Asset Managers Regain Ground in Transition Services

Demand is soaring for asset managers that provide transition management services.


Custodial banks and asset management firms are regaining ground in transition management after years of losing territory to broker-dealers.

The bankruptcy of Lehman Brothers Holdings in September eliminated one major competitor from the business, which guides institutional investors as they switch from one money manager to another, make major moves into new asset classes or rebalance massive portfolios. Since then a number of global banks — including Citigroup, Royal Bank of Scotland Group and UBS — have either scaled back their transition management services or eliminated the labor-intensive units altogether amid widespread cost-cutting, clearing the way for other firms to capture market share.

Bank of New York Mellon Corp., which is both a custodial bank and an owner of independent money managers, oversaw the transition of $165 billion in assets last year, an eye-popping 85 percent increase over 2007, according to Mark Keleher, San Francisco–based chief executive officer of Mellon Transition Management.

Lehman’s collapse, Keleher says, left some pension plan sponsors in the middle of transitions, creating confusion about such operational details as the settlement status of trades. That event, and the perceived structural weakness of other global banks, is prompting many institutional investors to take a closer look at who is managing their transitions, he notes.

“It’s important to choose a manager that will be here long term, one where the transition management team won’t disappear because of cost-cutting,” Keleher explains. “You have to ask, ‘Is it an important business? Or is it just ancillary?’”

BNY Mellon is expanding its transition management unit, because of rising demand from institutional investors, fewer competitors and an abundance of available talent, he says. In March the firm picked up seven transition management specialists from Citigroup, which shuttered its U.K. transition management services in January, and now has a global team of 50.

“There will soon be pent-up demand because many people who would like to transition assets are waiting for volatility to drop before hiring a new manager,” says Keleher.

“It’s a good time to ramp up,” agrees Grant Johnsey, head of North America transition management at Northern Trust Global Investments, the asset management division of Chicago’s Northern Trust Corp. Last year Northern Trust managed the transition of $70 billion in client assets, a 30 percent increase over the previous year, and Johnsey expects the robust growth to continue. “A lot of plans are trying to evaluate whether current investment management performance is a function of volatility, or if their current manager doing a poor job,” he says.

At the moment, plan sponsors are more interested in so-called interim transitions, or minor adjustments to portfolios involving the use of futures, options and other derivatives, while they wait for market turbulence to subside, according to Adam Esposito, North American head of the transition services group at Goldman Sachs Asset Management in New York.

Investors also want managers that will act as fiduciaries during transitions, a responsibility that broker-dealers do not assume. Last August, Goldman moved some of its transition specialists into its asset management division so they could provide oversight, Esposito says, because the firm was losing contracts because of fiduciary concerns. The rest of the group remains housed with the broker-dealer.

J. Cooper Abbott, senior vice president of institutional sales at Eagle Asset Management in St. Petersburg, Florida, notes that asset managers can include transition management as part of their regular services.

“A transition manager will argue that they provide better and more effective execution, but it is an additional service being paid for,” Abbott says. The expense may be justified in cases involving a portfolio of illiquid stocks or complex fixed-income investments, but a specialist is not needed for routine rebalancing, he adds.

With many institutional investors reeling from staggering losses that stemmed from the credit crisis, the opportunity to save money and increase oversight by allowing custodial banks and asset management firms to handle their transitions may be too tempting to pass up. Similarly, with many third-party managers struggling with plummeting fees as market depreciation and record outflows have decimated their assets under management, the boom in transition services is one of the few bright spots in this bleak economic environment.