25 years, 25 CEOs, Marc Briol, CEO, Pictet Asset Services

25 years, 25 CEOs, Marc Briol, CEO, Pictet Asset Services

Currently there are three issues in the industry that worry me most. The first arises from the current illusion of a free lunch around pricing. The major providers are following an unsustainable pricing model comprising pure asset gathering, lower fees and fewer staff. 

Costs are increasing – notably around regulation and technology – while fees are going down. Our clients are second-guessing excessively competitive offers between providers such that the benefits of niche providers – flexibility, quality and personalised services – become less.

The second issue is around the lack of transparency on the profitability of asset servicers’ business model. It would help if the regulator took a closer look to see whether there are cross-subsidies hidden behind the industry currently. When you have captive clients it is easier to drop the prices for marginal clients who you service almost at a loss.

There should be greater emphasis on providers’ business models and the presence or absence of conflicts of interest. There are many areas where this can arise: asset servicers forces custody clients to use their trading desk or to buy products from them; providing them with free ETFs, using their cash balance. These ingredients form a toxic combination.

The third area of concern is around regulation and the framing of custody as a quasi-insurance business by an excessively strict liability regime, which is being raised by the current discussion around UCITS V. This will create excessive concentration risk for clients: you’ll end up with only two or three providers who are ready to guarantee all their banks. The temptation by regulators to put the entire financial burden on custodians should be resisted.

We are in no position to lecture emerging markets about the development of their industry, but as it grows, it would be wise to note some of the mistakes that we have made. In particular, our industry suffered from a lack of focus prior to the crisis – there were firms that were combining investment banking, bridge financing and investment management, with a bit of custody on the side.

I think asset servicing business should also be self-financing; each business should have its own P&L. There are still some firms where asset management and custody are part of the same division. I don’t think you can guarantee Chinese Walls in these cases, or the removal of conflicts of interest.

The second observation in emerging markets is the importance over the regulatory approach they take. They should be tougher over conflicts of interests than has been the case here, perhaps going as far as banning asset servicers from forcing products on captive clients.

ETFs are receiving a lot of attention currently from investors and regulators, including the Financial Stability Board and ESMA. Certainly for asset servicers they mean challenges around providing investors with the required liquidity. But ETFs are a ticking time bomb – especially synthetic products – with all the ingredients of a major concentration risk.

I don’t think the operational risk is accounted for adequately: there are lots of hidden costs that are not clear to investors and I don’t think the required transparency is present. For example, why are fees for passive management funds higher than those of ETFs, while ETFs have more frictional costs in order to provide intra-day liquidity?

The current trend doing most to transform the asset servicing industry is the greater specialisation we are witnessing in providers, notable especially over the last year. There has been a strong dichotomy between alpha and beta generators, distributors and asset servicers, and we’re seeing more emerging boutiques that are established from people leaving bigger firms.

Meanwhile, the clients of asset servicing firms are expecting an increasingly integrated service, with providers having a fully cross-industry view.

Regulators, meanwhile, are pushing against this trend by trying to separate custody, fund administration and management company responsibilities. It’s challenging to comply with the regulations while providing the asset managers with the smoothness and range of products of a one-stop shop.

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