Private banking business enters JPMorgan mix

Service providers have increasing contact with distributors as complex products and open architecture mutate the form of the basic value chain. But distributors rarely pay for the services provided, leaving the manufacturers to pick up the tab. A good thing too, according to Richard Warne, head of relationship management for JPMorgan Worldwide Securities Services in Europe, the Middle East and Africa. He thinks that the whole industry would do well to remember that distributors bring in the sales that make the whole investment world go round. “The whole value chain for this industry is increasingly competitive and so our remit is to basically make life easier for everyone when doing business,” says Mr Warne. “People need access to all sorts of data over the internet, help with regulatory and compliance issues and also products that will appeal to the end investor in terms of design, domicile and structure. They also need easy access to valuations and paying agency facilities must also be easy to navigate,” he says. “Our business remit is to help everyone with the process of investment. The value chain is very fragmented and distribution networks are so varied that it’s impossible to follow any one model,” he says. But with $11,200bn (?9,100bn) in assets under custody and servicing $6,800bn in debt and $250bn in equities worldwide, the firm uses its global provision of custody and investor services, plus securities clearance and trust services, to help its clients become more efficient, mitigate risk and thus gain better revenues. The company was also in the news recently for swapping some of its securities services business for the Bank of New York’s retail banking arm. Mr Warne compares the situation in Europe, where fragmentation is as much down to language and cultural differences as it is to having differing historical systems and investment preferences, to that in the US where the NSCC (National Securities Clearing Corporation) acts as a central depository for share dealing. “Clearly having an equivalent body in Europe would make life so much easier. In fact one of our key aims is to link up with as many platforms as possible to try and replicate the functioning of a central clearing house, providing as much automation and as a result, as much timely authentification as possible,” he says. “Living in the paper world is just no fun.” Payment flows He says that the obvious link that services providers have with distributors is that of managing payment flows which he describes as “pretty low level but important to get right.” Functions include the paying agency and managing payment flows such as standing orders, plus savings schemes of which there are various types in the European Union. “These functions are not generally associated with service providers but anything that makes life easier for investors and facilitates inflows into investments is good news for all of our businesses,” says Mr Warne. The other function most commonly associated with the distributor is that of transfer agent; essentially acting as a keeper of records for shareholders of mutual funds. “In this function we deal extensively and often directly with distributors on manufacturers’ behalf and look at general enquiries, subscriptions and offer web-enabled tools so that the distributors can see what’s happening and offer their clients advice based on the data that they are getting back from us.” Indeed, the role of the transfer agent has become dramatically more important in recent years. Traditionally, this service was simply to process investor transactions and issue dealing confirmations. But the expansion of compliance and other regulatory demands, plus the general requirement for transactions to be recorded electronically rather than manually has brought this function to prominence. And Mr Warne thinks that regulation and compliance are key areas when it comes to adding value for distributors. “This is an area of high cost in both monetary and time terms,” he says. Initial product design is yet another area where having good initial contacts with distributors is important. “The industry and its various components can sometimes forget that without distributors there would be no investors and consequently no inflows. It helps to have some input from distributors as regards what they need to have in terms of structure, tax transparency etc,” he points out. But all these functions are relatively straightforward and for the most part, carried out via a link with the fund manufacturer, rather than being an independent relationship in its own right. As complex investment propositions and open architecture blurs the line between product provider and distributor, how is the relationship with the service provider impacted? Indeed in the vanilla investment world the distinction between provider and distributor is easier to see: “Firms are now choosing to be either manufacturers or distributors but not both. Yet for distributors with their fees now under pressure, the problem is finding good outsourced solutions that do not add to their cost base; the industry as a whole is agreed that the cost of investing, to the investor, is too high.” Mr Warne looks to private banks as a good case in point. Historically private banks have tended to provide their own funds and administered them in house as well. Bespoke solutions “They have a problem in that services required by high-net-worth individuals are very bespoke and so for us their requirements in what they need for a service provider can be worlds apart from a large institutional client like a pension fund or insurance company,” he says. But as private banks follow the wider investment world and begin to break up their own internal value chains then inevitably they begin to seek outside help and thus become increasingly important to the services world as a client in their own right. “As investment vehicles become more and more complex then so the need to outsource their provisions and administration becomes apparent,” Mr Warne states. But distinguishing between provider and distributor in the world of complex investments is not as straightforward. “Everyone is basically chasing alpha and that means there is increased focus on complex products like private equity and collateralised single loan obligations. Again it’s all about supporting the end investor,” says Mr Warne. With hedge funds, for example, asset managers are investing on behalf of clients and need to demonstrate that they have high quality standards and safeguards in place – especially as hedge funds come down into a more retail space. In the past the view was that such investments were the domain of the experienced investor who needed less protection. And this is where the services provider can link up directly with all aspects of the industry to form a more circular relationship. “We support the hedge fund manufacturer in building and maintaining their products. In our interaction with the prime broker, they might outsource custody to us; indeed prime brokers tend to offer a bundled service to managers to include custody, accounting and trading. In addition, the larger hedge funds now want to deal with a variety of prime brokers and so we also have a role to play there,” he says. But the role played vis à vis the distributor is that of reassurance. “One example of where this can be done is where we provide independent valuations of OTC derivatives which are subject to a broad range of influences. They typically have a life of five years, but need daily pricing. Once that is done then the systems in place to track payment flows, corporate actions, collateral and to fulfil margin requirements are all within our remit. By giving an independent valuation what we are essentially providing is comfort,” says Mr Warne. Private equity is another area where the relationship between all parties is becoming more circular. Here the issue seems to be more about how the initial structuring should be done. “Many are done as limited partnerships and the support needed is complex – we aim to provide the heavy lifting possible to do this,” Mr Warne says. But who pays for all this? In the main the client is still the manufacturer, with distributors historically not paying for such services. Mr Warne thinks this will continue, assessing the distribution world as “secondary register as opposed to asset managers, who are primary register.”

Warne: living in the paper world is just no fun for JPMorgan