A key architect of the compulsory retirement savings system lauds its many achievements, stretching from the national economy to the individual. Where it’s double faulting is in serving members – and it needs to be addressed promptly.
With performance and diversification driving demand, these funds are expected to experience four-fold global growth over the next decade to nearly $AU65 trillion.
New-look custodians come out from the backoffice
(pictured: Teresa Heitsenrether)
Major trends among big super funds, such as the management of more assets inhouse and building up products and services for members in retirement, are presenting opportunities and challenges for securities services companies. J.P. Morgan’s Teresa Heitsenrether discusses some of those trends.
Heitsenrether, the New York-based managing director and global head of Custody and Fund Services for J.P. Morgan, says some funds are taking more of their investment management inhouse, thereby increasing the complexity of their businesses. Given the long dated liability structure of their funds, they are able to introduce more complex products with longer investment horizons to their portfolios such as infrastructure, real estate and private equity.
Funds around the world are also increasing their cross-border investing, which adds to demands on custodians, especially in some emerging and frontier markets, for efficient FX, settlements and reporting.
Heitsenrether, who has been at J.P. Morgan since 1987 and has held other global roles including running the firm’s prime brokerage business, points out that most of the firm’s securities services clients leverage a broad range of products and services from across the bank’s network of business lines and regional offices.
“We operate in more than 100 markets, including 77 emerging markets,” she says. “Clients want us to partner with them across multiple areas including providing data and analytics to help in managing risk, performance and capital allocations, in addition to helping them enter new markets.”
The trend for those clients is to increasingly want to provide for members in retirement, especially among Australian super funds because of the high proportion of lump-sum payments made on retirement compared with defined benefit pensions, Heitsenrether believes.
“Catering for the post-retirement phase means that some clients are, in a sense, competing with traditional asset [or wealth] managers. We are also working with clients on solutions for this. It’s about having a customer service focus for the different phases of their [members] lives,” she says.
“We are helping them through the delivery of technologies, building front-end interfaces for clients and in developing their client servicing models.
The Australian super fund market tends to be “at the leading edge of developments and in terms of knowledge and sophistication”, Heitsenrether says. “There is an acute awareness of putting members first and also a focus on what the funds are delivering, which means extra scrutiny on efficiency and performance.”
In Australia, the SMSF phenomenon, as the largest and fastest-growing segment of the superannuation market, means that all service providers need to be able to adapt to a more retail-orientated environment. Technology is very important in this regard. And the global banks tend to spend a lot more on technology than other financial services firms.
“The firm spends a significant amount each year globally in Custody and Fund Services,” Heitsenrether says. “We are very active in working with latest technology trends and we’re always exploring new opportunities. We have to make sure that we are the most efficient we can be.” In Australia, for instance, J.P. Morgan recently acquired a stake in the platform solutions company Linear Financial Holdings. Adding to the challenges of securities servicing firms are the regulatory changes, such as Basel III, which have meant increased capital requirements that result in making institutional deposits a far less valuable source of liquidity and revenue. To put it another way: banks make less money from the deposit balances of their institutional clients. The banks are also lending less in certain areas due to balance sheet constraints and taking fewer proprietary positions in some markets. For big super funds, this is an opportunity for them to fill the void in areas previously dominated by banks.
As securities services firms also evolve with the changing landscape, J.P. Morgan will be looking to further broaden the engagement for super funds and other clients across the whole organization, including markets and banking.
Heitsenrether believes that securities services can lead the charge on behalf of funds in capitalising on all the change. “For our clients, the custody business provides access to the rest of the firm,” she says. “We have moved on from the days where we are just providing backoffice servicings. The value proposition has changed as has the needs of our clients.”
