Reelin’ in the Years

Nearly 50 years after the “invention” of global custody, it’s back in fashion.

Not long after he became CEO of State Street, Marsh Carter held his first analysts’ call. “Custody,” he opined, somewhat innocently, “is a mature business.” Wall Street did not like to hear this, and hammered the State Street stock. Lesson learnt.

Thirty years later, custody is even more mature – but, right now, it is back in fashion. The custody banks are hiring fresh talent – Ryan Cuthbertson at BNY Mellon, Steve Wager at RBC, Mike Hughes at Citi, for example – to strengthen the franchise whilst navigating a hostile, and often utterly confusing, regulatory environment. But, above all this, the banks actually want more custody assets (having spent the last decade trying to avoid them). One industry veteran once likened custody to the foundations underpinning the city of Venice (Italy, not Florida). Without it, everything else sinks.

No one has been more vocal about this than State Street. At the recent Barclays Global Financial Services conference, Lou Maiuri, the bank’s president and COO, made it perfectly clear that it wants more custody assets. Custody has become a cornerstone of its growth strategy, increasingly bundling it into other mandates. This will be especially true in the asset owners space, where State Street has underperformed in recent years.

Some refer to the “halo effect” that custody has on the rest of the investment services franchise. Deposits, FX, securities lending, and beyond – all those nice product adjacencies can be painlessly attached to a simple custody mandate. But, whilst State Street led the way in the nineties with incentive pricing – offsetting custody fees for CalPERS/CalSTRS against the much more significant securities lending revenues – don’t expect that to happen in the latest reboot. Custody is going to have to earn its keep.

What the industry can expect is a battle for assets between many of the major providers – again, asset owners will be the primary target, a space in which many of the leading banks have upgraded their client-facing teams. The banks like nothing more than in-house managed pension plans, insurance businesses, endowments and SWFs, which like to buy service and product bundles – very often starting with custody.

Whilst everyone wants to talk about private markets and ETFs, a new generation of managers is beginning to appreciate the intrinsic value of custody. In a world which has long attached unwarranted importance to total AuC/A, asset gathering remains an important element in the overall business mix. The trick, as always, is to come up with a service proposition that satisfies clients and boosts the bottom line.

Reports of the demise of custody have been greatly exaggerated. Now we must wait and see whether a more rigorous pricing model can stand up in the face of very tough market conditions and continued downward pressure on tariffs from the end investor.


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