Re-thinking The Value Proposition
By: Blair McPherson
Survival in today’s business world requires quick and efficient responses. Today’s custodians are responding to the needs of pension plan sponsors and money managers for more sophisticated analytical tools and data. Blair McPherson, of RBC Global Services, examines what today’s custodians can do for pension fund clients.
Someone once said, “In the business world, if you’re not moving ahead, you’re destined to fall behind – there is no status quo.” It’s no secret that industries and companies that focus on evolution and continual improvement stand a much better chance of long-term success than their inert counterparts.
To survive, and indeed thrive, in any business today, the key is responding quickly and effectively to the ever-changing needs and demands of clients and the marketplace. The proof is everywhere. Just look at the recent seismic shifts in the ways travel agencies, booksellers, and even coffee retailers are delivering their wares. Then, peruse some of the names in the graveyard of fallen companies – those which were too slow to adapt or which lacked the foresight of their still-walking and breathing competitors.
This shift has also made its mark on the pension business as plan sponsors and managers look for more timely delivery of sophisticated analytical tools and data that will enable them to best manage their assets, particularly in today’s less-thanideal market conditions. To meet this need, custodians have ramped up their resources – both human and technical – to develop and deploy a host of value-added products and services, including investment analytics that are aimed at making a plan sponsor’s job a whole lot easier.
Custodians have extended their scope and reach to help clients make decisions aimed at improving fund performance. In short, those custodians who have survived the tumultuous changes that evolution has thrown their way over the past 10 years have done so by transforming themselves into powerful investment management service providers, building on their traditional roles as dependable transaction/settlement suppliers.
So why have custodians seized upon the provision of these value added benchmarking products as their newest frontier? Well, it really comes down to a matter of expertise. By virtue of their traditional roles, custodians have unparalleled access to three critical resources: intellectual capital, advanced technology, and data – lots and lots of data.
To offer these value-added products and services – including performance measurement, universe comparison, risk management, and compliance monitoring – custodians are focusing their new hiring on staff with middle and front office core competencies, in addition to ‘big-picture’ thinkers of the PhD variety. They are attracting individuals with the specialized skills, training, and education needed for the shift that’s taking place.
With the help of sophisticated software, custodians are now able to aggregate their data, and then drill down and analyze it on behalf of their clients to a degree that wasn’t possible in the past. Thanks to their traditional roles, custodians are sitting atop a powerful infrastructure and vast amounts of data, which can be culled daily to deliver decisionmaking tools for clients.
Many custodians are partnering with leading technology suppliers and integrating these firms’ sophisticated solutions with their own offering. Custodians are forging relationships with technology companies specializing in areas such as risk management. They can provide sophisticated products that allow pension funds to answer questions such as:
- How much risk is the manager taking?
- Is the manager’s risk profile changing over time?
- How would a change of allocation affect the plan’s risk/return profile?
- Is the portfolio providing optimal diversification?
- What securities contribute the most to the portfolio risk?
This new breed of custodian adopts a ‘big picture’ approach, taking a jumble of analytical products that have been disparate in the past, integrating them under a single roof (for example, bringing together disciplines such as performance measurement and risk analysis as part of a seamless reporting structure). The result is a powerful suite of investment analytics tools, which leverage the strengths of each of the components, providing clients with levels of information and analysis they might have only dreamed about in the past.
With this kind of information at their disposal, pension fund managers are looking for more detailed, timely reporting. To respond to this need, custodians are supplementing static, periodic reports with ASP (application service provider) technology that allows the client to interact with and analyze the data on their own.
The evolution of the custodian/pension fund relationship couldn’t come at a better time. Due to recent market events, terms such as risk management, due diligence, fiduciary responsibility, and governance have dominated newspaper headlines and, as a result, they’re also top of mind for pension fund managers. In such an environment, plan sponsors are looking for solutions and avenues to assist them in managing risk more prudently.
As well, many pension funds are focusing on diversification, venturing into areas where risks are harder to assess, such as real estate, hedge funds, and private equity. This – combined with the downswing in the economy, fluctuating interest rates, shrinking assets, and increased liabilities – has highlighted the need for pension funds to employ more sophisticated risk monitoring tools and demand improved risk reporting from asset managers and custodians.
Finally, many organizations are looking to focus on their core competencies, outsourcing non-core capabilities such as performance measurement, risk management, and compliance monitoring. In the current tough economic climate, some businesses are choosing to outsource services to those that have the infrastructure already in place, preferring instead to concentrate on what they do best.
With custodians around the world establishing their place in the value-added services arena, pension funds are among the clear winners, having access to a suite of integrated products to help them save time, improve fund performance, and manage risk more effectively. And as these product and service offerings grow and evolve over time, pension funds will continue to benefit from deeper levels of information and analysis, giving them unprecedented intelligence about the composition, dynamics, and inner-workings of their investments. As such, they will be able to focus on the most important business issues of the day, confident they’re fulfilling their fiduciary duty and managing their funds with the best available tools.
Blair McPherson is head of Europe and the Middle East for the benchmark group of RBC Global Services.
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