A risk-based approach

When leveraged effectively, a custodian can be an invaluable partner in prudently managing, administering and overseeing institutional investments. All custody relationships introduce operational, credit, legal and systemic risks. Investors should identify and manage these risks to ensure the custodian is adding value to the investment management process versus impeding it.

Further, custody relationships should be actively monitored and managed to ensure a custodian’s capabilities continue to be suitably aligned with an investor's specific needs and that the investor does not incur excess costs and risks due to opaque systems, inefficient operations or capability constraints. These costs can be considerable, particularly if operational or reporting issues result in missed market opportunities, processing errors, or if fund administrators must divert internal resources to rectify problems.

Mercer Sentinel's evaluation process is one of the most comprehensive in the industry, combining our proprietary best practice benchmarking with comprehensive on-site research and due diligence at each custodian's operating centres, regardless of location.

 Capabilities and controls benchmarking

There is a common misperception that custodian services and capabilities are undifferentiated. Our experience is that there are material differences, which can significantly affect service quality, accounting and reporting accuracy, operational efficiency and, ultimately, fiduciary control. Additionally, we believe that there can be significant differences between global and local services. Our global knowledge combined with local experience help ensure our clients benefit from our work with diverse investors and custodians across borders while providing advice relevant to local market issues.

To accurately assess and compare custodians’ relative strengths and weaknesses, we utilize a proprietary best practice benchmark customized to client needs and requirements. This evaluation framework utilizes a risk-based approach, focusing not only on a custodian’s product and service capabilities, but also on the risk controls surrounding each function.

Our benchmark analysis comprising over 20 categories representing over 300 specific evaluation criteria, enables our clients to compare a custodian’s capabilities and controls to best practices, a peer group and market standards, both globally and locally. Such analyses identify product or service gaps within the context of a client’s specific situation.

Our web-based Mercer Global Custody Database allows us to collect information and evaluate custodians in a timely, efficient manner.We supplement these qualitative evaluations with on-site research and due diligence. While our process is very thorough, it is also designed to be transparent – both to our clients and the custodians, which ensures objective and consistent evaluations and produces comprehensive due diligence documentation.  

 Custodian selection

Changing custodians can be expensive, time-consuming and disruptive, so selecting the right custodian to meet an investor's current and expected needs is critical. Mercer Sentinel’s evaluation and selection framework combines proven capabilities and a fee benchmarking process with a rigorous, customized request-for-proposal solution. This methodology enables our clients to identify the custodian that offers the best value to meet their particular needs.

In addition to producing a comprehensive search report and due diligence documentation, we assist the client in preparing for and conducting finalist presentations and perform on-site implementation due diligence. Our experience and expertise help clients ask the right questions for their situation and ensure that they achieve their goals when meeting prospective candidates.

 Fee analysis and benchmarking

Custodian fees are often difficult to assess, and compare, as costs are both explicit and implicit. Significant investments in technology have made once labor -intensive processes highly automated, which has led to increased cost efficiencies. Rapid industry consolidation has also enabled custodians to realize considerable economies of scale, resulting in a trend towards cost and fee reduction. Institutional investors proactively surveying the market, particularly those with significant cross-border investments, have benefited from fee reductions.

Achieving an objective and consistent fee comparison is difficult. Mercer Sentinel’s consulting process considers explicit and implicit fees and provides a comprehensive context within which clients can assess overall charge levels and value for service. 

 Conversion assistance

As the official book of record, a custodian conversion must be carefully managed to ensure data integrity and avoid costly errors, omissions or oversights. Conversions should also have minimum disruption on the asset management and fund administration processes.

We work with clients in a project management role during a conversion, interacting with all the relevant parties to meet deadlines and fulfil client specific requirements. We also assist clients in completing relevant documentation, serving as a liaison between the custodian and investment managers, and acting as an advocate for the client. 

 Contract review and negotiation

Custody arrangements are highly specialized and complex relationships with which most legal advisers have limited technical expertise and experience. Mercer Sentinel advises clients and their legal counsel regarding custodian operational and administrative functions, providing technical and business context within which legal counsel can opine and assess contract language or omissions. In addition, we provide clients and legal counsel with an understanding of market practices so clients can both effectively negotiate their position.

  Ongoing monitoring

Once a custodian is appointed, custodian and investment operations should be monitored to ensure that fund administrators are meeting their fiduciary duty and explicit, implicit and opportunity costs are being managed. Our consulting approach enables fiduciaries with segregated investment portfolios to measure, monitor and manage critical procedures through various stages of the investment operations process – providing benchmarking and comparisons over time.

The Mercer Sentinel Group’s monitoring provides the opportunity to:

• Identify and realize opportunities to reduce costs and increase returns
  
  
• Increase efficiency of interaction between investment managers, custodians and other third-party agents
  
  
• Improve governance
  
  
• Validate value for money as your needs evolve and the market changes

IMPORTANT NOTICES

Proprietary and confidential
This contains confidential and proprietary information of Mercer and is intended for the exclusive use of the parties to whom it was provided by Mercer. Its content may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity, without Mercer's permission.
Opinions – not guarantees
The findings, ratings and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes or capital markets discussed. Past performance does not guarantee future results.
Not investment advice
This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances.