The recent transition management fee incident at State Street Global Markets, the research and trading arm of State Street Corp., is highlighting the need for institutional investors to better understand the finer points of transitions, experts say.
“Hiring a third-party or outside consultant for double-checking your trades and costs is not a bad idea,” said Laurie Berke, principal at financial industry consultant TABB Group, New York. “Certainly in this case it was money well spent.” She was referring to the incident in which a consultant for an unnamed U.K. client of State Street reportedly spotted the fee error before the client alerted the manager.
That incident resulted in the departures of two of the highest-ranking transition management executives after the company discovered it had overcharged a U.K. client.
After the client dispute, State Street began an internal investigation, said Lucy Davidson, company spokeswoman. As a result of that investigation, Ross McLellan, executive vice president and head of transition management, left the company, and Edward Pennings, senior managing director and head of the portfolio solutions group (which includes transition management) in Europe, the Middle East and Africa, was “no longer in the office,” according to Ms. Davidson. She said she could not be more specific because of a privacy agreement.
According to the U.K. Financial Service Authority's register of regulated financial professionals, Mr. Pennings became inactive at State Street on Sept. 21.
One expert who requested anonymity said institutional investors should demand a “fiduciary standard of care” from their transition managers. “What investors can ask for today (from their transition managers) has increased a lot from what it was just a few years ago,” the person said.
Rick Di Mascio, CEO of performance specialist Inalytics Ltd., Croydon, England, says he expects investors to put greater scrutiny on trades than they have in the past, and to demand performance track records from transition managers.
Talking about the State Street incident, the expert who requested anonymity said that “people are skeptical it's just a pricing error. To take out (two such senior executives) over an error — no one thinks that makes sense.”
The source noted that every transition manager has made errors in the course of making trades.
In the meantime, at least one consultant is not recommending clients use State Street for now. “It's prudent for us to recommend to clients that State Street's transitions team is not used at this time until further information is forthcoming,” said John Belgrove, principal at Aon Hewitt in London.
State Street reported the pricing incident to the FSA, a standard procedure, Ms. Davidson said. The FSA does not disclose whether it's conducting an investigation of any firm, according to spokesman Joseph Eyre.
Officials at Mercer LLC and Towers Watson & Co. declined to comment on whether they are currently recommending the firm for transition management, citing company policies.
Nicholas Bonn, president and chairman of the board of the global markets unit, has temporary responsibility of the transition management business, Mr. Bonn explained in an Oct. 7 letter to clients obtained by Pensions & Investments.
In the letter, Mr. Bonn said the firm is “conducting a comprehensive review of the small number of other transitions in Europe from earlier this year” that involved similar fee pricing to the incident. “Our normal practice is to reflect our compensation as a commission on market trades and/or a management fee. While we may agree to a compensation arrangement that entails both a commission and a management fee, in this instance both a commission and a management fee were applied without that being expressly communicated to the client,” Mr. Bonn said in the letter.
According to the letter, the client was reimbursed.
Ms. Davidson said Mr. Bonn was unavailable for an interview. She would not disclose the name of the client or the size of the reimbursement.
