Benchmarking is the process of comparing business performance metrics of a company to those of other businesses in the same industry. With increasing competition between financial services providers and growing regulatory pressure to justify outsourcing choices, Benchmarking has never been as relevant as it is today. We have met with Nicolas Xanthopoulos, Alpha FMC Luxembourg CEO, to better understand the benefits of this process.

Could you please tell us more on the reasons why Benchmarking has become so important in the Asset and Wealth Management industry?

In the Asset and Wealth Management industry, the reasons for conducting Benchmarking can be diverse. Lately, we’ve seen an increasing demand from Company Boards and Trustees to understand how the company performs at all levels. Indeed, Boards are willing to ensure that the interests of their investors are protected and that the fee exposure is monitored. Companies also initiate Benchmarking prior to negotiations with their Asset Servicers (fund administration and custody activities) to understand the impact of changes to the business since the deals were negotiated. Benchmarking can also occur halfway through contracts between Asset Managers and their service providers as there are often Benchmarking clauses in outsourcing contracts.

 

What are the Benchmarking services that you perform the most?

At Alpha FMC, we focus on 3 types of benchmarking:

- Operating Model Benchmarking, assessing costs, headcount, service performance and other capabilities across the full Middle and Bank Office;

- Outsourcing Tariff Benchmarking;

- KPI & SLA (Service) Benchmarking

On many occasions, Alpha FMC is hired by both the Asset Manager and its Asset Servicer for a joint Benchmarking study as Asset Servicers also benefit from this process.

 

Benefits for the Asset Manager are straightforward, but where is the added value for the Asset Servicer?

For Asset Servicers, it shows good will to participate in Benchmarking projects, which is valued by their clients. As a result, the relationship is strengthened between the 2 parties. One common assertion is that if an Asset Manager is paying its Asset Servicer less than the market rate, the Asset Manager will be happy. This is actually not always true as a very cheap rate cards could mean that the Asset Servicer might not spend adequate time on the client, updates/upgrades might be delayed, etc.

Still, this is very oriented towards the Asset Manager’s benefits, can tariff benchmarking be also beneficial for Asset Servicers?

Absolutely, in addition to the joint Asset Manager / Asset Servicer projects described earlier, we do a lot of work with Service Providers. The projects broadly fall into 2 categories:

- We support the review of RFP responses for large deals where Alpha is not involved by advising Asset Servicers on whether the fees are in line with recent market development

- We are also asked to review the standard template rate cards used by the providers and compare these to the market. This comparison can cover the pricing of additional services proposed by the Asset Servicer that would have limited experience of market pricing for such service. We can also support the review of classic rate cards and provide insights on the tiering mechanisms that are used in different client segments. Often the standard offer at a given Asset Servicer includes services that are typically considered as value added functions charged by competition.

The fact that we have such a large library of recent tariffs from the tariff review we run means that we are very much up to speed with the latest trends and pricing approaches from all the leading players in the market. It is also a great way to review the standard rate card of an asset servicer and identify sources of additional revenues.

 

Each company and contract has its own specificities, how do you take that into account when Benchmarking a relationship or an operating model?

Comparing outsourcing tariffs is not like comparing the price of a car or a tin of soup – rate cards can be very complex and are tailored to the individual asset manager’s profile. We have over the years developed a methodology that, by breaking down the cost to the most appropriate drivers of effort at the Asset Servicer (e.g. the number of NAVs calculated for Fund Accounting or the number of Transactions and Investor Accounts for TA), and taking into account the economies of scale that exists in the market (larger managers pay less than smaller managers do) allows for fair comparisons.

 

How are you able to maintain an up-to-date database of Asset Servicer prices, KPIs and SLAs?

We only use live rates cards, and we get these by doing many Benchmarking projects. Last year, we’ve completed over 30 different projects all over the world on these topics. Having a large and relevant comparative data set is the key driver behind a successful comparison and we are confident that we have, by some margin, the largest rate card library in the market.

 

So if I mandate Alpha FMC for Benchmarking or other purposes, will my data also be used later in Alpha FMC’s Benchmarking projects?

That is correct, that is how we are able to have such a large library of comparable tariffs. However, we have a very strong focus on client privacy and confidentiality. All data used is completely anonymized and only a small team of Alpha FMC consultants have access to the confidential data. We have never had a data breach since we started 15 years ago.

 

Could you give one or two examples of Benchmarking success stories?

A successful project is where all parties are happy with the analysis and where we identify relevant actions. We recently conducted a large review where a global asset manager outsourced a wide range of middle and back office functions in several locations to the same Asset Servicer. Overall, the costs were broadly aligned with what would be expected and the service performance was, with a few exceptions, excellent. However, there were some areas where the manager was over-paying and others where the fees were well below market, so the two parties agreed to a number of adjustments to the rate cards to get each area in line with the market.

Sometimes changes to a manager’s profile can materially impact the competitiveness of a deal. In the autumn we benchmarked a Fund Accounting deal where the average AUM per fund had increased by 250% since the tariff was agreed. As the bps fees were set for much smaller funds, the manager was significantly overpaying for this service and they negotiated a reduction in fees with the Provider.


Publié le 08 mars 2019