Is less really more?

Consolidation seems to be a word that is being heard with increasing regularity in the corporate and financial services world. Not only are vendors actively pursuing strategic mergers but the corporations are looking to streamline costs and get a better understanding of where their money is going. The transfer agent business is no exception. After several years of merger activity, nearly all of the transfer agent business is consolidated among a small number of key players.

Less competition can sometimes be a concern but Andrew Wilcox, founder of Shareholder Service Solutions, believes that the upside of recent merger activity is that ‘the players that remain are actually very good because they have to be.’

Companies are looking to improve the service they receive from their agents and part of this process is reviewing the range of services the transfer agent provides and exactly how those services are paid for. ‘They want to make sure they have the right contract in place and are paying a fair price but they want to do this without the hassle of sending out RFPs all the time, ’ Wilcox explains. Many corporate secretaries don’t always fully understand the language or the finer points of exactly what goes on behind the scenes and are looking for simple answers.

There are a lot of moving parts in the stock transfer business. Apart from the basic managing of transfers, the transfer agent (TA) is often also tasked with doing proxy solicitation and tabulation, shareholder correspondence, corporate actions, mergers and exchanges, dividend reinvestment plans and other services. Given this set of responsibilities, it is very complicated in terms of pricing.

In an effort to reduce the complexity of billing, many companies are asking their TA about a flat-fee pricing structure. In the past, fee structure in the industry was mostly based on charges per line item. The past several years have, as one major TA explains, seen a move away from that model as clients prefer a bundled approach to minimize the amount of internal resources they use to manage costs.

For most large companies there are a number of processes that are being performed and each of these items would be charged for. Beyond that, quite often, each item would also have an expense which would be passed onto the client. These are often referred to as ‘above the line’ and ‘below the line’.

Over time transfer agents realized how expensive it is to cost account for separate functions. It is costly not only for the agent but also for the company receiving the services. The theory, as Wilcox explains, ‘became lets make this simpler and make everything at least above the line in terms of fees. This made fees a lot more condensed and many of the various functions could be part of a monthly fee.’

This approach well suits the larger companies that use more TA services, but there are certain elements companies should consider when discussing a pricing model with its transfer agent.

One trend that is driving the reevaluation of transfer agent fees is the general shrinking in the registered shareholder base. As Wilcox explains, ‘The accepted idea is that registered shareholders are declining 3 to 5 percent a year.’ This is mostly due to the rise of street-name ownership. What does that do to the company that is paying a flat fee? As the registered base declines over time and the flat fee remains the same then the per-holder costs will rise.

As a result, advises Wilcox, ‘the best idea might be to go flat fee in terms of multiple functions and fees wrapped up under one number, but to go flat fee per shareholder. This will be a great benefit for companies with declining shareholder bases.’

Wilcox concludes, ‘The core message I have to corporates is that you need to review the flat fee on a regular basis. Ask what is included under the flat fee. Assess what is happening to your shareholder base and volatility of share trading activity. Is everything that should be included actually in there?’

Interestingly, to this point, the fee structure set down by transfer agents is determined by transfer agents’ own corporate structure and the segment of the market they serve. Most TAs have a degree of flexibility to meet clients’ needs and budgets.

Barton Hill, chief marketing officer of Bank of New York Mellon Shareowner Services, explains that the key element in any pricing model is transparency. Clients want to have clarity in their invoices and ensure that they are receiving the best pricing and service. He says flat-fee billing offers clients the convenience of level (and therefore accruable) monthly invoices. ‘How an agent arrives at a flat fee level is fairly simple. Based on years of experience in this business and based on a number of key input variables, we have developed models that fairly accurately predict the number of transactions an account will generate each year. Based on these inputs, an agent can predict the number of phone calls, the number of transfers, the number of dividend checks that the account will generate. It can then price the account and divide that fee into 12 equal installments.’

Certainly, an agent will want to protect itself from any unforeseen increase in these planned volumes, so it might increase its estimates by some amount. This risk premium may in fact end up costing the client more money than if they were billed based on actual volumes, but that may be offset by the benefit of having level invoices.

By and large, the flat-fee phenomenon seems most attractive to smaller issuers that see very small amounts of transactions from their shareowner base. It is also offered most commonly by smaller transfer agents that do not offer a broad range of diverse services. This makes the estimation of costs easier and less risky for the agent, thereby likely reducing this risk premium from the agent. Issuers with larger shareowner bases that demand more complex services typically seek out the services of larger agents who can support those needs and typically favor the greater transparency of itemized invoices.

Even with the bundled fee approach, some TAs can take a hybrid approach and make visible any out-of-pocket expenses that fall outside the fee agreement on the invoice so that all of the charges are completely transparent. Some companies, however, still prefer to have visibility on every line item or every transaction that carries a fee. While this can be a challenge on the administrative side, some clients see this model as a useful tool for controlling costs. If you are a huge company with a large accounting and payables unit available to review bills and sample those against the contract, then it may be better to stay with the ‘laundry list’ approach.

 ‘If you have a lot of seasonal volatility, then a flat fee is better because it will smooth out the fluctuations,’ Wilcox advises. ‘For some low volatility companies a pre-transaction approach might be better.’

The best piece of advice for corporate secretaries is: ‘Don’t be shy’ when asking about what is and what is not included in the flat fee and get a better understanding of what the process is and what the agent is doing for you. A little pushback can lead to a better relationship on both sides of the equation.