© Copyright 2007 Rogers Publishing Ltd. The following article first appeared in the February 2007 edition of BENEFITS CANADA magazine.
The major players in Canada’s custody industry are getting larger. But is bigger really better?
By Don Bisch

Last December, when The Bank of New York and Mellon Financial announced their agreement to merge, it was just the latest indication that the players in the pension custody industry are getting fewer in number and much larger in size. If it receives approval from regulators and the two companies’ shareholders, the merger will create a behemoth—the largest securities servicing company in the world, with US$16.6 trillion under custody.

Add that to the joint venture that made RBC Dexia Investor Services the world’s ninth-largest custodian with $2.4 trillion of assets under custody, and it seems that competing in the custody industry these days is all about how big you are.

“You need scale in this business. That’s a fact,” says Thomas MacMillan, president and chief executive officer of CIBC Mellon in Toronto, which currently ranks third in Canada for pension assets under custody with $200.8 billion as of Sept. 30, 2006, up 14.6% from $175.3 billion in 2005. The firm ranked second in mutual/ pooled assets at $372 billion, an increase of 8.5% from $342.8 billion.

MacMillan couldn’t provide details on exactly what impact The Bank of New York Mellon merger will have on the 11-year-old CIBC Mellon joint venture in Canada, but noted that the status quo as it relates to ownership will prevail. In the long term, however, he says that having “a bigger, richer parent” will make his company even more competitive, and it will mean that his clients get the benefit of increased capabilities, greater global reach and more investments in technology.

“We’ll have the capacity to do more, which is what our pension clients want,” says MacMillan. “As the investment instruments get more complicated, as the markets get more global, as the governance demands get more complicated, they’ve got a provider who’s going to be capable of delivering on or anticipating those needs.”

But with any deal involving the merger of two large companies, there is potential for growing pains as systems, personnel and cultures are combined into a single entity. This can mean that client service takes a back seat to managing the transition.

MacMillan says he recognizes the importance of managing the integration well and is committed to ensuring a strong level of client service through the transition. “The integration as it’s planned is not only going to be very measured, but it’s going to be done by a separate team. It’s not going to be done by our clients’ day-to-day officers. So that’s really important.”

Not surprisingly, MacMillan’s competitors aren’t as optimistic. “Global deals—especially deals of this magnitude—are very large and very complex, with a lot of moving parts,” says Rob Baillie, chief executive officer of Northern Trust Company in Toronto, which ranks fifth in Canada for pension assets under custody at $66.1 billion, up 22% from $54.2 billion the previous year. “You can always get to a point where you have diseconomies; you bring complexities into your business and they can make you inefficient. On paper it looks great. But as with many things, it’s all about execution.”

Baillie adds that, in the short term, the Bank of New York Mellon deal will create some opportunities for his firm and other custodians in the marketplace. “It’s just inevitable that it’s going to bring uncertainty into the equation for some of their clients.”

José Placido, chief executive officer at RBC Dexia Investor Services, agrees that the merger will open some doors. “From a Canadian perspective, hopefully the acquisition will provide a distraction for Mellon and Bank of New York, which will allow us in Canada to focus on our key strengths.”

Some were making the same predictions about Placido’s company a year ago when the RBC Dexia joint venture was completed. But Placido says a great deal of preparation went into ensuring that the combined company would continue to run smoothly. “We were able to prove to our clients that while we were integrating two companies, we could still focus and keep our eye on delivering the day-to-day service,” he says.

At Via Rail Canada, which uses RBC Dexia as the custodian for its $1.6 billion defined benefit pension plan, they haven’t noticed any change or interruption in service levels as a result of the joint venture, says François Quinty, director of investment management. “We’re still being serviced from the same offices, we’re still dealing with the same people, so [there’s] no visible change at this point,” says Quinty.

Making the transition as seamless as possible has paid off, says Placido. Not only have all of the clients of the former RBC Global Services stayed on board, but the firm’s Canadian pension assets under custody grew 16.7% between September 2005 and September 2006, keeping it firmly in place as Canada’s largest pension custody provider.

As for size, Placido says it does matter. “I think it’s scale plus capability. It’s not scale for scale’s sake because you could be a very strong scale player in one major geography such as the U.S., but if you don’t have a cross-border and geographical reach, you probably are not moving up the value chain.”

MacMillan agrees that global reach—operating in as many markets as possible—is key. “The reason we’re in these countries is because our clients are invested in these countries. They have instruments that need to be accounted for, settled and reported,” he says. “We’re in those countries, we know the regulations, we understand the environment there. It just makes for a more robust global custody network.”

Scale is also becoming more important since the technology required to service clients’ increasingly complex needs doesn’t come cheap. “Technology is a major driver in this business, and scale allows you to spend the money you want to spend,” says Doreen Rigby, managing director, investor services at State Street Trust Company Canada, which ranks second in Canadian pension assets under custody at $346.3 billion as of Sept. 30, 2006, an increase of 37.4% from 2005. It ranks third in mutual/pooled assets under custody at $177.9 billion, a jump of 22.7%.

However, Rigby is quick to point out that scale isn’t everything. “We really don’t see it just as a scale issue. It’s about what you can do with the assets when you have them. How do you service those assets?” says Rigby. “If you can only offer custody, accounting, and you can’t stretch everywhere that the clients are stretching, that’s not our business model. We offer a complete set of services.”

Northern Trust’s Baillie agrees that scale is only part of the equation. “What it really puts the focus on, in my opinion, is your commitment to client service and technology. Because, at the end of the day, that’s really what clients care about: how well they’re being serviced and how able your technology is to help them in their daily lives.”

As for the clients themselves—Canadian plan sponsors—they say size and global reach are just two of the many factors they consider when choosing a custodian or evaluating their current custodian. And they usually aren’t the most vital ones.

“Cost is probably the most important factor for us,” says Quinty. “We don’t want anything fancy like some big plans want, such as daily downloads of market data. We want the plain vanilla service at the cheapest cost.” He says the next most important qualities in a custodian are accurate and timely reporting.

“We’re always asking for the moon. We want something that’s perfect all the time, and we want to pay as little as possible for it.” But with all the consolidation taking place in the custody space, he fears that fewer players will mean less competition, less service and less downward pressure on prices in the long term.

Zaheed Jiwani, investment consulting office head at Hewitt Associates in Toronto, says plan sponsors need not worry. While he doesn’t expect any drastic fee cuts, he says the race for market share will ensure things remain competitive. “Custodians are attempting to distinguish themselves through competitive pricing and/or the delivery of new services,” he says.

Bruce Grantier, managing director, pension assets for Scotiabank, has even noticed a drop in fees. “It was quite gratifying to see that among Canadian custodians surveyed, the cost difference has shrunk from the last time we reviewed.” Grantier says cost is a factor when choosing custodians, along with quality and range of services. While size is a consideration, he doesn’t think bigger is always necessarily better.

For example, Scotiabank uses different custodians for its pension assets in Canada, the U.S. and Jamaica. “So far, we have found regional circumstances have led us to use custodians whose more tailored products meet our specific needs or offer lower costs.”

That’s music to Adrian Baker’s ears. He is the chief operating officer of Canadian Western Trust, a regionally focused custodian with its principal office in Vancouver.

With $3.3 billion in pension assets under custody, the firm is small compared to the top players in Canada. But the firm is growing in leaps and bounds with a 29% increase in assets under custody between 2005 and 2006.

Its combination of low price and personal customer service is hitting a chord with small- and medium-size pension plans in Western Canada. Baker says Canadian Western Trust is able to keep fees affordable because smaller plan sponsors generally have fewer complexities.

Although there’s still room for smaller players, the Canadian custody industry remains, for the most part, a big boys’ game. And the large players will likely continue to get larger, with many in the industry predicting some sort of further consolidation.

While mergers can create some hiccups in the short term as larger companies integrate, they will likely translate into better access to foreign markets and better technology in the long term. As for what larger custodians will mean for future cost and service levels, only time will tell.



The year 2006 was a healthy one for Canada’s pension plan custodians. Total pension assets under custody grew by almost 29% to $1.2 trillion as of Sept. 30, 2006 from $898 billion the previous year. At the same time, mutual and pooled fund assets under custody also grew at a healthy clip of 18%, to $1.2 trillion from $1.0 trillion.

That increase, according to the custodians who spoke to benefits canada, was due in part to organic growth driven by the health of Canada’s markets. But some of the growth can also be attributed to new business. And much of that new business is coming in the form of outsourcing, as pension funds and money managers alike cast off their non-core functions.

For instance, last September Manulife Financial chose RBC Dexia to be fund administrator for a $26 billion portfolio of funds in its Canadian individual wealth management and group savings and retirement solutions business. Two months later, CI Financial extended to 2011 an outsourcing relationship with RBC Dexia to offer custody, fund accounting and securities lending for $62 billion in assets. And in October, Evergreen Investments appointed State Street to provide investment manager operations outsourcing services for portfolios worth about $150 billion in assets.

Doreen Rigby, managing director, investor services at State Street acknowledges that outsourcing is where much of their new growth is coming from. ”We tend to see investment management type organizations outsourcing what is termed their ‘middle office,’ which generally includes investment support activities,” she says. ”We can extend what we do today to take over what they do and allow them to focus on their core activities.”

In addition to money managers outsourcing their non-core activities, Robert Baillie, chief executive officer at Northern Trust, has seen a rise in pension plans outsourcing their benefit payments. ”There’s still a number of corporations that pay their own pensioners. We’re working with clients to help provide them with outsourcing solutions.”

As for José Placido, chief executive officer at RBC Dexia, he doesn’t think the outsourcing phenomenon is a passing fad. ”The trend has started and is well in play. And I think in 2007 and 2008 you’ll see many more deals like that.”


Don Bisch is editor of Benefits Canada. don.bisch@rci.rogers.com

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