Transfer agents in transition

The transfer agency business is changing rapidly, and issuers need to be aware of how the industry’s evolution will affect their relationship with their shareholders and may add potential risks to their business. Consolidation has been the big challenge for transfer agents over the last decade and, because they serve a critical function for publicly traded companies, it is important that these firms transition successfully to a new business structure that allows them to be profitable without causing undue risk to clients and shareholders.

As the entire industry makes changes and it appears consolidation has settled down to leave only a few major players, issuers may need to re-evaluate where they are outsourcing their stock transfer needs. Companies should take a second look because the remaining transfer agents have implemented various integrated business models to increase the services they provide, so companies may want to make sure they can maximize value from any new service offerings.

The SEC has also hinted that it will increase its scrutiny of transfer agents from next year, which means companies need to ensure their provider is complying with all stock transfer rules and has a good relationship with regulators.

According to several panelists who spoke at this year’s Shareholder Services Association (SSA) conference in July, the SEC is likely to begin viewing transfer agents with the same level of scrutiny it applies to banks in an effort to curb potential fraud. Experts suggest the regulator is considering requiring transfer agencies to register as financial institutions; certainly, at least one of them could currently qualify as a bank.

Eliminating or reducing conflicts of interest and risks to issuers are also said to be on regulators’ radar. ‘The timely turnaround and accurate record keeping of all stock transfers’ and the ‘safeguarding of information connected to the funds and securities’ of issuers are significant concerns.

Another key issue the SEC has raised is: do transfer agents provide appropriate services without offering investment advice that would require them to register as a broker-dealer? Transfer agents will have to deal with many of these issues as the industry continues to evolve.

Following the rules
SSA president Karen Danielson says her organization is very concerned about ‘the secondary effect of the outsourcing of stock administration operational knowledge and regulatory compliance from company management to the transfer agent. This transfer of knowledge has also created a gap in management’s full appreciation and awareness of the risk it continues to retain even when it outsources [work] to a transfer agent.’

Danielson warns issuers that their responsibility to regulators and shareholders does not end when they outsource their stock-transfer processing. They must follow up with the transfer agents to ensure all rules are being complied with and all their shareholders are happy with the service they receive.

‘To continue to be an effective model, the transfer agent industry needs to ensure issuers and the transfer agent work together as co-pilots and avoid the temptation to allow that relationship to default to an auto-pilot function,’ she explains. ‘The SEC’s plan to revisit transfer agency rules and regulations, combined with support from organizations such as the SSA, will renew awareness of transfer agent operational risks and restore issuers’ engagement with their shareholders.’

Is consolidation over?
With so much going on in the industry, some observers are wondering whether there is more consolidation to come. ‘If you are an issuer, before you change transfer agents you’d better be sure you are going to move to a certain survivor,’ warns Carl Hagberg, chairman and chief executive of Carl T Hagberg and Associates.

He points out that the industry’s registered shareholder base is declining by 5 percent a year, leaving less business for transfer agents to secure while still remaining profitable. He says he is not aware of any strategy to increase the number of registered shareholders industry-wide, so the continuing decline in business may eventually push someone to sell.

‘When you have only five players and every year the pot gets smaller, you can’t continue with the same levels of profitability or investment,’ he reasons. ‘There is no doubt in my mind there will be continued consolidation. Firms say they are in it forever, but the numbers do not support that.’

Danielson is concerned, too. ‘The transfer agent’s commitment to the business could be a concern for issuers, so issuers should have a contingency plan in the event their transfer agent is acquired,’ she says. ‘Fewer transfer agent options could create challenges when negotiating contract pricing for services.’

Strategies for success
Even though there are significant challenges, transfer agents are very optimistic about the future of their industry and their ability to service their clients. Computershare is the current market leader with an estimated 70 percent share of the transfer agency business. The company has more than 120 million shareholders globally and more than 10,000 employees, so its customers shouldn’t worry about it surviving this rough time in the industry. ‘We’ve got some size at Computershare,’ says Jay McHale, president of equity services at the firm. ‘That doesn’t mean we’re not personable; it just means we are well positioned to respond to how the industry has been changing.’

Computershare has helped usher in many of the industry changes through acquisitions, including its $550 million purchase of Bank of New York Mellon’s shareowner services division in January 2012. McHale emphasizes, however, that becoming the biggest doesn’t mean the company can be complacent: it must make sure it moves as quickly as other players when conditions in the market shift.

‘We’ve been growing through acquisitions and, as part of that, providing products and services shareholders come to expect from an organization of our size,’ he says. That has meant providing foreign exchange capabilities for clients to receive funds in a variety of currencies around the world ahead of other competitors, and providing what Computershare calls QuickCert, the ability to provide printed stock certificates on demand.

‘What we’ve been doing lately is focusing on speech recognition interactive voice response, which we are rolling out to our shareholders and issuers,’ McHale adds. ‘We recently redesigned our website to meet all security requirements and standards of the Office of the Comptroller of the Currency, and we’ve made the site more mobile device-friendly. We even allow shareholders to pull up proxies through their smartphones.’

McHale says industry changes have also meant transfer agents are being asked to provide a number of new services. ‘We find ourselves needing to provide products and services that are not unlike those of a broker-dealer’s,’ he says. ‘People like to hold their shares directly through a corporation, which means we must have the ability to give people access to data 24/7.’

Future considerations
Computershare has the size and financial strength to benefit from the consolidation and continue its acquisition strategy. ‘We see growth in the consolidation from people who are not happy with the products and services of their existing provider,’ explains McHale. ‘We also see growth from some of the in-house agents that are looking at all of the regulatory changes [and perhaps thinking], This isn’t something we want to do anymore.’

He adds that there may be growth opportunities in helping some of the small businesses created by the JOBS Act and the new concept of crowd funding, where companies can raise capital on their own without any oversight from the SEC. Computershare believes such companies need a transfer agent. ‘We think you need a bank or trust company to hold the [IPO] funds in escrow,’ McHale notes.

He acknowledges, too, that it will be important for Computershare to meet the challenge of keeping its clients informed about how they may be affected by potential transfer agency rule changes from the SEC and how new rules requiring tougher data security may affect the transfer agency business in the future. To handle that, each Computershare client has an assigned team that acts as a dedicated partner, helping it develop custom solutions to meet its goals, whether that is growing or shrinking its registered shareholder base.

‘We don’t take anything for granted,’ says McHale. ‘You’ve got to be out there providing value and leading-edge products and services so you can go to an issuer and say, You want to be with Computershare because we’re in it for the long haul.’

American Stock Transfer & Trust Company
With a new branding campaign and an effort to add the power of research behind its new product development, American Stock Transfer & Trust Company (AST) is seeking to become the most successful integrated provider in the transfer agent business. To integrate its complementary services, the company created ASTOne, which provides clients and public issuers with access to corporate governance, investor relations and proxy solicitation services through one combined offering, thanks to its affiliates’ connection with the Link Group network of companies.

‘We came out with ASTOne for the single purpose of saying you can get all of your advisory, solicitation and IR solutions under one roof,’ says AST president and CEO Mark Healy. ‘With our current and prospective clients, we want to be able to have them interact with us through whatever doorway they want to come through. If they want to come to us for corporate governance and advisory work and they are not really a transfer agent client of ours, that’s fine. They can get the expertise we provide in the advisory work, but they are also getting access to the other services we offer.’

According to Healy, AST serves one out of every four publicly traded companies in North America. The company believes it has an opportunity to grow those numbers, but it will need better market intelligence to do so. To get that market information, AST and the Executive Advisory Council – an independent advisory group sponsored by AST – are undertaking a comprehensive study that hopes to chronicle the needs of issuers and shareholders in North America.

The research will extend beyond the transfer agency business to include questions about employee equity plan management, proxy solicitation, investor relations needs, corporate governance and specialized shareholder advisory services. Healy hopes the survey answers will inform AST about how each of these markets is moving, what services are still needed, what solutions people are using to remain competitive and what they are looking for to help them succeed.

Once the analysis of the survey answers is complete, it ‘will allow us to react to that, and become a better provider of services in whatever fashion or way folks want to engage with us,’ Healy says. The survey and analysis is expected to be complete by fall 2014. Healy adds that the industry as a whole should benefit from the findings.

Size matters
In the meantime, AST continues to enjoy an edge in the industry because of its size, financial standing and talented network of professionals. While Healy feels his company has benefited from consolidation, he points out that it hasn’t necessarily been good for the entire industry. ‘Most firms have reduced their technology investment and their staff, and are really evaluating their core competencies – and that’s an important thing for people to evaluate,’ when looking to choose a transfer agent, he says.

Healy is still driven to expand his business, adding any products and services he believes may give AST a better chance of adding customers over the long term. As one of the transfer agents that has used its resources to acquire other firms during this cycle of consolidation, Healy is not opposed to continuing to employ a strategy of buying into markets, as long as the right reasons present themselves.

‘Our commitment is very strong and we would look for opportunities to continue to acquire companies, assets and talent that will ultimately help us, our clients and the health of the industry,’ he asserts. ‘That is something you will continue to see from us over the next 12 months. We are actively looking at continuing to add to our platform.’

Wells Fargo Shareowner Services
Wells Fargo is relying on 80 years of experience building one of the most trusted names in the financial services industry to lead it through the current period of consolidation and uncertainty in the transfer agency business. Its shareowner services division enjoys the support of the bank’s size, reputation and resources, which have helped it become an attractive option for issuers that have considered moving their transfer agency services over the last two years.

Todd May, head of Wells Fargo Shareowner Services, notes that because the bank can be the lead financier on an issuer’s loan, provide access to investors, help with other capital markets needs, handle treasury management and be a shareowner services provider, those connections help establish long-term relationships with the client that are difficult for competitors to duplicate.

Building relationships that allow for cross-selling between the bank’s divisions is the cornerstone of Wells Fargo’s growth strategy.
‘There may be eight or nine other business units working together with the client through our bankers,’ explains Bill Milbauer, vice president and national sales manager at Wells Fargo. ‘We tend to have far deeper understanding, a lot more knowledge and a lot more information about the company, its strategies and how it feels about its shareowners.’

Focusing on its corporate clients to obtain additional insight into their needs is a key part of how Wells Fargo maintains it current client base and lures potential clients away from competitors. If a client is not using Wells Fargo’s shareowner services, ‘we want to know what its strategy is and, based on that strategy, [we can discuss] how we can help it succeed financially based on its goals and objectives,’ says May.

This can lead to a conversation about the challenges shareowner services can help the client face as states ramp up escheatment practices and understand other new regulations that may threaten potential fines or lawsuits. The idea is, if the client already trusts Wells Fargo with other services, it would likely welcome a conversation about transfer agent services. It’s a traditional approach to growing the business that seems to be working. ‘We have a steady base of new business coming in, in a very manageable fashion,’ says Milbauer.

Getting technical
Conversations with clients have also led Wells Fargo to invest in technology. The company has built state-of-the-art call centers around the country to satisfy customer expectations of having real people taking care of shareholder issues. Wells Fargo’s call centers handle more than half a billion calls each year, and the company has developed proprietary workstation technology that makes it easier for its call center agents to handle a multitude of transactions.

Additionally, the company continues to expand the rollout of its Shareowner Online and Shareowner Client Connect tools via the internet. The Shareowner Client Connect tool is contained within the firm’s commercial banking portal and allows customers to access all Wells Fargo products and services through the same portal. Shareowner Online has the look and feel of WellsFargo.com and provides web-savvy customers with access to their personal accounts. ‘We have very robust technology investments that we make on a consistent basis,’ says May. ‘We not only do it from a customer client interface, but are also developing the technology our team members need.’

With technology investments added to the power of a bank that has dealt with the recent financial crisis and the higher scrutiny of Dodd-Frank legislation, Wells Fargo Shareowner Services is well placed to continue maintaining its long-term view of managing clients and relationships that will help it remain a steady player in the transfer agent business.

The company notes that it is an extremely well-capitalized business with the intellectual capital to deal with the modern challenges of the Foreign Account Tax Compliance Act, cost-basis adjustments, dematerialization issues and escheatment laws. As Milbauer says: ‘We’ve got a rock-solid, time-proven strategy that continues to work really well.’

Registrar and Transfer Company
Tom Montrone, president and CEO of Registrar and Transfer, has his company’s sights focused on providing personalized service to his corporate clients and their shareholders. The firm does rely on a strategy that includes use of the latest technology and the integration of products and services, but Montrone believes personalized customer service is the key to customer retention and growth.

‘We are focused on the small and mid-sized issuers in terms of registered shareholder base, although we have typically handled larger issuers,’ he explains. ‘We find the smaller and mid-sized issuers, particularly the community banks, seek out personal service for their shareholders as well as for themselves. These are the issuers that feel it’s important for their shareholders to talk to a live person and get assistance on a one-to-one basis rather than have to enter a 16-digit account number or talk to a call center located way offshore.’

It is the attention to detail and the personal needs of the client that allows Registrar and Transfer to customize solutions that fully leverage all of the assets the company has to offer. In addition to its stock transfer business, the company owns Eagle Rock Advisors, which provides proxy solicitation services and a financial printing company that provides web-based services such as web hosting, automated fulfillment and regular printing services.

‘We have expanded our capacity to provide an integrated service platform for our clients who may need proxy solicitation services, printing for a shareholder meeting, online and telephone voting for shareholder meetings, and a whole host of other related services, both production and consultative,’ says Montrone. ‘We can provide expert advice as well as closely co-ordinated and integrated services, which makes for a much more cost-effective solution.’

Montrone adds that his company will continue to focus on ‘not just providing, as it used to, service to the retail shareholder, but also providing assistance to the small or mid-sized corporation that has its hands full dealing with all of its own products and processes and needs to have expert assistance in a wide variety of areas ranging from abandoned property to the shareholder meeting process. Our primary strategy is to continue working with this blueprint, which we’ve found to be highly successful in the past.’

Broadridge
With its March 2010 purchase of StockTrans and its portfolio of 140 clients, Broadridge entered the transfer agent business and started to pose a serious challenge to other competitors. Robert Schifellite, president of Broadridge’s investor communication solutions business, outlined the company’s approach to breaking into this new market in a press release announcing the deal.

‘This is an opportunity to apply our proven leading technologies to a broader set of solutions, and support even more corporate issuers as they face increasing budget constraints and resource demands, while increasing transparency through the entire process,’ Schifellite explained in the release.

‘Broadridge will add value to the stock transfer process by establishing new standards for streamlined processing and communications by leveraging its established processes with more than 800 bank and broker-dealer clients that co-ordinate the existing beneficial stockholder clearance and settlement system.’

As Broadridge handles proxy-voting services for 90 percent of all publicly traded companies, it already has the means to begin persuading companies to move over to its transfer agent services. Peter Breen, general manager of Broadridge’s corporate issuer solutions, says the company is emphasizing ‘a value proposition’ to prospective clients that involves its own take on the industry’s integrated business model. Broadridge offers a ‘single-source solution’ for issuers that need transfer agency services, proxy voting services, annual meeting services, document management and printing services.

Breen also suggests that Broadridge can be competitive on pricing, especially when it comes to handling registered shareholders. Acknowledging that the registered shareholder base for most issuers is shrinking, he says: ‘We will reduce our fees over time as your registered shareholder base erodes.’

Building up numbers
Over the next few years, Broadridge will be focusing on making significant gains among smaller companies that have a shareholder base of 20,000-40,000. The company brought in 50 new clients in 2012 and it continues to rapidly increase its market share. In a significant move, Walt Disney, with a registered shareholder base of 980,000, signed Broadridge to handle its shareowner services in July. Having already obtained business from other large clients such as the Green Bay Packers and Spectra Energy, Broadridge has established itself in the transfer agency marketplace and hopes other larger clients will inquire about its services.

Offering the backing of Broadridge’s proven technology, the credibility that comes with its proxy services business and a discounted price relative to what other transfer agents are charging has got the company off to an impressive three-year run. ‘The growth curve for us is going up,’ says Breen.

Only time will tell how successful each company’s approach to the new transfer agency business will be, but the industry’s transition has begun.