Transition Management in Transition

Terry Flanagan

The transition management business is itself in transition, with some providers extending their services, and others getting out of the business.

In recent months, Credit Suisse and J.P. Morgan have shuttered their transition management operations.
“Big firms are dropping out of transition management because they were making money off order flow, and that order flow is no longer there,” said William Conlin, CEO of Abel/Noser Corp., an agency broker-dealer.

Abel/Noser Corp. transition management service has been growing rapidly, having already surpassed total 2012 activity. With several large players recently exiting the transition services arena, Abel/Noser sees more opportunity to expand its business.

“The exit of Credit Suisse and other players in recent months confirms that our agency model, trade execution, and trade-cost analysis tools are most effective in this space,” Conlin said.

The perception of whether a transition manager is successful is often based on the percentage of the trading that was executed by crossing securities outside of the open market with other clients, index funds or external crossing networks.

“Often, buyers of transition management services are sold on the idea that hiring a transition manager will help reduce the trading costs associated with moving assets,” said Dan Connelly, a former vice president of transition management at Fidelity Capital Markets, in a 2010 report.

The underlying assumption is that trades executed outside of the open market, or “crossed,” are less expensive than those executed in the open market, and the cost savings ultimately improve performance.

“When looking at spread costs, for example, many plan sponsors have accepted that equity cross trades occur at the midpoint of the bid/offer spread, and trades that occur in the open market generally incur the full spread costs,” Connelly said. “This is often not the case.”

Fidelity created a methodology for evaluating execution quality that enables clients to simply and effectively evaluate the degree of price improvement that the transition manager actually achieved.

“With this methodology, plan sponsors may be surprised to see that an open market trade on the NYSE can often realize more cost savings than a cross trade within a private liquidity pool,” said Connelly.

Noted Conlin, “It’s not unusual for a third-party transition review to reveal that, while crossing did afford explicit savings, these savings were dwarfed by the poor execution quality of crossed securities relative to those traded in the open market.”

BNY Mellon is expanding its transition management capabilities to serve large investment management companies that typically utilize networks of sub-advisors to manage investment companies registered under the Investment Company Act of 1940 (40 Act Funds).

It has formed a registered investment advisor so it can provide its comprehensive suite of services to the large investment management firms, such as insurance companies, that manage registered 40 Act Funds.

“We’re seeing growing demand for transition management services from insurance companies and other financial intermediary complexes that manage 40 Act Funds,” said Mark Keleher, chief executive officer of BNY Mellon Beta & Transition Management.

Mark Keleher, BNY Mellon

Mark Keleher, BNY Mellon

BNY Mellon Beta & Transition Management assists pension plans and other financial institutions move assets from one asset manager to another, or change the allocation of different types of assets in an investment portfolio, while aiming to reduce costs, risks and operational burdens.

Keleher noted that while the utilization of transition management for large portfolio changes has been widely accepted by pension funds and other institutions that own the assets under management, it has been less widely adopted by financial institutions with sub-advisory platforms.

For these investment management firms that have used transition management, many have historically tapped their existing broker-dealer relationships. Recent regulatory changes are causing many broker-dealer-based transition managers to leave the business, Keleher observed, and as a result, demand is rising for transition managers that are registered investment advisors.

“As we set out to serve these investment management companies, our basic process will not change,” Keleher said. “Our expertise and experience with pension assets will be applied to the 40 Act Funds managed by these firms.”

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