The investor services industry is at a significant stage in its development and market maturity, espe...
Custodians have moved into information provision and in today's market place even what could be considered a standard custodial package provides limited levels of portfolio valuation, performance measurement, risk management and return enhancement services. These are in addition to the 'bread and butter' capabilities of asset safekeeping, securities settlement, income collection and tax reclamation.
Value-added service capabilities fall into two broad categories - accounting and valuation services provided for a fee, and income generating services such as stock lending and cash or treasury management.
The investor services industry is mirroring many other information and service-based industries in its move away from a commodity product-based offering to one based on ease of delivery and service. The changing description of the business excellently illustrates this point, from 'securities processing' through 'securities servicing' to 'investor services.' These trends are particularly pronounced in the US and UK and we are now witnessing similar trends in Europe as financial services are affected by global market forces.
Against this backdrop, investment and pension funds' requirements are also being driven by the forces of consolidation within their own industries. For pension and investment fund managers, this is concentrating on the investment strategy itself and allowing other institutions to carry out the implementation process.
For example, as the number of sub-managers increases to an investment fund, the requirements for consolidated reporting increases, which funds require on a monthly basis. The provision of this service is called 'Master Custody'.
As a trade execution can be captured electronically by the custodian on behalf of an investment scheme, the custodian can provide trade-dated investment reporting and accounting as opposed to trade-dated reporting. As settlement, even with moves to same-day settlement, can be three to five days after a trade, a more accurate picture of an investment portfolio can be provided by the custodian at any one point in time. Accounting reports also include security and income reporting, profit and loss accounts and reports of unrealised gains and losses.
At present the focus is on the value-enhancing portions of the investment life cycle as a means of customer retention and new client acquisition. It begins with securities issuance and leads to making the investment decision through execution, asset servicing and portfolio analytics. Analytical services, such as asset duration reports, price/earnings ratios and earnings per share figures on stocks can also be used to assess the portfolio characteristics of investment holdings.
Detailed performance measurement reports can cover time-weighted returns, attribution analysis and risk information from standard deviations to more advanced analysis. In addition, services can also include compliance monitoring of the sub-manager according to whatever guidelines have already been pre-determined.
In addition to reporting services, custodians can generate further income of investment funds from stock lending and cash management. The main determinant of a client's ability to benefit from this service is their approach to risk. Some clients are happy to add a few basis points of earnings to their funds, others are not. But to deliver true levels of value-added service, custodians must deliver a true consultative approach and fully appreciate that every business problem is different. It is then up to the industry to deliver suitably tailored service-based solutions.
This metamorphosis has not occurred against a static industry or 'provider' backdrop and indeed has driven many of the changes in the nature and culture of the market itself. As the range of services provided by custodians continues to increase, so too have the demands for the efficient reporting of those services and the demands on the capabilities and capacities of the custodians themselves.
Scale has become the major prerequisite of a global custodian's ability to offer the broadest range of these product solutions and service-based delivery. Custody is a capital-intensive business. The continual requirement for re-investment in information technology, provision to upgrade and re-engineer existing and development of new service provision comes at a huge cost.
Custodians are now in effect central repositories and generators of critical information, improved information flows and services. In reality, the custodian is a service provider and this emphasis is set to be increased as the level of solution and innovation provided by the leading custodians increases. In a way, one of the major drivers of business expansion for the custodial industry follows neo-classical economic theory - as the level of sophistication and service element of the industry increases the demand for those services increase.
Outsourcing is a classical case in point. Where once it may have meant the transfer of the basic custodial service from an in-house function over to a dedicated custodial provider, that is no longer necessarily the case. Wholesale outsourcing of ancillary functions, fund accounting, compliance monitoring and portfolio management, activities that would have been considered key to client business, are now easily transferable to the custodian provider. It is with the security and knowledge that this information can be provided in a reliable, timely manner in the format required that the custodian
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