding what you’re paying for and whether it is worth it. Few institutional investors have the time to unravel the various components of their custodial service. Likewise, the perceived complexity of reviewing custodial fees and services a few years after the initial appointment of a custodian is often a barrier to doing so, and as a result, overpayment is rife.

The Custody industry is now dominated by a few large organisations as substantial investment in technology has been required to keep pace with more complex investment markets and demanding clients. Significant economies of scale have resulted in lower costs for basic custody services such as safekeeping and settlement. While custodians have little choice but to pass on these costs savings to new clients, very few, if any, of their existing clients benefit from fee reductions unless pressure is brought to bear by an appropriately qualified consultant.

As well as general fee savings at the overall level, institutional investors are often unaware of the hidden costs, such as transaction related costs, FX expenses, and forgone interest on cash deposits. Stocklending is another activity that raises thorny issues of revenue sharing and unrewarded risk taking, with all too many investors often conceding a disproportionately high share of the revenue to their custodian and accepting inappropriate collateral guidelines.

How Can We Help?

Our team has conducted an extensive number of Custody searches and reviews over their careers, as well as played an active role in shaping industry best practice. We have extensive asset management, banking and investment consulting experience, including direct responsibility for deal processing, custody activities and IT development.

We know the industry inside-out and understand the perspectives of all of the parties involved. We can help you to identify the right service requirements and levels for your assets, as well ensure that you understand what risks may be inherent in certain activities and that the benefits you should therefore be receiving. We also know how, and where, savings can be made, and how potentially expensive pitfalls can be avoided. A short review can lead to large cost savings.

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