(May-2003) Administrators’ costs: up and up

The issue of fees and costs is so dominating the lives of service providers — administrators and consultants alike — that last year’s TOP 300 themes of global entrants and domestic innovations appear a distant memory.

Many foresee a looming shakeout in the market. Pressure on fees is mounting from embattled super fund trustees and fund managers who are having to justify to their members a second year of poor and mostly negative returns. At the same time, adhering to extensive legislative change is adding to costs in the form of changing computer programs, changing administration systems, learning what the changes are, training staff to deal with the changes and meeting tightening regulatory conditions and compliance protection.

Put this together, and it is small wonder that some service providers are operating at a loss when, Citistreet managing director Gary Cox estimates, returns need to be 12-15 per cent simply to be viable. Worse, in a vicious circle, service standards are slipping as administrators try to save costs in computer system development and by employing inexperienced staff. Investment in new processes and in supporting technology that could boost the bottom line through cost efficiencies and service improvements is being put on the back burner.

Simon O’Regan, the CEO of Mercer, which is the only financial institution that features in the top ranks for both the TOP 300 survey listings of administrators and asset consultants, is less gloomy.

“Changing client needs are a challenge to administrators and consultants. Life is certainly difficult for super trustees, but this is where service providers can help.” He does not see a shakeout among service providers but rather a “gradual erosion among the less capable”.

Few doubt that the capacity for administrators to re-invest will ultimately determine which administrators succeed. Administration has always been a low return business where volume and scale are essential to succeed. Technology is where the administrator gets its competitive edge and achieves efficiencies. Companies providing administration services can only compete in the long run if they align themselves with a significant technology partner.

The obvious solution is for trustees to pay more if the service providers are to properly carry out their functions, develop their technology and improve their service.

Frank Gullone, the managing director of Superpartners (formerly Jacques Martin Industry Funds Administration), detects a shift in attitude towards performance-based fee deals. “We are doing this by setting service standards which technology is facilitating. The concern is that over the next few years, service providers will have to deliver on their promises.”

Mike Turner, Pillar’s general manager for marketing and business development, argues “you get what you pay for”.

“The cheapest prices often mean members lose out in service and products. In the end, low prices come back to bite,” he says.

He reckons that administration fees will be increasing over the next two years. “The mantra of one-dollar-per-member-per-week will be challenged. It is unsustainable.”

But trustees, grappling with explaining poor returns to their members and more focused on corporate governance issues, are in no mood to listen.

To this, Cox adds that clients are not growing their membership base while demanding greater transparency and governance.

“Paying for cost increases through the organic growth of a fund is no longer an option. Bundling services no longer subsidises the rising costs,” says Cox.

“True costs are not being communicated and this means trouble down the line for many service providers who are absorbing the increases. The industry will have to start competing more on product than on its price fixation. In the present climate, it is difficult to get the message through that different products require different charges. Super funds in some market segments — those that charge members a per-week fee — are relatively price-inelastic to a point in Australia. Some trustees in the tender process are still demanding champagne products at beer prices.”

So a shake-out is looming, particularly in the corporate super market. The industry funds have less scope for consolidation.

Mercer reckons the corporate fund administration market is reducing by 5 to 10 per cent annually.

Cox thinks there is a ceiling on rationalisation as politics intervene. “Key players want to protect their turf. Also, clients are loath to move their administrators which they consider a long-term relationship.”

The big players are certainly going for growth.

O’Regan sees growth in the master trusts and industry fund markets. “We are having to work harder, invest more in processes and secure our presence across the broad spectrum of client needs which are increasing. We are confident about future growth and maintaining our dominant position.”

Gullone expects to gain market share over the next few years especially as members become more discerning about their super products as opposed to simply going for a brand name. “Because of poor performances and growing complexity as regulations change, companies are looking at their super funds on an almost daily basis rather than the yearly basis,” he says.

Cox says Citistreet, the superannuation administration joint venture formed last year between US financial services giants Citigroup and State Street to become one of the faster growing administrators in Australia, will double in size over the next few years. “We are here for the long haul and aim to reach scale by seizing on the potential to service the broader market, partic-ularly master trusts and government funds,” he says.

The second foreign institution to boost its Australian presence last year, Mellon Financial Corporation (which recently increased its stake in NSP Buck to 100 per cent from 30 per cent), also has aggressive growth plans.

Gullone reckons Australia has probably seen the last of the global entrants to the market. “With such a small global market share and a highly regulated environment, it is a big ask to enter and build up a new business. The only way for a global player to come into Australia is via an acquisition.”

Asset consultants, to a greater extent than administrators, have a choice where to move on the scale versus service spectrum.

David Holston, a director at John A Nolan Investment Advisers (JANA) which has overtaken Mercer to become the TOP 300’s biggest asset consultant in value terms, finds opportunity as investment funds refocus their investment objectives. “There is nothing like the reality check of negative returns.”

He adds that boards and trustees are also facing challenges around governance and disclosure areas. “This all requires more trustee time and use of consultants,” he says.

Anticipating that funds will rationalise heavily in the years ahead, JANA is moving into providing manager of manager investment platforms although Holston is quick to note “that this will never be the main part of our business which remains research and advice”.