By Clive Bellows, Head of Global Fund Services EMEA, Northern Trust
The last decade has seen tremendous innovation by asset servicers, fueled by automation and technological advancements, as well as the growing complexity and globalisation of the investment industry. In a world where cybersecurity, cryptocurrencies, artificial intelligence, cloud computing, advanced data analytics and blockchain are creating both challenges and opportunities, custodians are repositioning themselves for the future.
Amidst all this rapid change, we should remember that it is not when these re-engineered custodians emerge as much as how they get there that will be key. For some, embracing the future has meant jumping on the technology bandwagon and branding themselves as technology or data analytics providers before anything else. Others are taking a step back and considering how to innovate with technology while remaining relationship-driven service companies at their core.
It’s easy to get carried away by the hype. Asset servicers need to remember that they have always had a duty of care, and amidst all of the excitement that responsibility has not diminished. They are, first and foremost, guardians of their clients’ assets, and that must remain their primary focus. Therefore, providers must look to the future, but they must also ensure that they remember their past and get the basics right.
The transformation of asset servicing has been significant. At the beginning of the millennium an RFP (Request for Proposal) would be based on the provision of basic services like safekeeping, settlements, corporate actions, and tax services. Asset managers and other clients would choose their provider based on how successfully a custodian could provide these services.
Today these services are taken for granted. Looking to the future, providers will be judged on their value-added activities such as client service, knowledge provision, data management, liquidity and risk management and their own ability to manage cyber risk.
To be competitive, service providers will have to be holistic in their approach, but they must remember the continued importance of the ‘bricks and mortar’ of custody. This isn’t always the easiest thing to focus on, especially when technological change provides new bells and whistles and efficiencies to pass on to clients.
The technology boom has had a significant impact on how businesses operate, and how their business models are changing. For example, custodians are moving up the value chain – increasing their focus on the front and middle office needs of their clients. Some are signaling through acquisitions that gaining access to the client front office is core to their business strategy. However, the market’s initial reaction has been mixed and the long-term success and value of these transactions remains to be seen.
Technology is an essential catalyst for the future of the investment industry, but it cannot solve every problem. Not every company can successfully evolve into an Apple or a Google and technology rhetoric can sometimes be misleading. Too much focus on technology alone risks losing sight of the core mission. Clients need to know their providers are going to keep their assets safe, with meaningful emphasis on transparency, integrity and regulatory changes.
Custodian 3.0 cannot be all things to all people. Clients will expect access to the best technology at any given point of time – enabling them to take advantage of new platforms and strategies to help maximise returns and minimise risk.
Of course, emerging technologies will drive a layer of more innovative solutions. While custodians should provide services through technology, they shouldn’t attempt to reinvent themselves and transition into a pure technology company.
Providers should also be adaptive and flexible, while recognising the value of data and analytics. They should have a fundamental understanding of each individual client, how their businesses are unique and how to provide strategic benefit. Clients will have different needs across the value chain, based on their investment strategies, their risk appetite, and the asset mix that they manage.
Going forward, asset servicers must place client interaction and client services at the forefront in terms of priorities – taking on consultancy-type functions, such as helping clients navigate new markets and regulations. They should also become a data consolidator and data creator, providing strategically valuable information to clients.
TECHNOLOGY: NO SUBSTITUTE FOR CLIENT SERVICE
There’s a lot of talk about the future of asset servicing and the disruption/disintermediation of securities services. Amongst all that, it is easy to lose sight of what’s important. Those who excel will be nimble and innovative, but they must remain committed to their core principles and to their client servicing philosophies. Leveraging technology and data to create advanced solutions for their clients’ needs will become the new service proposition.
Custodian 3.0 may be wildly different from what we know today – nevertheless just like its forbearers, it will have to put clients first.