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BoA Consolidates Custody, Accounting to State Street: But Shareholder Services to Remain In-House

Fallout from fund company mergers often means fund service providers will find themselves in one day and out the next, without them having caused a single service breach, tech snafu or operations meltdown.

Consolidation of fund service providers is driven by a desire to achieve economies of scale, simplify servicing across all funds and deal with a single provider. And, in light of increased regulatory scrutiny and enhanced compliance requirements, risk management issues now also weigh heavily into such decisions.

Case in point: Bank of America (BoA) recently announced that it would be consolidating its service providers across the combined Columbia Management mutual fund complex. The move to uniform providers was precipitated by BoA's merger last year with FleetBoston Financial, which had previously acquired a handful of mutual fund groups through its earlier acquisition of Liberty Financial.

State Street Corp. of Boston was awarded the contract to handle the custody, fund accounting and financial reporting for the various managed assets under the BoA umbrella. All told, State Street won the right to service $201 billion in mutual fund assets, plus another $23 billion in other managed assets. These include BoA's Nations Funds, which were originally the proprietary funds of NationsBank; Fleet's original proprietary Galaxy Funds; and the subsets of other fund groups that had since been rebranded under the Columbia Management moniker. Included is the Columbia Acorn Funds managed by what is now Columbia Wanger Asset Management of Chicago.

In reassigning service providers, BoA also hired Boston Financial Data Services (BFDS), a joint venture between State Street and DST Systems of Kansas City, Mo., to provide transfer agency services for the funds.

Value Through Consolidation

BoA's Columbia Management unit is embarking on a larger effort to create value for fund shareholders by consolidating vendors, said Chris Wilson, head of mutual funds at Columbia Management. "We hadn't taken advantage of economies of scale," he admitted. Moreover, having a core servicer allows for better internal controls and risk management, he said.

BoA learned the importance of internal controls the hard way. Within the last year it has settled charges of market timing and other abuses with regulators.

"We have had an existing relationship with BoA over the last four years, and they were comfortable with us," said Alan Greene, head of the U.S. investment services group at State Street. "We have demonstrated that we were able to handle a large, complex conversion like this," he added. State Street had helped convert the various Columbia Management fund groups to a common custody and fund accounting platform. And with $9.5 trillion in assets under custody, it had also seen Federated Investors through its 1997 conversion involving 255 funds and $108 billion, as well as other companies, Greene noted

It can be a good idea to have just one servicer, said Janaya Moscony, a principal with SEC Compliance Consultants in Philadelphia. It can make good sense especially "if you become very familiar with that vendor and you have a certain comfort level," she said.

But should fund advisors put all their eggs in one basket and use just one provider?

"The benefits of economies of scale can outweigh the risk of putting all of your eggs in one basket, if managed properly," said Jeff Squires, a principal with Vista360, of Milwaukee. But lots of fund companies have two service providers that can run parallel to each other so that if one vendor trips, it is easy to shift to the other.

Across the mutual fund lineup, Columbia had maintained contracts with five vendors, which included both State Street and BFDS, but also included PFPC of Wilmington, Del., The Bank of New York as custodian and even Columbia's internal fund servicing unit, aptly named Columbia Fund Services.

PFPC had established an office in Charlotte, N.C., specifically to provide transfer agency to the Nations Funds. Now that PFPC will be released from its duties, that Charlotte office will close. Approximately 80 employees in that office are affected, but all have been offered the opportunity to seek jobs within PFPC's other offices, confirmed a source. The office closing won't take place for several months. A PFPC spokesman declined to comment.

Earlier this year, PFPC took over the servicing of one million accounts as part of its windfall as the surviving vendor of BlackRock's $375 million acquisition of State Street Research & Management and its proprietary mutual fund family. BlackRock is majority owned by PFPC's parent company, PNC Financial.

According to Wilson, the funds' custody conversion will begin in the second quarter of 2005 and run through the fourth quarter. Transfer agency conversion will take place during July and August, traditionally considered the fund industry's slow season.

The one thing Columbia won't hand off is its shareholder servicing effort. "We can add the most value by retaining that function," Wilson said. Columbia will still maintain its Denver-based call center and the current 115 employees, and will expand staff as needed. The firm is currently working to expand its Web-based self-service applications, as well as automated voice-based servicing for investors, Wilson added.