Some asset owners are taking a closer look at the fees they pay custodians. But some consultants say bringing them down might not be easy — and in many cases, clients could ultimately see fee increases.
Pension funds and endowments have hired or retained custodians over the past two years with stipulations for lower fees. They include:
- The $137 billion New York City Retirement Systems, which hired State Street Bank & Trust Co. as master custodian in July, in part, because it provided the lowest fees;
- The $1.1 billion Wake Forest University endowment, Winston-Salem, N.C., which this past summer chose Northern Trust Corp. as global custodian because of lower fees; and
- The $6 billion Arkansas Public Employees Retirement System, Little Rock, which retained BNY Mellon Asset Servicing as global custodian in spring 2012 after the firm agreed to cut its fees by $2 million over the course of the five-year contract.
At Wake Forest, cost was important in the selection of a new custodian, but as important was “what we paid historically for the services our previous custodian had provided,” said James Dunn, chief investment officer. State Street was the previous custodian; its contract had expired.
“The old custodian offered us a good deal,” he said, but Northern Trust's fees were lower, and although it did not have the lowest fees among those who submitted proposals, Northern Trust was chosen for overall value of services, Mr. Dunn said.
Custodial costs are on the minds of other asset owners. In a Callan Associates Inc. survey of 49 pension funds and trusts in April and May of this year, 13% of those surveyed said renegotiating custody fees was the biggest anticipated change with respect to costs to be made over the next two years.
Clients of Mercer Sentinel Group, Mercer's custodial consulting business, have been asking about fee renegotiation, said Arti Sharma, Toronto-based principal and head of the custody practice. But many custodial clients who now are only looking at reducing their custodial fees have timed it poorly, she said. Fees had been declining since 2005 until recently, when they flattened — the same period that asset owners focused more on external money management costs than their custodial arrangements.
Among pension funds, “custodians had been treated like a poor cousin. They recognized their importance but always kept them kind of at the bottom,” Ms. Sharma said. “Now, those clients are saying, "Maybe I should take a look at this cost since I haven't done so in five to 10 years.'”