Brown Brothers Harriman proves that there is more than one path to success in global custody.
By Tom Groenfeldt
March 2001
Institutional Investor Magazine
Brown Brothers Harriman proves that there is more than one path to success in global custody.
Conventional wisdom says that size and scale matter in global custody. Banking giants J.P. Morgan Chase & Co. and Bank of New York Co. became the dominant players in the business by gobbling up smaller rivals and continually reinvesting in technology to provide more services to major institutions.
Brown Brothers Harriman & Co., America’s oldest privately held commercial bank, with just a fraction of the assets of the two industry leaders, has traveled a different route. With custodial assets of $900 billion, Brown Brothers is the seventh-largest custodian in the world. Its custodial assets now surpass those of a number of longtime back-office heavyweights: Mellon Bank, HSBC Holdings and Northern Trust Co. Although Brown Brothers’ custodial assets are dwarfed by J.P. Morgan Chase’s $6 trillion and Bank of New York’s more than $7 trillion, its reputation for excellence is backed up by revenues that have increased by between 25 and 30 percent annually during each of the past four years. And New York-based Brown Brothers, better known as a provider of private banking services to the ultrawealthy, shows no signs of exiting the custody business the way the old J.P. Morgan did in 1996, when it sold out to Bank of New York, or Morgan Stanley Trust Co. did in 1998, selling its assets to Chase Manhattan Bank.
Brown Brothers approaches the custody business much as it does private banking - selecting customers carefully and then lavishing quality services on them. The hope is that its clients reciprocate by giving the bank a sizable chunk of their assets. The strategy seems to work. Brown Brothers’ 496 clients, which tend to manage a minimum of $1 billion apiece, allocate roughly eight times as much in assets as the typical custody customer. This allows the bank to tailor its services to - and focus its all-important technology investments on - a relatively small and homogeneous class of asset-heavy funds with global reach.
“While most of our competitors take everything that comes their way, we turn down about 30 percent of the requests that come to us,” says Brown Brothers partner Susan Livingston, who oversees investor services. “We want to reserve capacity for our existing clients who are successful asset gatherers.”
Building on a worldwide network of merchant banking partners, Brown Brothers has established subcustodial relationships that enable it to offer services through 135 banks in 104 markets (113 countries in all). Livingston’s overall investor services area, including custody and related services such as risk management, has grown 25 to 30 percent a year during the past ten years. Custody assets have been rising at the same rate and contributing 35 percent of the bank’s total revenues during the past two years. Two thirds are in cross-border holdings. By comparison, such holdings represent about a third of J.P. Morgan Chase’s custody assets.
Alliance Capital Management, with some $450 billion in assets, spreads its mutual fund assets among all the major custodians. But for international securities it relies heavily on Brown Brothers. With a number of country and regional funds, Alliance felt it was critical to choose a worldly wise custodian.
“Brown Brothers came out as a niche player in international securities, building a global custody network, having the right infrastructure to monitor it and to make sure it is operating properly,” says Mark Gursten, who oversees accounting for mutual fund clients at Alliance. “Recently, we have started giving them other types of products as well, including domestic equity funds.”
Alliance is not alone in moving domestic funds to Brown Brothers. Although Livingston says that her firm hasn’t especially pursued home-country work, many clients who started with global custody have since asked Brown Brothers to handle domestic equities. Likewise, foreign banks that have used Brown Brothers for U.S. equities are adding global funds to its custody.
Such opportunities to increase services for existing clients rather than add new clients is at the core of Brown Brothers’ growth strategy. In fact, to get a shot at larger asset pools, the bank will at times take on small funds run by big parents, such as London-based Foreign and Colonial’s Romanian fund. “We did so well with Romanian that they just awarded us their entire suite of Luxembourg funds,” says Livingston.
Brown Brothers’ experience with global finance dates back to 1818, when Alexander Brown emigrated to the U.S. from Northern Ireland and opened a merchant bank in Baltimore specializing in international trade lending and private banking. Brown Brothers, by now with offices in Liverpool, Philadelphia and New York, combined in 1931 with two firms owned by U.S. industrialist W. Averell Harriman to become Brown Brothers Harriman. The firm entered the custody business 70 years ago and moved into global custody about 35 years ago as its customers began acquiring non-U.S. securities.
In 1989 it opened its first custody office outside the U.S., in Luxembourg, largely at the urging of Fidelity Investments, which was beginning to sell funds to European customers. Soon the Luxembourg operation was serving Merrill Lynch & Co., Wellington Management Co. and other U.S.-based firms. More recently, European-based asset managers have become customers. Brown Brothers has since opened offices in major financial centers around the world.
But it’s more than a reputation for understanding global markets that has earned accolades for the bank’s custody business. “When we were looking for a custodian, there weren’t too many who had the technological capability to support our funds,” says Iain Macleod, chief executive officer of Credit Suisse Asset Management Luxembourg. Brown Brothers’ information technology strategy “was clearly thought through at a level that their competitors did not have.”
After Credit Suisse signed on as a client, Brown Brothers placed three of its IT people on site for six months to assist the bank in moving from its proprietary systems to more efficient ones. Although this isn’t something Brown Brothers does with all of its clients, such hands-on attention is becoming increasingly common. And ensuring that clients are working on the most efficient systems possible is at the center of Brown Brothers’ technology strategy. “When we do that with a client, then our strategies are fully aligned,” says Livingston. “We have a fully automated client, and we have made an investment in the relationship.” Brown Brothers would have a hard time providing such personalized service if its customer base were larger or more diverse, Livingston explains. Because global asset managers have similar requirements, solutions created for one client can often be used by others with only modest modification.
Indeed, one of the keys to Brown Brothers’ success has been its focus on the future. The bank has kept pace with larger competitors in terms of its ability “to develop an IT strategy that looks out three to five years,” says Rajeev Agarwal, a financial technology analyst with TowerGroup, a Needham, Massachusetts, research and consulting firm. “BBH, like Bank of New York and State Street Bank & Trust, realizes you have to leverage your technology.”
Brown Brothers employs 600 people in its IT area. It invested 18 percent of its total revenues in 2000 in technology, with 75 percent of that going to support investor services. In addition to its focus on back-office technology, the firm has emphasized the role of the Internet. It was the first global custodian to offer institutional clients access to their holdings over the Internet - something that’s now commonplace.
Alliance’s Gursten says that his firm has enjoyed the increased efficiency of accessing custody information over a secure Internet connection. “We don’t have to print reams and reams of paper now that we are able to go online and bring up whatever information we need,” he says.
Brown Brothers is deep into the global financial services industry’s marathon run toward straight-through processing, in which transactions flow through systems without the need to enter or transfer data manually. The average custodian handles 40 to 44 percent of transactions without human intervention, says Livingston. In comparison, Brown Brothers does 85 percent of its overall custody transactions and close to 100 percent of its settlements electronically.
As it pushes along on that front, the bank will also focus greater attention on Europe and Japan, where the use of privately funded retirement savings similar to America’s 401(k) plans is gaining in popularity. “We see a huge opportunity for these new pension funds that are just starting to be funded,” says Livingston. “They will need, for the first time, a global custodian, because unlike state pensions that were in government bonds, these new funds are looking at more equity and at more global products.” Brown Brothers, of course, will review its list of potential clients carefully before jumping in.
