Custodians Make the Case to Be Full-Service Providers Under AIFMD

Aside from increasing the responsibilities for fund managers and their providers, the Alternative Investment Fund Managers Directive (AIFMD) could also cause a consolidation of service providers, as custodians look to take on a full-service role.
By Jake Safane(2147484770)
Aside from increasing the responsibilities for fund managers and their providers, the Alternative Investment Fund Managers Directive (AIFMD) could also cause a consolidation of service providers, as custodians look to take on a full-service role.

At Global Fund Distribution: USA 2014 in New York at the end of February, service providers made the case for why custodians should also serve as fund administrators, as doing so could provide more capabilities at a potentially lower cost.

In terms of how fund managers go about selecting their service providers, Dianna Raedle, CEO of Deer Isle Capital, said that cost is at the top of the list.

“A lot of it is obviously cost and the ease of use versus that cost,” she said. “Regarding distribution, the bigger name service providers help investors feel comfortable with the structure, but we always have to weigh what the cost of that comfort and safety is versus what services are being delivered.”

As AIFMD will increase the need for oversight, costs will inevitably increase. But to Raedle’s point that cost is a major factor, service providers would prefer to have both the custodial and administration roles, not only because of the risk and coverage perspectives, but also because it would be more cost effective to oversee all that can be done.

“There are cost efficiencies for service providers which translate to cost efficiencies for the manager, especially if a manager is working with a provider that can handle a range of services across a range of domiciles,” says Chris McChesney, senior vice president, head of Brown Brothers Harriman’s Alternative Investor Services Group.

“Consolidation of custody and administration services also helps in terms of the provider’s capabilities,” he says. “From a service provider perspective, what we can do around reporting often hinges on what assets we service. Regulatory reporting gets more challenging for the manager, and for providers, of course, when assets are spread across multiple parties.”

Some providers may be more willing than others to provide a singular function such as reporting, but the larger providers seem to be more comfortable with a full-service offering.

McChesney adds: “It would be challenging to act as a depositary in a situation where we’d be depending on a small, unknown administrator to strike NAVs. That could put us in an uncomfortable situation. On the other hand, another depositary might be willing to rely on BBH as an administrator. I think, though, in the end you’ll see certain banks like us making the case for full service. It’s just so natural under the expanded responsibilities of a depositary.”

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