During the crisis of 2008, service providers faced an environment in which they saw their clients' assets decline sharply. After the dust settled, a new order was born with clients demanding more for less with increasing scrutiny as regulators ramped up their efforts.
Andrew J.F. Tucker, partner, and head of the Latin America, insurance and pension businesses for investor services at Brown Brothers Harriman (BBH), discussed with MME the state of the asset servicing industry post crisis, where the growth opportunities are now and what regulations he sees affecting the business in the coming year.
Can you describe the differences in the service provider marketplace pre and post crisis?
The main difference in the asset servicing industry post crisis are the challenges our clients and we share adjusting to wide-ranging new regulation issued concurrently from multiple jurisdictions. While the challenge of digesting and ensuring compliance has preoccupied the industry for some time, we are seeing the potential opportunities for the service provider marketplace to deliver more value to asset managers and financial institutions.
For BBH in particular, client demand is increasing for our particular expertise and solutions to help them manage risk and operational complexity.
Can you elaborate on the potential opportunities to deliver value?
An example where clients have gravitated to BBH's approach in the post-crisis environment of the past five years include securities lending, where our longtime focus on intrinsic lending of select securities rather than high volume securities financing has gained converts.
With regard to the significant expansion of fund distribution outside mature markets, clients face the challenge of delivering investment products efficiently through a cross-border vehicle like UCITS, while still ensuring that the local investor's particular needs, such as NAV deadlines, are met.
To support this need, BBH provides clients with a global service model that combines global support capabilities with local market knowledge.
What type of efficiency measures have you taken with regard to your operating model and the use of technology?
Many of the efficiency gains BBH has enjoyed have been largely driven by technological innovation. The current wave of innovation has moved beyond linear processing efficiency and is now tackling a more complex sphere of less structured information, which is more challenging for the industry to automate.
Clear examples of such innovation are the new areas where our Infomediary solution is being applied to improve informational flows and connect formerly disparate pieces of an overall process. In the case of improving foreign exchange processes, the InfoFX module can digitally route, link, index and aggregate securities transaction orders against foreign-exchange execution. Another example is a solution called ETF Connect that we developed where ETF sponsors, Authorized Participants (APs), and BBH as the custodian and administrator can manage ETF operations through a single operational platform.
In what asset classes do you see growth opportunities both domestically and globally?
As trends in asset class selection domestically and globally continue to converge, the widening range of investment vehicles drives growth opportunities available to investors. Alternative products and ETFs complement investment fund offerings. BBH has experienced significant growth servicing vehicles in these two segments and is actively advising clients as to designing and launching new products.
How do you differentiate your business in an increasingly price sensitive environment?
The complexity of managing assets globally has offered ample opportunities to deliver value to clients. BBH differentiates on the basis of a better client experience.
What else differentiates your firm's client experience?
BBH's Investor Services clients benefit from a focus on asset managers and financial institutions. Having a more concentrated client segment focus allows us to design and deliver products specifically targeted to the needs of these particular segments.
In addition, being able to deliver these services off a single globally deployed infrastructure is another contributor to a different client experience. Finally, coordinated delivery of such services is critically important for our markets serviceswhere custody, markets and fund administration activities are typically intertwined.
What recent regulations have been the most challenging from an operational standpoint?
Certainly any discussion about financial regulations in the U.S. has to include Dodd-Frank. Given its wide scope, Dodd-Frank has been a challenge with respect to operations. Another piece of U.S. regulation that has been operationally challenging is the Foreign Account Tax Compliance Act (FATCA). In particular, FATCA is a challenge for BBH and other asset-servicing firms with a global client base.
In view of that global presence, we must be prepared for regulatory change outside the U.S., such as the EU's Alternative Investment Fund Managers Directive (AIFMD), which has required significant enhancements to our operational workflows.
What regulatory issues do you see most affecting asset serving in the next year?
AIFMD is a significant new regulation with implications beyond Europe. Over the next 12 months most of the asset management industry will respond tactically to it, adopting a "comply and survive" mentality.
However, after the first year of implementation, we expect the industry will start to look at some strategic questions in response to the directive, and determine if AIFMD can transform into a "brand" attracting non-EU investment, as has been the case with European UCITS funds.
We recently issued a paper on this topic that explores the challenges investment managers need to overcome to attract non-EU investors' AIFMD funds. The sooner financial institutions start to contemplate the longer-term strategic implications, the better positioned they will be to take advantage of the opportunities that AIFMD may present.
