While the industry plays that role today, I believe this function will evolve to a vastly more sophisticated set of capabilities in the future as we help clients with valuations, reporting, reconciliations, compliance, risk management, client reporting and a host of other activities that contribute to the ultimate objective of improving client returns on a risk-adjusted basis.
In a post-Madoff, post-financial crisis world, clients want vastly more information, more frequently from more independent sources. They have shifted from returns, to trying to better monitor and understand where those returns came from, how they were derived and what risks were taken to achieve them.
Examples of what clients are looking for are virtually limitless. From total exposure reporting to peek-through on assets held in funds to enhanced granularity on private equity and hedge fund investments the bottom line is clients want more. Insufficient regulation contributed to a variety of problems.
In reaction, regulation and legislation advanced to fix the gaps. In some instances, however, these changes are not well constructed or result in unintended or unanticipated consequences. I have some concerns about the dramatic nature of the change and some of the problems it may cause.
The industry will have to continue to work with regulators and others to help find the right balance: we all – investors, regulators, asset servicers, and the ultimate beneficiaries of the investment funds be they retirees, fund investors or others – have a vested interest in a sound, secure and stable industry.
When it comes to the impact of regulation virtually all segments of our industry are impacted – and each segment thinks that the legislation or regulation impacting them is the biggest. For example, the banks are impacted by Basel and Dodd Frank, US ERISA funds by some recent Department of Labor proposed changes, insurance companies by Solvency II, investment funds by UCITS IV and FATCA.
The size of impact depends on the nature of your institution, where you are located, and who governs your activities.
Looking forward over the next two years, I think the basic construct for the asset servicing industry will be consistent with where it is today – an industry that has consolidated to a relatively small group of significantly sized competitors on a global basis. I would expect the core players to be larger than they are today both as a result of organic growth and as the process of industry consolidation continues, particularly in Europe.
I believe continued consolidation is likely because the client demand for service continues to accelerate and the wherewithal to meet that client demand requires a cost structure with scale economics. Concurrent with this demand from clients, the industry has become more global, more complex, more driven by technology; and requiring of greater expertise.
All of this necessitates scale, though I hasten to add that size and scale are not the same things. Size is about being big. Scale is about the ability to convert one’s size to economic competitive advantage.
The long term viability of any business relies, ultimately, on a product or service that adds value for clients and that can be delivered on a cost competitive basis. The asset management industry is under pressure to improve its sustainable value, including an improved cost structure. One outgrowth of that quest has been the dramatic increase in investment operations outsourcing, which continues to be an attractive growth opportunity for the asset servicers.
Looking back, apart from the financial crisis, I believe the event or development that has had the most significant impact on the growth of the asset servicing industry has been the utilisation of technology, on multiple fronts, and the ever lower cost of both hardware and software.
The change in our industry as capabilities have migrated from manual to mainframe, client server to internet, and from mobile devices to the cloud have transformed and industry and the capabilities it provides to clients.