(Lounarda David … ramifications of insourcing)
Lounarda David has worked with all the big names of Australia’s securities services industry and with a lot of the big global names. She set up Mercer Sentinel in Australia and New Zealand, and then expanded it into Asia. She became a regional director with global responsibilities and a Mercer Partner. Now she’s taking a different path as an independent consultant. She speaks with Greg Bright.
Lounarda David is very fond of Mercer, the consulting firm where she spent 14 years until she felt she really needed a break. Her departure in April 2012, which followed shortly after a number of other departures including her colleague Marian Azer (now at JP Morgan), rocked the custodians as well as clients. Mercer Sentinel had become the premier consultant for all investment operational issues in the Asia Pacific region. The rest were mainly one-man bands.
Mercer Sentinel was an interesting arm of Mercer globally. It did traditional custody consulting for clients, as well as applying new techniques to operational efficiency, helping the investment consultants and their clients. It also ran the firm’s agency-style transition management service.
“I loved my time at Mercer,” David says. “Loved the work, complexity of the projects, people that I worked with and the client base. We had a good track record and delivered high quality service. Our clients were loyal, so most of the business just came to us.”
Following an internal restructure, the US-based global head of Mercer Sentinel, Stacey Scapino, moved into a different role and three regional directors, of whom David was the most senior, assumed day-to-day control of the global business.
“I was doing a lot of work for the offshore clients as well as those in Australia,” she says. “The work was very interesting but the time zone differences made the working hours quite challenging and long.”
Robin Solomon became Australia and New Zealand head of Mercer Sentinel in June 2012 but left in April this year. Then the stand-in head, Mercer COO Jodie Hampshire, left in July to go to Russell. The job has now been filled by former Singapore-based Mercer consultant Ravi Nevile.
Prior to the career-defining stint at Mercer, David had spent 12 years at State Street, which she joined almost straight from university, via two years at a law firm.
“I came from a legal family, although I had an accounting and business degree,” she says. “I joined a law firm and began studying law but I didn’t like it and decided to get into accounting and finance. I went for a custody job at State Street. I didn’t know anything about custody and they couldn’t explain it to me very well in the interview.”
She apparently sorted all that out and went on to become head of operations, followed by becoming a vice president and senior relationship manager after a restructure which split operations from the client-management roles.
When she joined Mercer, in 1998, the world of investment operations was very different. Towers Perrin had made the running with custody consulting for many years, under the late David Taplin. He later shifted his team to Deloittes. He employed Brett Elvish, who went on to become chief executive of Intech and now an independent consultant, Margaret Bishop, now at BNP Paribas, and Wendy Leong, now at the Future Fund.
Mercer hired David, Drew Vaughan, now an independent consultant, and Bernard Morris, also an independent consultant, to start up their custody consulting business. About a year into it they added transition management to their brief. Over time, David added other operational and execution consulting capabilities to the brief, providing a total package.
“We had a solid custody consulting business,” David says. “We were doing it differently to the other consultants. They tended to focus on fees, contracts and indemnities. We considered those factors, but also drilled down into the individual services, processes and resources to differentiate between providers. We were also looking for service improvements and efficiencies to reduce costs without sending the custodians broke. We spent a lot of time inside our client organisations to understand them and be able to develop practical operational solutions for them. So we turned the relationship into a retainer role.”
Handling transition management also brought advantages for the custody consulting. Unit pricing, for instance, was not seen as a very important service, especially in the days when most super funds had monthly pricing or crediting rates. But, it improved our knowledge and results for transitions.
“We had to understand the implications of money going into and out of investment products, to maximise the transition results.”
”Thinking about what the market is likely to want in the future and developing solutions ahead of the market need- is both challenging and rewarding” David said. “I spent a lot of my time doing exactly that, anticipating potential challenges for our clients and making sure we were ready to help them when they needed it”.
Integrity is also very important, not just to clients but also to the consultants. “Mercer Sentinel had a reputation of credibility and integrity,” she says. “As a team gets bigger you spend more time making sure people are keeping to the protocols. Processes have to be in place and this gets more difficult to oversee as you get bigger.”
Looking ahead, David sees the insourcing trend by big super funds as potentially defining the future of asset and operational consulting: “When the outsourced model changes, the need for consulting will change. It will be very different from what it’s been in the past.”
In her new capacity as an independent consultant, David is taking on different and broader advisory roles to assist funds ride various trends in the industry, including fund mergers and in-sourcing investment management functions. “Industry consolidation, growth in size of the assets under management and pressure on costs are forcing funds to consider insourcing investment management functions to reduce asset management costs and improve their returns” she says. “There is no one organisational design appropriate for all funds, so developing the right model and structure is critical to implementing and managing the ongoing costs and risks of an organisation, in such a regulated environment. But, building an effective operating model within an appropriate governance structure will challenge many funds that in-sourcing their investment functions.”
David is helping financial institutions to identify suitable operating models, design structures, define responsibilities, develop procedures, build processes, develop internal capabilities, identify and manage risk factors and establish lines of accountability.
“The role of internal management at funds will also change,” she says. “They will be split between fund manager and fund manager controller. And the role of the service providers will change. Their relationships will be tested.”
For instance, she says, custodians have built their capabilities to support internal trading, be it by a manager or a fund, but with a fund, it is not just about execution or acting on instructions. Funds will need help at both the business level and the execution level.
A good question is: who will do the due diligence on a fund’s internal investment team? External managers tend to be held to a high standard and level of accountability and subject to detailed due diligence scrutiny. Will this be the same for an internal team?
David also continues to do custody and transition consulting. “Custodians are not very good at differentiating themselves, which is why too often they get down to competing on price rather than service and capability.” she says. “They often don’t do justice to themselves.” “They also create new challenges for their clients which are not always obvious. For example,industry consolidation is increasing the pressure on the custodians as the market becomes smaller. To remain competitive and keep the costs down, they are offshoring more functions which creates other types of risks and challenges for their clients…Obviously, risks cannot be eliminated, but they need to be clearly identified, understood and managed on ongoing basis by clients.”