It’s the number–one question readers ask us and we’ve been struggling hard to come up with the right answers.

We’ve also been struggling with how to say it, and with how to balance our remarks… since some of our best friends are transfer agents. And also, because transfer agency people are, by and large, among the hardest–working and most dedicated people we know, even while being, all too often, among the most mis–guided and unsupported by their corporate taskmasters.

We’ve concluded that there’s only one way to say this and that’s to say it straight out: The transfer agency business is in deep trouble, and if the agents don’t get their act together, and do it in a hurry, there may soon be no business worth having.

As with all such unpleasant tasks, we’ve tried to put this off as long as possible. But two recent events impelled us to get on with it:

The first was the recent publication of two new "transfer agent benchmarking surveys"; one from Group Five, covering 11 agents and 1,050 respondents, and one from Stockholder Consulting Services (20 agents, 788 respondents). While we’ve been critical of both these surveys and we still are (weak methodology and an almost total lack of statistically meaningful data) one truly noteworthy finding stood out in both surveys: Not only has customer satisfaction with transfer agents declined significantly over the past year, it’s at a perilously low level.

Only two of the largest seven agents in the Group Five Study got over scores in the "good–to–excellent" range from 80% or more of their clients, down from three the previous year, while in the Stockholder Consulting study, three of the top seven passed this sniff test, down from four last year. Bear in mind that these marks reflect the perceptions of the paying customers. By our own sniff test, and that of most surveyors, when 85% of them won’t give you "good to excellent grades" you’re in very deep trouble.

The second event, which we and most of the industry had been waiting for, was the announcement that First Chicago Trust Company and Boston Equiserve, the Bank of Boston–State Street Bank–DST joint venture, would combine their transfer agency businesses. Once concluded, this combination, which will give the new company 41% of the stock transfer business, will fundamentally alter the competitive landscape. Ideally, it will point the way – and maybe even force the transfer agent community as a whole – to address the long list of serious problems facing their industry in a more focused and aggressive manner.

From our viewpoint – as thirty–year observers of the industry from the inside and five–year observers from the outside – the number one cause of all the many problems transfer agents face is simply this: The transfer agency business is suffering from tremendous overcapacity.

And unfortunately for the long–suffering agents– and for their employees, and for many of their customers too, who are suffering along with the industry – the problem doesn’t seem about to resolve itself in a hurry. The only problem we really see with the First Chicago–Boston EquiServe deal, is that it will take almost three years to really consolidate itself.

"What’s the problem with excess capacity?" one might well ask. If you’re an issuer – especially one that’s jumped ship for another provider in recent years – you’re probably enjoying lower direct costs than you’d be paying otherwise. But from where we sit, and from what our readers tell us, there’s been a very steep price to pay, in the form of declining service levels, increasing nose levels, and the need to get more involved and entangled in matters that agents used to handle as a matter of routine. The continuing struggle to corner market share at almost any price inevitably takes its toll: something’s got to give and that something has been service.

Another major problem; as they’ve struggled to eke out short–term profits that will keep them in the gam for another year, most agents have put off the systems investments they need to make to assure their long–term viability.

Agents like to tell you they spend big bucks on systems – and some do. But most has been spent on patchwork.

Virtually every agent is working from a classic "legacy system." We’ve likened it before to living in a classic historic mansion: handcrafted over many years by people and methods long forgotten, with rickety underpinnings, lots of rewriting and replumbing jobs cobbled together by who knows whom over many years and with lots of equally rickety superstructures, underground passageways and outbuildings, clinging precariously to the main edifice. Everything is fixable of course – even Y2K – but at great cost and equally great risks of having the whole thing tumble down.

To get to the heart of the problem; the inability of the various parts of most agent systems to relate to one another seamlessly – without going through a lot of subsystems, "exception process routines" and manual interventions– is creating extra work, extra rework, extra problems for issuers to deal with and extra costs for agents on a daily basis.

You’ve heard of "relational databases"? Here’s an example of the typical lack thereof, and the consequences: Say the agent fails to sing you up automatically and in time for your dividend reinvestment request to kick in. Most will have to manually back–out the transaction, cancel the check in a separate check–rec file, move the money to the DRP file, manually calculate your dividend reinvestment position (shares, commissions, tax status, etc.) manually enter it in the DRP subsystem, make a trade to buy the shares and settle it and, if they remember to do it, adjust a separate cumulative file for year–end reporting.

Bad as all this sounds, the number–one cause of declining customer satisfaction in our opinion, is that many agents are working from a business model that’s 180 degrees off the mark; viewing the business, and running it as a manufacturing business rather than a service business. As a result, many agents have seriously underinvested in people – and in simply having enough well–trained, service–oriented people on hand. In fact, the most common complaint we hear from readers is that more often than not, when they call their account manager with a problem, they end up guiding their contact through the solution.

Further; with this manufacturing mindset, most of the investments that have been made are designed more to downstream work to shareholders and to customers themselves than aimed at providing superior customer service. Too harsh, you say? Just compare the kind of service received by mutual fund shareholders when they dial that 800 number with the kind of service transfer agents typically serve up.

Part of the problem, as transfer agents are quick to point out, is that customers have been squeezing the lemon too hard. But we say: as long as the overcapacity problem exists, agent themselves will continue to lower their prices – sometimes unrealistically low levels – and to balance the books by underinvesting and by squeezing the service component.

The industry consolidation that’s taken place so far has also been a major contributor to customer dissatisfaction. Consolidating two books of business is an incredibly complex task. It’s complicated even more by the tight timeframes involved – and by the consequent shortage of time and talent at even the best–staffed organizations. The number of things that can and do go wrong is mind–boggling. And, with all the politics, politicking and stress that arises when you’re trying to integrate two business cultures, it’s hard to get people to focus on customer needs. Some agents have gotten better at this with practice, but some – largely because they seem to lack the people–power – have not.

Another big problem, and another potentially fatal one, is the inability of the industry to work together for its own advancement, much less for the good of customers and their stockholders.

Over the past five years, the STA, their 87–year old trade association, has promised to mount investor education programs on registered vs street–name ownership, on the Direct Registration System, and on the benefits of direct investment and dividend reinvestment plans. All of these promised and much needed programs, sad to say, have largely fizzled for lack of broad industry support.

There have been excellent opportunities for the STA to fund such programs – by serving as the primary clearinghouse of information about investor–friendly stock purchase programs, or by forming a group to distribute the materials under their aegis – but they’ve been consistently beaten to the punch by better focused and more entrepreneurial folks.

There have even been some new business opportunities on the horizon – householding across the registered, employee and street–name population for example, which transfer agents are well–geared to do. But transfer agents have been losing rather than gaining ground here, in large part because they can’t pose a united front. Meanwhile – and hats off to them for their moxie – ADP, having conquered the street–side servicing business, is actively soliciting issuers to handle the registered side too – not just for householding the mailing of proxies and interim reports, but for the TA’s proxy tabulation business.

And finally, as described elsewhere in this issue, Direct Stock Purchase Plans – the one real hope for the industry as a whole – are not being marketed as widely and as well as they could be and should be by the industry.

In terms of pricing, many of the agent–sponsored plans are not nearly as competitive as they need to be with brokerage firm offerings.

In terms of customer service, agents need to recognize that many of their "automated voice responses" – and many of the barely–trained live people you get if you persist – are total turnoffs to savvy, self–directed investors.

After listening last week to two full minutes of someone singing "Do you want me now… Do you want me how?", over and over again, followed by "If you play the fool then you don’t have a clue", repeated for another two minutes to a tick–tock beat… all just to get a DSPP brochure… we wonder if some agents have even tried own com–centers.

Transfer agents like these seem to be totally unaware of the fact the registered holders do have a choice, other than the one that issuers have made for them.

There have been some positive developments for sure: the STA just introduced its own website, with a plan, they say, to add useful investor–friendly info soon. There are murmurings that members might work together on a system to consolidate DRP and DSPP statements for investors and on a shared platform to foster internet commerce. But frankly – and we hope we’re wrong – we don’t sense the necessary sense of urgency, much less a real desire to cooperate with their rivals to counter–market against brokers and other asset managers. Most agents still seem to get more joy from seeing a competitor have a bad day than from having a good day of their own. And, sad to say, we think the beatings will continue unless and until the excess capacity is wrung out.

Where’s the Good News?

Despite the long list of problems, the industry has at least five positive factors going for it:

1. Every Company Needs A Transfer Agent and, unlike the buggywhip business, where there are many similarities, TAs will be around for the foreseeable future.
   
   
2. The Transfer Agency Business Is A Very Simple One, despite what TAs like to tell us. It’s a combination of basic bookkeeping – with accurate typing and adding–up a must – and what your editor likes to call a "goesinta business" [as in "the proxy and the proxy statement and the return envelope goesinta the big envelope which goesinta the mail."] Rocket science it ain’t.
   
   
3. It’s also a low–cost business to run these days… as long as you do everything right the first time. And if you run it right, it gets cheaper by the day. While the old business used to have huge fixed costs – to type and mail all those certificates, to do all that goesinta work and to house all the workers – the most people–intensive parts of the business have been falling steadily (except for most phone centers, where staffing is directly related to widget–pushing accuracy or the lack thereof). A lot of the high fixed–cost and highly seasonal goesinta work can be, and increasingly is being outsourced. Some TAs actually seem to be discovering that going back to basics – like getting it right the first time, anticipating questions and answering them before they’re asked, and having people on hand who actually know the answers – will really lower their costs.
   
   
4. Social and Demographic Facts are Still Highly Favorable for the Business. Whether one looks at the number of individual investors, the dollar value of investments held by them, the level of interest in the market expressed by people of all ages, the rapidly growing interest in self–directed investment and the amazing growth of internet investment activities, there’s a potentially huge and growing business out there. The trick of course is not to lose it to discount brokers who are already offering cheap and user–friendly on–line service… without the broker.
   
   
5. Industry Consolidation is Inevitable. Some will be due to the growing recognition that existing legacy systems leave many players with no viable alternative other than to buddy–up with someone, to share the systems’ development expense, or to exit.

Some will come from the simple fact that competing with the EquiServe – with twice the units of its nearest competitor and roughly five times those of the new number four and five providers; and with a running start on a new system – just won’t be possible unless you have either (a) more critical mass or (b) a "niche" that’s (somehow) truly secure from the big agents, with their big spending power.

In our opinion, there’s room for no more than two big agents, for one mid–sized "boutique", and perhaps for no more than two or three other providers of "plain vanilla" service.

The biggest chunk of consolidation, however, will likely have nothing to do whatsoever with the stock transfer business. Rather, it will arise from mergers and acquisitions at the parent–bank level.

We realize of course, that the coming consolidation won’t necessarily seem like a good thing to the hundreds of good people who work in the industry – or to their corporate customers, who’ll have to ride–out the rough waters that every business combo generates in its wake. But from our vantage point, it’s the only thing that will enable the business to right itself at long last. The big open question: Will the agents themselves wake up – and act – in time?