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“It takes many good deeds to build a good reputation, and only one bad one to lose it.”
Since Benjamin Franklin uttered these words, there have been innumerable less-wise men wishing they had paid attention—none more so than those in the transition management and asset servicing business who have had financial regulators come down hard on their activities and made them pay for their mistakes.
In December, the US Securities and Exchange Commission (SEC) slapped a $150 million fine on ConvergEx for overcharging clients. (“The mark-ups and mark-downs caused many customers to unknowingly pay more than double what they understood they were paying to have their orders executed,” the SEC said in its ruling.) In February, the UK’s Financial Conduct Authority (FCA) made State Street cough up £23 million for similar offences. (“State Street UK breached a position of trust… caused a significant risk that financial crime would be facilitated.”)
Both companies admitted there had been “irregularities” and said that these were “legacy” issues, but the affair is not over yet. Tantalizingly, the SEC mentioned an “unaffiliated company” party to ConvergEx’s activity, but has not yet named it. The agency even worked with the Federal Bureau of Investigation on the case—the regulator means business.
On the other side of the Atlantic, the FCA has undertaken a full-scale review of the transition management industry. Few working within the sector avoided an interrogation, and all had been waiting many months for the final analysis, published early February.
It has been a tough and tawdry couple of years for asset servicing. Aside from reputations getting slammed, the landscape has altered dramatically. JP Morgan decided transitions were just not worth the effort—despite the company managing some of the largest asset moves for the biggest clients—while Credit Suisse also threw in the towel on most markets.
Of the 17 companies that signed up to the T-Charter—the industry’s voluntary code of practice—in 2007, just 10 are still standing as independent entities, and only a handful of these are doing any sort of meaningful business. The T-Charter itself has been largely forgotten, and few seem interested in reviving it.
One head of transitions based in the UK said the document had been useful, but only as an educational tool—for suppliers and customers alike—as, without it, the “irregularities” that had been uncovered over the last few years may have remained hidden.
So as 2014 starts, where does the industry find itself? Investors are still moving money, and as unfathomable as it seems to some, the companies implicated in the (well-documented) scandals are still the ones they choose to have do it for them. Regulators have stepped up to reassure investors, and the world continues to turn.
It is not business as usual, however.
New players have thrown their hats into the ring: In September, Australia’s Macquarie bank appointed Credit Suisse veterans Fred Fogg and Lance Vegna to its portfolio solutions group, while insurer Legal & General’s investment arm has been quietly ramping up transitions work using its passively managed portfolios.
The “original” companies that weathered the storm have found it necessary to adapt, according to Lachlan French, global head of transition management at BlackRock.
Investors have become more demanding, not just about transparency of pricing and measuring the end result against estimates, but for what they expect their transition managers to be able to do. “We have expanded our product range,” says French. “We have gone from transitioning just core assets to illiquid securities and dealing with a larger range of alternative investment managers.” He also notes that increasing investor sophistication has required boutique asset managers to rapidly learn the transition management ropes. Geographical diversification of portfolios, increased volatility in markets—and the fear of a counterparty going “pop”—has also led transition managers to expand their trading partner pool, French says.
Investors are more able to keep an eye on what is going on, too. The advent of CIOs having real-time access to data has meant providers have had to keep pace and upgrade their own systems.
And let’s not forget defined contribution (DC). Transition managers’ parent companies—be they investment banks, asset managers, or custodians—have finally embraced the notion that DC pensions are the future. Transition managers, although not immediately a natural fit for the sector, are realizing that they must adapt to this “new normal,” too. Pooled funds, platforms, and unit-holding investors might not be a native hunting ground for transitions teams, but like the rest of their industry, they will have to get used to the idea and run with it.
Therein lies the irony: What a shame it would be for the industry to survive a raft of reputation-damaging scandals only to be killed off by a failure to evolve.