The ongoing evolution of custody: tips for renewing your custody contract

October 26, 2023

As an investment services cornerstone, custody must constantly evolve to meet industry changes and keep pace with technology. In our fast-paced world, it’s important to understand how it’s adapting and improving, and how your rates are determined so you can make smarter decisions in the future.

Custody is a foundational component of nearly everything we do in the investment services industry. Whether you’re an investment manager, corporation, government entity or not-for-profit organization, you depend on the efficient and consistent performance of your custodian. But how is it changing and what factors are driving its progress?

 

A continuous state of rapid improvement

Although custody has fundamentally done what it has always done, it’s far from static. In fact, custody is subject to virtually the same trends the rest of the industry faces, such as globalization, the need for new technology, increased regulatory burdens and constant threats to cybersecurity.

Custodians are making incremental improvements to always do the right thing for all their stakeholders. The pace of change impacting the custody industry is unprecedented, and improvements that used to take months or years can now be accomplished in days or weeks.

 

Adapting to technological advancements

A key area of change is in the technology used to meet the needs of the evolving industry. As regulations shift, such as the T+2 settlement requirement, custodians need to be agile and make enhancements to their systems and processes. Custodians are also developing critical processes and technology to meet heightened standards around anti-money laundering and economic sanctions policies.

It’s more important than ever to keep your information safe, and through a dedication to continual technology improvements, custodians are now able to OFAC scan SWIFT messages in real time. As more and more clients use the SWIFT network, custodians will be able to simplify processes, remove manual touchpoints and more aptly manage and reduce risk.

 

How client service models are keeping up

As the technology framework evolves, it allows client services teams to be more flexible and efficient. Because of this, the client service model is progressing toward a more personalized experience for clients. If service providers can understand the distinct needs of their clients and business models, they’ll be able to work together to identify targeted enhancements to align systems and processes to meet their needs, both in the short and long term.

Moving forward, the investment services industry will continue to evolve, and as it does, custody will adapt along with it. Custodians will carefully watch the market, listen to clients and partners and plan ahead with an eye for innovation and targeted improvement.

 

Custody contract renewal

Contracts and agreements need to be reviewed and updated regularly – whether it’s because you’re adding services, or your custodian is changing operational procedures. No matter the reason, renewing is the perfect time to review the costs associated with your investment portfolio and confirm the fee schedule is appropriate.

Enticing pricing is just that, an enticement. When a bid seems too low to be realistic long term, it usually is. And when you don’t anticipate upcoming fee increases to rebalance your ongoing or changing servicing needs, they can often come as a shock.

Staying aware of your portfolio’s makeup – knowing the details of its structure and activity – can help you avoid surprises. 

 

How are pricing structures built?

Knowing what elements weigh into fee structures can help you look at your strategy and make smart decisions for the future. These are the primary factors that determine your cost.

  1. Do you need a custodian or a trustee?
    This is the most critical aspect of your fee. Trustees require more fiduciary responsibility (reflected in a higher price), custodians require less (reflected in a lower price).

  2. What securities are you holding/ do you need serviced?
    Are you invested in equities, bonds, real estate? A mutual fund, hedge fund or exchange-traded fund? Private equity or debt funds?

  3. How many accounts do you need?
    Are you a single client with one long-term investment account? Or are you a holding company with multiple subcompanies or wholly owned subsidiaries?

  4. Are you involving outside parties?
    Do you have outside managers? Do you have outside advisors or consultants authorizing trades on your behalf and communicating with your custodian? Or are you doing all your work inhouse?

  5. What level of service do you expect?
    Do you require frequent in-person meetings? Reporting customization? Daily confirmations?

  6. Are your securities priced daily through industry pricing sources? Does your custodian have to do manual work to process transactions in private markets?

 

Why is my pricing changing?

Knowing what elements weigh into fee structures can help you look at your strategy and make smart decisions for the future. These are the primary factors that determine your cost.

  1. A change in investment strategy
  2. Acquiring a company
  3. A change in asset allocations
  4. An initial comparative pricing bid
  5. Elevated servicing demands
  6. Special customization or vendor involvement

Knowing what factors can impact custody pricing is crucial to creating successful investment strategies in the future. That’s why U.S. Bank has a team of experts ready to offer you a tailored solution that meets your needs and allows you to focus on achieving your goals. Visit usbank.com/custody to learn more about our custody solutions.

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Investment products and services are:

NOT A DEPOSIT • NOT FDIC INSURED • MAY LOSE VALUE • NOT BANK GUARANTEED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY

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