What is Asset Servicing?

Asset servicing is the essential backbone of the investment management ecosystem, providing critical support functions that maximize returns and protect investor rights across global financial markets.

As the invisible infrastructure connecting investors to their full ownership benefits, these specialized services encompass everything from dividend collection and tax optimization to corporate action processing and regulatory compliance.

For institutional and retail investors alike, effective asset servicing can significantly impact investment performance through enhanced income recovery, reduced operational risks, and seamless access to ownership privileges that might otherwise be missed in today's complex, cross-border investment landscape.

Asset servicing is a vital part of the financial industry that helps investors take care of their securities investments. Think of it as maintenance and upkeep for financial assets, similar to how a property manager maintains real estate. This service ensures investors receive all their benefits and rights from owning stocks, bonds, and other securities.

Global custodians and banks handle most asset servicing tasks. They watch over investments and manage all the events and activities that come with owning securities. These activities range from collecting dividend payments to helping investors vote at company meetings.

The most common type of asset servicing involves handling dividend payments. When a company pays dividends to its shareholders, the asset servicer makes sure these payments reach the right investors. They calculate how much each investor should receive, collect the money from the company, and put it into investors' accounts. They also handle tax matters, like withholding the correct amount of tax or helping investors claim tax refunds.

Tax reclaims are a complex but important service. Different countries have different tax rules and rates. For example, a U.S. investor owning German stocks might have 26.375% tax withheld from their dividends. However, under tax treaties, they might only need to pay 15%. The asset servicer helps claim back the extra 11.375%. They prepare the necessary documents, submit them to foreign tax authorities, and track the refund process. This can take months or even years in some markets.

Interest payments on bonds need careful attention. Asset servicers track when interest payments are due. They collect these payments from the bond issuers and distribute them to bondholders. They also keep track of when bonds will mature and handle the repayment of the principal amount. For complex bonds, they calculate floating interest rates and any adjustments based on market conditions.

Corporate actions form another important part of asset servicing. These come in many forms. Mandatory actions like stock splits or mergers require asset servicers to automatically update investor holdings. Voluntary actions like rights issues or tender offers need more work. Asset servicers must inform investors about their choices, collect their decisions, and make sure their wishes are carried out correctly.

Securities lending has become a significant income source for many investors. Asset servicers match securities owners with borrowers who need those securities, often for short selling or settling trades. They handle the whole process - checking borrower creditworthiness, taking collateral, monitoring loan values daily, and collecting lending fees. If corporate actions happen during the loan, they make sure the lender doesn't lose any benefits.

Proxy voting is more complex than it might seem. Asset servicers must track thousands of company meetings worldwide. They translate meeting materials into different languages and summarize the voting items. They work with various voting platforms and methods - some markets still require physical attendance or special powers of attorney. They must submit votes by each market's deadline and confirm they were counted correctly.

Class action monitoring and claims filing has grown more important. Asset servicers watch for lawsuits that might affect their clients' investments. When settlements occur, they analyze trading records to determine eligibility. They file claims with detailed supporting documentation. They might also advise clients about whether to participate in or opt out of class actions, especially in complex international cases.

The income collection process involves more than just receiving payments. Asset servicers must validate that payment amounts are correct based on official announcements. They chase up missing payments. They handle currency conversions at appropriate rates. They also process tax vouchers and other documentation that investors need for their records.

Foreign exchange services require careful timing and rate monitoring. Asset servicers can convert dividends and other payments at wholesale rates, saving investors money compared to retail conversion rates. They can also arrange standing instructions - for example, automatically converting all Euro payments to U.S. dollars. For large institutions, they might offer currency hedging services to protect against exchange rate changes.

Regulation compliance has become increasingly complex. Different countries have introduced new requirements like the European Shareholders Rights Directive (SRD II) or various tax reporting regimes. Asset servicers help investors comply with these rules. They collect and verify investor information, submit required reports, and keep records of compliance activities.

Technology continues to transform asset servicing. Modern systems can process corporate actions automatically, reducing errors and processing time. APIs (Application Programming Interfaces) let investors access their information directly and give instructions electronically. Blockchain technology is being tested for areas like proxy voting and securities lending. However, human expertise remains crucial for handling exceptions and making judgment calls.

Asset servicers also provide market intelligence. They analyze corporate actions to identify trends. They warn clients about upcoming regulatory changes. They share insights about market practices in different countries. This information helps investors make better decisions about their investments.

The future of asset servicing involves more automation and data analysis. Machine learning might help predict corporate actions or identify tax reclaim opportunities. Digital platforms might make it easier for investors to make decisions about their investments. However, the core role remains the same - helping investors get the full benefit of their securities ownership.

Key Takeaways

• Asset servicing functions as financial asset maintenance, ensuring investors receive all benefits from their securities investments.

• Major services include dividend payment processing, tax reclaim assistance, and interest payment management.

• Corporate action handling covers both mandatory events (like stock splits) and voluntary actions (like rights issues).

• Securities lending provides additional income for investors through a managed borrowing process.

• Proxy voting services help investors participate in company decisions across global markets.

• Class action monitoring identifies potential legal settlements affecting client investments.

• Foreign exchange services offer cost-effective currency conversion at wholesale rates.

• Regulatory compliance assistance helps navigate complex international requirements.

• Technology is transforming the industry through automation, APIs, and potentially blockchain.

• The sector is evolving toward greater automation while maintaining the core mission of maximizing investment benefits.