Ways to Lift Profits in Shareholder Services

Stock transfer services, commonly called the shareholder services business, are offered by financial institutions to corporate clients as a way of generating fees.

There are two areas in which a strong treasury department can make a major impact on the bottom line. First, by making the treasury staff an integral part of the sales and marketing team and, second, through sophisticated cash management.

Key financial staff should be viewed as part of the sales team. Clients react positively to the presence of a strong chief financial officer at presentations and client calls. It is a signal to the client that the management of the shareholder services company is united and pulling together, and that there is no culture gap between sales and finance.

First, some background: The shareholder service agent provides stock transfer execution services, keeps the shareholder and company-issued share capital records, and acts as the dividend paying agent.

Shareholder services is a mature industry and has low margins. And the companies who use these services see them as something to be endured in order to issue and trade shares.

The major providers are Bank of Boston, First Chicago Trust Company of New York, Mellon Bank, Chase Manhattan, and Manufacturers Hanover Trust.

Without some major consolidation in the industry, the providers are unlikely to significantly improve profitability by either increasing sales or by cutting expenses.

The market is fairly rigid, characterized by competition through intense price cutting and an unwillingness of clients to switch transfer agents.

The business is still labor and paper intensive. A typical major transfer agent company employs a thousand people, most of whom shift a large amount of paper in processing stock transactions.

Also, providers have to service two sets of clients: the company that issues the shares as well as the shareholders (there may be as many as 8 million on the books) who receive the shares.

This makes the operation more complex. It's also less profitable because, while absorbing the overhead of dealing with two parties, the provider agent receives fees only from the issuing company.

Providers have examined cost reduction techniques (which also invariably reduce revenues), employed external consultants, and evaluated automation as a way to improve performance.

All these measures have had limited success. Another way for transfer agents to get an edge on the competition is by having a skilled and aggressive treasury and finance department.

Also, clients like to be reassured that the provider agent has strong financial and operating controls in place -- for example, that the audit department performs operational risk reviews of the various business units.

This may be especially true if the provider is attempting to sell a particular product line. If an internal audit has been performed of the employee stock ownership plans area, client anxiety over the risk of the product may be allayed.

An effective treasury may help avoid difficulties arising from the stock transfer agreement, for example, where right-to-audit clauses are part of the arrangements.

These right-to-audit clauses allow the client send in its own internal auditors to examine the operating and financial records the provider maintains for that particular client.

Often, the inclusion of such clauses and their execution create tension between the provider and the client and lead to misunderstandings.

Reassuring Clients

Different expectations between client and provider about the significance of audit findings can sour the relationship and even result in the loss of the business.

Internal audits performed by clients frequently end up becoming tools in the clients own internal politics. If the client is convinced at the beginning that internal controls are effective and that there is a credible internal audit presence at the stock transfer company, these difficulties can be avoided.

Finally, financial staff may be key to the selling of the security aspects of new technologies. Shareholder services providers are constantly developing technology for customer service purposes.

For example, clients now access shareholder via information computer terminals and shareholders can access automated voice response systems that allow them to get information on their holdings by phone.

Handling that Cash

These capabilities raise significant systems and operational control issues in terms of client confidentiality, access controls, and the risk of fraud. Clear evidence to the client that these risks have been addressed and are being controlled gives the provider a competitive edge.

One thing shareholder services companies have more of than anything else is cash. Transfer agents are conduits for dividends, share redemptions, maturities, cash for share exchanges, and any other cash flow resulting from corporate reorganizations.

The amounts can be over $100 million on a daily basis.

There is a good case therefore for a well-developed investment policy that is appropriately weighted between risk and return. These funds could be invested in traditional term deposits at market rates. With such large sums available, however, there is scope for more aggressive investing for at least a segment of the portfolio.

Very small yield increases can translate into significant improvements in returns. An increase of half a percentage point on $100 million balances can increase profits by $500,000. These types of returns in the current state of the industry can make the difference between losses and profits.

An Active Treasury

The key to the success of this strategy is establishing an active treasury department looking at cash positions on a daily basis. But also important is the need for a reliable cash forecasting system, not only daily but for the medium term and long term.

Shareholder services companies can set minimum balances and invest the excess balances in slightly higher yield investments with a minimal amount of additional risk.

A daily operating forecast involves good communication between the treasury and other areas of the organization and should include a complete accounting of receipts and disbursements.

The key to effective investing is a reliable forecasting system.

In an industry characterized by zero growth and slim profitability, transfer agents can use financial and treasury expertise both to win new business and increase returns.

Mr. Jonathan Shatz recently left First Chicago Corp., where he was an assistant vice president, to become chief financial officer of the International Youth Foundation, Battle Creek, Mich.

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