The ranks of stock transfer agents
The stakes are higher than ever in the stock transfer game, with trading volumes notching up new records this year. Individual investors look to be on the rebound, signaled by the falling share of block trades in NYSE volume. This year block trades sank to below 49 percent, the lowest point in over a decade. That compares to 57 percent in 1995. And this new generation of individual investors is different from the Ma & Pa of old: they devour shareholder information, they invest online, and they put shares away in direct stock purchase plans - not under the mattress.
The result is that transfer agents are left holding more cards than ever. And each year comes the day of reckoning: the Shareowner Services Benchmarking Study from New Jersey-based Group Five illuminates the stock transfer terrain with a survey of over 1,250 public companies.
Jack Sunday, president of Group Five, points out that while client loyalty and overall satisfaction have held steady in this year's study, there has been a dramatic, three-year drop in client companies' perception of shareowner service, which is usually judged by the handling of shareholder complaints. 'We don't think service has actually become worse,' he admits. 'But volume has doubled or even tripled. Meanwhile transfer agents have been pushing Drips and DSPPs, generating still more transactions. I think the industry is a little behind the curve in providing the resources to keep up.'
First Chicago Trust Company, which ranked first in the survey, reports that the burst of transactions this year saw it take as many phone calls up until September 30 as it did for the whole of 1997. 'Volume levels have gone up dramatically, putting a lot of pressure on service representatives,' says Joe Spadaford, president. 'Most transfer agents have done a good job of dealing with that volume.'
Indeed, overwork may be behind Bank of New York's fall to third place after three years at the top. Winning DaimlerChrysler's 'global share' contract added a jewel to BoNY's crown and brought a flood of new customers.
William Skinner, senior VP at BoNY, points out that he has hired 50 new staff since the Group Five survey was conducted. He promises to be back at the top by year-end. A lot of new M&A business in 1997-98 'had one of the biggest impacts on our resource capability, but we think we've got it under control,' he says. To BoNY's credit, it was rated number one in the category of reorganization services.
Transfer agents are evidently troubled by clients' poor rating of shareowner services. ChaseMellon Shareholder Services, for example, has employed Group Five since the beginning of the year to conduct surveys of the shareholders themselves. 'They've ranked us at a much higher satisfaction level than the client survey indicates,' says ChaseMellon's Julian Clark. 'There is clearly a perception gap.'
First Chicago's Spadaford is also intrigued by clients' perceived drop in shareowner service, agreeing that surveys of shareowners themselves reveal a higher measure of satisfaction. 'One reason is that there are more calls to client offices than normal. There's an opportunity here: reduce that number of calls.'
To that end, First Chicago is plotting a whole new stock transfer paradigm. For example, Spadaford notes a trend toward the 'virtual' annual meeting. 'Once we get beyond the year 2000, this industry needs a different service model for individual investors and corporate clients, which requires a change in technology. Individual investors will expect and increasingly demand mutual fund-like servicing of their accounts, with very robust telephone and internet access. They want to be able to inquire and transact any time of the day. And they want it to be cheap.'
The internet is a focus for all the transfer agents, though for some more than others. 'Clearly it's a path that we'll follow, but very cautiously,' says BoNY's Skinner. 'We see great use for the internet. But we didn't jump into it.'
One firm that has performed consistently is Norwest Shareholder Services, achieving first place among medium-sized agents four out of the last six years. While Norwest concentrates on small and medium-sized companies, it has some marquee name clients including its new parent, Wells Fargo, as well as Merck & Co and 3M. 'First and foremost, this is a people business. And we invest a lot in our people, giving them the tools to do their job,' says Norwest's William Kennedy. 'We don't always invest in technology for technology's sake. We make sure it either improves what we deliver, or makes it easier for people to contact us.'
Kennedy says that 'direct registration' is a technologically-driven innovation that is currently very popular, and Norwest is working with the SEC on guidelines. Direct registration lets a shareholder maintain a book-entry position at a transfer agent, with instructions that can be activated to electronically move shares to a broker to consummate a trade.
Of course, direct stock purchase plans (DSPPs) have proven successful, helping drive transaction volume at all the transfer agents. They've grown 50 percent in the last year at BoNY, which handles Lucent's plan - possibly unsurpassed with over 675,000 DSPP accounts, and shares purchased equaling some $130 mn. Clark at ChaseMellon, which came in second among large transfer agents this year, adds that employee stock ownership plans are also a huge growth area for the future.
Cleared for take-off
First Chicago wins kudos for rising to the top even while dealing with its impending merger with Boston EquiServe. 'It's almost inevitable that a merger is going to consume resources and divert management's attention. That's the challenge it faces,' says Group Five's Sunday. He points out that the ChaseMellon merger three years ago had a bigger than anticipated impact on service to clients - a disruption it appears to have finally fully recovered from.
Spadaford admits that First Chicago has a lot of major projects underway, including the merger and Y2K efforts - 'Any of them could cause you to take your eye off the ball.' But he says management is conscious of the risks and so keeps frontline staff focused on clients, not on special projects. For example, a team of 90 was brought in to specifically address the Y2K bug so as not to distract existing staff.
'Mergers are very difficult in any business,' agrees ChaseMellon's Clark. 'But they are extremely difficult in the stock transfer business because the devil is truly in the detail, and there's so much detail in serving the shareholder excellently. Three years after our merger, we have completely pulled our processes together and made them one.' Indeed, Group Five cites ChaseMellon as the only agent to show sustained improvement over a three-year period, rising to second place this year.
To Jack Sunday, the reason for transfer agent consolidation is obvious: technology. As Clark comments, 'Certainly there was critical mass that we needed in this business.' What is less apparent is the part played by the Y2K bug. 'It forced people's hands, precipitating the decision whether to spend on technology or seek a partner,' says Sunday.
As for the end result of consolidation, Sunday suspects clients will eventually end up with higher fees and a more limited choice of services available. 'With all the reorganization and demutualization going on, transfer agents are up to their necks in work. At first we saw a little dip in fees, but now clients with contracts coming up for renewal are getting hit with fee hikes because the agents are saying, Where are they going to go? Everybody's got a full plate.'
Juggling an unprecedented volume of business, transfer agents do not look to be slashing rates. That's bad news for issuers shopping for stock transfer services. On the other hand, the agents do not look complacent. They consistently pledge an improvement in technology and quality of service, vowing to crank up client satisfaction in time for next year's Group Five study. And as transfer agents raise the ante, issuers may still find themselves the winners in the end.