Some readers may perceive the asset servicing side of the ETF ecosystem as being less glamorous than being involved in launching the next hot thematic or ETF product or developing the next high-octane index but whatever your view there is no getting away from the fact that without the asset servicing function, there is no ETF.
What do asset servicing firms do?
Generally, people associate asset servicing as offering fund accounting, administration, custody and transfer agency support to asset managers.
All of this is standard for the mutual fund operating model but in the case of ETFs, there is the additional requirement to service the authorised participant (AP) market. Effectively, for ETFs, the asset servicing firm is the gateway between the primary and secondary market.
It is the asset servicing firms who act as the link with the APs providing them with daily PCFs and up to date information on the funds they are servicing. Some may argue it is difficult to differentiate your services based on custody or fund accounting alone but there is no arguing that the ability to service the AP community is a key differentiator for today’s ETF asset servicing firms. Ensuring a seamless flow of real time data with APs is a key component to success.
Big is beautiful
It is fairly obvious that scale is key to success in this market. In Europe, the dominant providers are BNY Mellon, BBH, State Street, Citi, HSBC, JP Morgan, Caceis, Societe Generale and Northern Trust, none of which could ever be accused of being a small scrappy start-up.
When one considers the investment required to safeguard trillions of assets and the state-of-the-art technology needed to support the instantaneous flow of information, then it is clear this can only come at a sizable cost.
However, this is not to say there is no opportunity for disruption in the market. While BNY Mellon, BBH and State Street dominate the market, firms like JP Morgan and Citi are relatively newcomers and are offering a holistic end to end service to the market as a means of differentiating themselves i.e. not only providing the core services but also providing market making services, seed and distribution support.
There is also the opportunity for companies with a very specific service to provide plug-in services that complement the overall asset servicing model i.e. firms like Ultumus who specialise in PCF production and distribution.
Are these firms doing enough to support start-ups?
In a previous article for ETF Stream, I reported that a number of start-up ETF providers experienced difficulties in finding a service provider partner, citing high minimum revenue requirements as a barrier to entry.
While a reasonable claim, it is worth noting that these firms are always very open to discussing with new providers and a great number of them have clients with assets well below $1bn.
It is also worth remembering that asset servicing firms can be a great source of knowledge for start-ups. As one insider commented to me “we are an inch wide but a mile deep”.
These firms have a ringside seat in terms of observing what success looks like for product providers and are usually very willing to share their experience with potential new market entrants.
At the end of the day however, the asset servicer needs to assess whether the business plan being presented to them makes sense and whether there is a long-term partnership opportunity on offer. It is a commercial venture after all.
However, every single firm I spoke to stress their desire for a true partnership model with their clients as being of top priority when working with new providers.
The growing influence of technology
As with the rest of the ecosystem, the asset servicing model is being heavily impacted by technological change. Real time AP connectivity requirements, a growing need for the dissemination of large chunks of data, and a need to implement low touch/high automation processes, is all driving rapid change across the industry.
ETF clients are demanding, and the need to implement best in class tech whilst providing a high level of service and ensuring costs are minimised for clients results in a fast-paced, high octane environment.
Further technological change is likely to come about once blockchain starts to be adopted so the asset servicing business of the future is likely to look very different to the one we see today.
All of which begs the question, as a career choice, why is it still seen as the less glamorous part of the industry versus the ETF product provider space or trading or the index construction sectors?
The common thought is lower compensation, one I would not necessarily agree with. A more likely reason is people perceive asset servicing as operations and a back-office function. Whilst its true there is an element of that to it, the same could be said for asset managers. Not everyone at iShares works in sales or portfolio management.
There is also the location element to factor in. Most positions tend to be based in either Dublin or Luxembourg which tend to be not as diverse in roles on offer versus London or Paris or Milan.
Regardless of what the perception is, a career in asset servicing can be just as satisfying as anywhere else, so have an open mind.
Lastly, it is worth mentioning the likely impact regulation around non-transparent ETFs is going to have on the industry (and is already having in the US market). The structure is coming to Europe. It is not a question of if, but when.
We have already seen huge shifts in the US market this year, most recently with the news that Dimensional Fund Advisors intend to convert existing mutual funds into ETFs. This, in itself, will provide huge opportunities for asset servicing firms. As highlighted at the start of this article, the ETF operating model is a different model to the mutual fund model and not a simple copy/paste exercise.
Supporting mutual fund managers to take their first steps into the ETF field will be a huge undertaking but is something the industry is well set up for.
As they say, the devil is in the detail, something asset servicing firms tend to be good at.
View From The Desk is a new series where Michael O'Riordan, founding partner of Blackwater Search & Advisory, a specialist ETF and digital asset executive search firm, examines the key trends taking place across the European ETF industry from a people's perspective.