Many treasurers stick with a bad custodian bank because switching is too much of a bother.
Changing custodians is not fun. At a recent NeuGroup Treasury Investment Managers’ Peer Group, members said they dread switching so much they’d rather just stick with what they have. But this isn’t the only reason: members also aren’t convinced there’s anything better than what they have.
Despite the gloom and doom, one member was able to show that it is possible to make a pain-free switch and find something better. Another member then shared an evaluation template to use when reviewing and communicating with your current custodian.
Here are a few of the takeaways from those presentations:
Have we given up on excellence? In the pre-meeting survey, only one member responded that they would give their custodian a 5 out of 5 (highest or excellent) score. Most others considered their custodian as average or very good, giving their custodian a 3 (average) or 4 (very good) rating. One of the chief complaints about custodians were lack of security knowledge and mistakes.
Time for change. The member company that switched custodians had used the same custodian since the late 1990s. The main problem: service was declining while fees were not. The company saw very little improvements in tools and reporting over the years, so it was time to look and see what else might be out there. The company had just renewed its credit facility and wanted to award the custody business to a credit bank.
Where to start? Their first decision was to award the accounting to a well-known investment portfolio reporting and analytics firm. By removing the accounting portion, the RFP could focus on the custodial services.
In the decision process, the company outlined some key factors; mapping out the trail went a long way toward a smooth transition. It first had to satisfy its external auditors that treasury was not responsible for pricing, since this function was going to be the responsibility of the custodian, performing due diligence on outsourced pricing models was important. Also deemed critical were failed trades as this is where custodial pain usually occurs; therefore, experience and a track record in this area was deemed important. The company also surveyed current asset managers for input on custodians and their opinion was factored into the analysis. All of the information below was summarized on reporting grids for side-by-side comparison.
Here were some of the key requirements for the RFP response:
- Separate price quotes for Custody and Accounting.
- Detailed descriptions of customer service structure, trade processing,
- Security pricing, controls, accounting, reporting.
- Additional services offered: e.g. analytics, compliance
Smooth move. Not to oversimplify the transition, but the process ran very smoothly, according to the company. The accounting book of records transfer took place in October 2012, with a one-month parallel for both systems. Then the custody switch-overs occurred at the beginning of 2013, again a very smooth transition.
A Framework for evaluation. The other presenter in the session said his company redid its credit facility and also decided to award custody business to a participating bank. The company issued an RFP to five banks and its evaluation was based on both services and cost. The company’s current custodian has been there since 2008.
Report card for custodians. Many members put together a scorecard for the investment managers; however, not all prepare the same feedback for their custodian. Here is a partial list of what goes on a custodian report card.
- Custody—Any issues with service or process?
- Accounting—Are they meeting reporting requirement or any issues with accuracy?
- Compliance—Any issues with compliance monitoring?
- Performance Reporting—How is this working (if applicable)?
- Service—Client relationship team and service
- Reinvestment—Any system developments or improvements?
Selecting a new custodian need not be an overwhelming task. Regular communication and a more formal evaluation process with your current custodian can help improve the relationship. Always remember, the best custodian could very well be the one you are not using.