At first glance all custodians appear to be alike and offer similar services, but the day-to-day experience of many super funds reveals that this is not the case. A custodian search should expose the relative strengths and weaknesses of the different providers and supply insight on the kind of relationship likely to develop going forward.
Detailed information about custodians is not readily available to prospective clients. A Request for Proposal (RFP) is probably the best way to collect data on a consistent, client-specific basis. There are seven key areas to focus on:
n Business management: How does the custodian conduct and manage its business? This includes its commitment to the custody business, strategy for growth, and financial strength and stability. The structures for managing clients, sub custodians and staff are also important.
n Core and value added services: What capabilities and expertise does the custodian have across a range of services, and what reporting and support is a client likely to receive?
n Internal procedures and controls: What processes does a custodian have in place to minimise risk, including audits, quality assurance and insurance?
n Information technology: What is the quality and functionality of existing systems infrastructure, including client reporting, and what is the planned investment going forward?
n Transition: How will the transition of assets to the custodian be managed so as to minimise risks, disruption and costs to the client and its investment managers?
n Legal issues: Does the contract adequately address liabilities, indemnities, termination and insurance? Are there schedules that set out the fees, proper instructions, reporting and key performance indicators?
n Fees and costs: Is the fee quote competitive and structured to meet any likely growth and changes in the fund’s assets? Does the fee reflect only those services the client expects to utilise?
Even a structured RFP process may not uncover all the black holes. Tips for the unwary include:
n Negotiate the contract as part of the RFP process. Also, agree on a set of key performance indicators against which the custodian’s performance can be benchmarked on a regular basis.
n Seek a live demonstration of the online reporting system. Copies of reports attached to an RFP response do not give you a feel for the functionality and reliability of the system.
n Ask your investment managers what they think of various custodians.
n Make sure you meet the staff nominated for your account and ensure they have sufficient experience and time to deal with your account. Seek reassurance that the RFP and its marketers have not offered services that cannot be delivered.
