Fund services may be a “great business”, says Mark Porter, London-based global head of fund services at UBS, but it is also one with rising costs and squeezed revenues.
These pressures are leading to what he says will be a bifurcation among fund administrators worldwide. Some will focus more on fiduciary outsourcing, while others will double down on commoditised processing. He said UBS aspires to be in the first camp.
Rising costs are partly due to how the business naturally evolves, particularly with regard to technology budgets. UBS has spent the past two years developing a platform for hedge fund clients combining both proprietary and third-party tools.
But regulation has become a major shaper of the business – and a determinant in how tech dollars get allocated. Platforms are no longer just for efficiency and smooth processing. They must now adapt to meet regulatory obligations.
Moreover, the nature of those obligations is changing. Whereas a few years ago the focus was on transparency and updating investors on regulatory changes, now it is about reporting requirements, including for taxation, and filings with US and European regulators.
A combination of regulation and market evolution is also prompting buy sides to be more demanding with regard to transparency of information and quality of reporting, which further adds to service providers’ tech requirements.
Secondly, business and market conditions are making it harder for service providers to make money. The ultra-low interest rate environment has eroded revenue-generating opportunities within banking services. “Now we can only defend our revenue pool,” Porter said. That implies competing via new value-added services.
The good news is that clients are also being pushed by regulation and market developments to outsource more to providers, so they can focus on running portfolios, so businesses such as UBS’ can enjoy rising volumes.
But this isn’t compensating for the rising cost base, so firms can either try to maintain margins by shifting activity to lower-cost countries, or they bite the bullet in order to maintain the quality of their service – the route Porter said UBS has taken. It accepts narrowing profits because the division exists to compliment other offerings at the group level.
As a result, however, service providers have to think strategically about where they want to be. This is an acute question in Europe, where the Alternative Investment Fund Managers Directive has put hedge fund and private equity structures under similar rules as retail funds, including requirements for third-party custodians and other measures designed to enhance end-investor protection.
Porter expects this will become a more relevant issue in Asia as well. China has also updated its rules for its private funds market, moving supervision from the banking regulator to the securities regulator and the Asset Management Association of China. Mainland authorities now also require such funds to appoint independent custodians and register their products.
The next three-to-five years will see providers move into fiduciary services, handing issues around fund governance, oversight, control and reporting to beneficiaries.
“This is clearly different from core administration, transfer agency, custody and accounting,” says Porter, due to regulatory changes and new client demands. “We could see the polarisation of the industry between fiduciary providers and industrialised, commodity offerings.”