Overview

Service Provider Selection and RFP Process

Every institutional investor now appoints a global custodian bank to look after and service its assets in multiple markets around the world. Since changing a global custodian is a time-consuming and expensive project, it is important to get the initial appointment right, as well as manage the relationship in a disciplined manner to ensure it continues to deliver exactly what is needed.

However, change is sometimes required, either for performance or operational reasons, or in the aftermath of a corporate transaction.

Our team exists to help institutional investors identify under-performing custodians, find service providers that match their strategy, and put in place monitoring arrangements that will keep the relationship healthy. Giving institutional investors dispassionate advice on their custody arrangements was the original business of Thomas Murray IDS, and it remains at the heart of the company today, both contributing to the data collated by the other parts of the business and drawing upon it as part of its analysis and decision-making.

Our service provides specialist support to facilitate the selection of service providers through a sophisticated, formal Request for Proposal (RFP) process.This covers custodians, fund administrators, depositaries, OTC clearing brokers, collateral managers, prime brokers, transfer agencies, service provider transition support

Thomas Murray IDS Selection and RFP Process

Frequently Asked Questions

Why should we go to the trouble and expense of a formal review of our custodians?

Some institutional investors do not. In the securities services industry, it is not uncommon to renew an existing relationship or appoint a new provider without assessing the merits of the competition. Even where investors decide to change their custodian, they are often happy to rely on the recommendations of others, and enter negotiations directly. However, the pitfalls of an uncontested bid are considerable, and the costs and risks of appointing the wrong provider can far outweigh the savings of a truncated, non-competitive process. The quality even of basic custodial services can vary enormously across different providers, as can the quality of staff and management, the level of investment in the business, and the value of the indemnities which a bank is prepared to offer. The fees quoted by one provider may look competitive, but be vastly outweighed by less competitive rates on cash balances, securities lending, foreign exchange and charges for incidentals. As in any commercial decision, it always makes sense to compare the quality, range and cost of services provided in the market.

How can Thomas Murray IDS help us review our existing custodial arrangements?

There are three different ways of taking advantage of the industry knowledge and service provider review methodologies developed by Thomas Murray IDS. The first is to appoint Thomas Murray IDS as an advisor, with the authority to conduct a full assessment of existing provision and, if necessary, search for a new provider through the issue of a detailed Request for Proposal (RFP). The second is to purchase a licence to the tried and tested model RFP questionnaire created by Thomas Murray IDS, complete or adapt it to your own requirements, and conduct your own RFP process. The third is to adapt a Thomas Murray IDS model RFP to your own needs, submit it, and obtain answers directly from RFx Hub for Financial Services, the Thomas Murray IDS database of up-to-date information about custodian banks.

Learn how RFx Hub for Financial Services can help you to run your RFP

What are the advantages and disadvantages of the three different methods of working with Thomas Murray IDS?

Purchasing a licence and conducting your own review process obviously keeps the visible costs to a minimum, but the savings are offset by the internal diversion of time and effort, the cost and risk of which is increased by the inevitably limited experience of conducting RFPs. Completing the process through SupplierSelect for Financial Services is more efficient, in that it cuts the length of the RFP process significantly by reducing the burden on the custodian banks of responding to a detailed RFP, without any sacrifice in terms of accuracy. Appointing Thomas Murray IDS to run the entire process is even more efficient, in that it minimises the time and effort which has to be devoted to the process by internal management and staff. While enabling buyers to continue to draw on the SupplierSelect for Financial Services database, a full assignment also allows for a fully customised approach to be taken to the entire process. The visible costs are higher, but the risk of making an expensive error is virtually eliminated.

Learn how RFx Hub for Financial Services can help you to run your RFP

How do on-line RFPs work?

Users of RFx Hub for Financial Services name the custodians which they wish to review. Custodians are invited to complete a detailed questionnaire, structured to provide unequivocal answers, that covers their credentials, core service requirements, and any client-specific areas of interest. Their responses to each question are scored on a scale of zero to ten, where ten means a provider meets or exceeds all requirements, without qualification; eight means the provider meets all requirements, but with some minor qualifications; five means the provider meets basic minimum requirements, but with some qualifications; two means the provider does not meet all requirements, but specific enhancements are planned; and zero means the provider fails to meet requirements. Questions are also weighted, mostly on a scale of one to five, with some exceptionally important areas receiving a weighting of ten. However, users are free to assign their own weightings to particular questions. The combination of unequivocal responses and weighted scoring facilitates numerical comparisons between providers, though qualifying statements by providers are always taken fully into account. At the end of the process, users receive a report showing the responses of the custodian banks, the Thomas Murray IDS analysis of the strengths and weaknesses of each provider, and recommendations for action. From this report, a short list of potential providers can be drawn up, and so-called “star chamber” questions prepared to differentiate further between the banks on the short list. The report also serves as the foundation for contractual terms and service level agreements (SLAs) when an appointment is made.

Learn how RFx Hub for Financial Services can help you to run your RFP

How would an RFP process run by Thomas Murray IDS as an advisor actually work?

It divides into four distinct stages. The first is an assessment of the current and future needs of the client, in which current service provision is compared with best market practice, to establish key buying requirements and whether existing arrangements are satisfactory, or can be improved, or a change of provider is necessary. This initial exercise also enables the list of potential providers to be kept to the minimum, making the overall process quicker and cheaper. The second stage is the evaluation of the providers on the initial list, in which Thomas Murray IDS issues to the potential providers through RFx Hub for Financial Services a detailed RFP tailored to the specific needs of the client. Because providers can make use of data already stored in RFx Hub for Financial Services, the generation and receipt of responses usually takes no more than three or four weeks. Analysis of the responses then enables a short list of potential providers to be drawn up. This is followed by a full due diligence exercise on the members of the short list by Thomas Murray IDS, including on-site visits lasting one or two days and interviews with existing clients, to establish whether providers can actually deliver the service levels promised in their responses to the RFP. The third stage sees the appointment of a provider, in which Thomas Murray IDS assists in the negotiation of contractual terms and especially service level agreements (SLAs). The gains made at the assessment and evaluation stages are easily lost if the service needs of the client and the service capabilities of the provider are not merely well-matched, but actually written into the SLAs. It is at this stage that the timing and process by which business is transferred to a new provider is negotiated, and fees are agreed. The fourth and final stage is monitoring, in which Thomas Murray IDS measures the actual performance of a new provider against the SLAs, in terms of fees as well as operations. Any problems which are identified can then be resolved, keeping the relationship healthy.

What do the custodians gain from working with Thomas Murray IDS?

A simpler, better and faster RFP process. The RFP is now a standard feature of any custodial appointment, and both buyers and sellers have a strong interest in the RFP process being as efficient, informative and rapid as possible. The leading custodian banks receive a flood of RFPs every year - 300 is not unusual for a major global custodian – and not all are of the quality the service providers have a right to expect. There is a tendency in RFPs to ask about everything, and not just about what actually matters. Many questions are frustratingly vague or open-ended, and some are immensely detailed and intrusive. Given the time it takes to respond to an average RFP, even with the support of digital technology and off-the-shelf answers, banks naturally want to know: is this institutional investor serious or is this simply a data collection exercise, designed to gather ammunition to use against incumbent suppliers? By working with Thomas Murray IDS, custodian banks have the benefit of updating a single source of information about their services, in the shape of RFx Hub for Financial Services, and the assurance of knowing that any investor working with the firm is deadly serious. They will also know that, when it comes to recommending an appointment, the advice of Thomas Murray IDS will be based on having asked the right questions in the right way, with no room for equivocation. No service provider resents being judged by a process which is properly conceived, efficiently organized, and designed to bring out real differences in service quality.

How large a part does pricing play in recommendations by Thomas Murray IDS?

For clients of Thomas Murray IDS, fees are the crucial factor in an appointment only when there is no other means of differentiation. That said, there are markets and sectors where buyers are obliged by law to select the cheapest supplier when they conduct an RFP process. This is especially true of State-owned institutions. Pricing can also be a key consideration for third party fund managers running their own custody networks, since cutting costs can improve performance (where the fund pays) or margins (where the fund manager pays). While Thomas Murray IDS certainly agrees that price is an important consideration, and will always favour service providers that are willing to share the benefits of greater efficiency with their clients, the firm seeks always to strike the right balance between low safekeeping and transaction fees, justifiable and transparent ancillary costs such as those incurred in securities lending and foreign exchange, the highest levels of overall service quality, and the utmost degree of safety and security for assets. Institutional investors are rightly wary of buying on price alone, given that a single missed corporate action, or failed delivery of cash or securities, or loss from lending securities, let alone the constant toll of uncompetitive rates on cash or foreign exchange, can easily eclipse any apparent savings on custody fees at the outset. This is why it is important to seek expert advice, not only on operational capabilities, but on exactly how a service provider intends to secure its own reward from a contract. With pressure now mounting within the industry for fee structures to be “unbundled,” with itemised charges for each service and no hidden charges for ancillary services, the need for expert advice on choosing the appropriate fee structure was never greater. Fee structure recommendations are a standard feature of a Thomas Murray IDS RFP process, and continuing fee analysis is an ingredient of the custodian monitoring service that the firm supplies to buyers after an appointment is made.

In which markets does Thomas Murray IDS provide advisory services?

Since the Thomas Murray IDS advisory team was founded in 1994, the firm has completed reviews of custodial arrangements on behalf of institutional assets worth a cumulative total of over €3.1 trillion. The firm initially advised pension funds in the United Kingdom, but now has clients throughout northern and western Europe, and especially in the large institutional markets of the Nordic region, Switzerland and the Netherlands. The company opened an office in Toronto in 2006 to service its growing Canadian and US client base, followed a year later by the opening of an office in Melbourne to service Australian managed and superannuation funds buying master custody services.

Select the links below to learn more about each service:

If you are based in Europe and would like to find out more about this service, please contact: Stephen Merry at smerry@ids.thomasmurray.com or telephone him on +44 (0) 20 8600 2300

If you are based in Australasia and would like to find out more about this service, please contact: Brian Keogh or Adam Zani at infoap@ids.thomasmurray.com or telephone them on +61 (0) 4 0790 8151 or +61 (0) 4 0488 2373

If you are based in North America and would like to find out more about this service, please contact: Janet Wynn at jwynn@ids.thomasmurray.com or telephone her on +1 416 628 3872