Boston, MA,
USA
November 30, 2001
Top 10 CEO-Level
Concerns in Brokerage
Institutional Brokerage
1) Increased
collaboration. As firms struggle to
remain competitive while cutting costs, it is imperative that they
implement plans for closer collaboration among business lines. This means
providing a channel for business line managers to communicate freely with
one another, reorganizing revenue reporting in some cases, and more
importantly, incentvizing all lines of business to participate in such a
scheme.
2) Disintermediation.
With the growing popularity of alternative means to execute trades,
such as crossing networks and direct access providers, broker/dealers face
the challenge of retaining business. They must develop new value-added
products to bolster their traditional fare: execution, research and
advisory services. They can find new products in the realm of technology
via increased connectivity to market utilities and market data via FIX
capabilities, as well as through business operations, such as outsourced
clearing and settlement services.
3) Straight through
processing. Institutional brokerage
firms are facing issues related to trade settlement cycle compression, and
while at the same time striving to increase efficiency through increased
automation. Efforts to achieve straight through processing are necessary
to address both these goals. These initiatives include internal work
necessary to tie disparate systems together and bring the operation up to
real-time status as well as external links to improve data flow both pre-
and post-trade, as well as amongst counterparties, clearing agents and
custody providers.
4) Trade activity
efficiency. Increasing
globalization and market fragmentation are making it necessary for
brokerage firms to reach an ever-increasing number of execution venues,
whether exchanges, ECNs or other types of ATS. Additionally, demand for
increased asset classes is causing firms to reach out to new venues. Firms
have to boost their order routing capabilities while at the same time
working to maintain links to the best pools of liquidity. Additionally, as
direct access providers and new forms of crossing networks court the
buy-side, broker/dealers must strive to increase anonymity and reduce
slippage.
5) Globalization.
As market activity in the US declines, decimalization erodes spreads, and
economic turbulence continues, investors will seek alternate havens for
their assets. This will result in a growing amount of globalization. Firms
must meet the need amongst their clients for increased foreign trading by
developing robust multi-currency capabilities, connecting to foreign
execution venues in an electronic format, increasing risk management
capabilities to handle more complex exposures, and beefing up the back
office to enable cross border clearing and settlement.
6) E-commerce strategy.
As with retail firms, institutional firms must centralize e-commerce
operations in order to increase efficiency. This will help organizations
leverage technology developed for one line of business across the entire
operation. However, institutional brokerage firms must also contend with
the plethora of existing online platforms designed to enable trading.
While some should be considered a competitive threat, most can be used a
means to increase liquidity. The problem is deciding which platforms will
give access to the best liquidity in a consistent manner, while remaining
extant. These platforms exist across numerous asset classes, such as
equities, fixed income and FX, further compounding the problem.
7) Market structure
and regulatory changes. In the US,
both listed and OTC markets are experiencing some form of change in the
form of new methods of connectivity, data dissemination, and trading
mechanisms. In Europe, ownership of the existing market structure and that
structure itself are in question as new initiatives pop up to facilitate
easier cross-border trading, clearing and settlement. Regulatory issues
such as Fair Disclosure and new best execution rules are changing the way
firms trade and report data. Firms must determine a path to meet these
challenges and work to implement solutions.
8) Managing cutbacks.
As firms announce cuts in operations, they must balance the need to create
shareholder value in the short term with the need to remain competitive in
the long term. This manifests itself in several areas. First, personnel
cuts must be made so that existing operations see as small an impact as
possible, while also attempting to keep morale high and a vision for the
future intact. Further, partnerships and joint ventures will inevitably be
cut back or eliminated altogether. While this provides an opportunity to
assess the business and pull back to core competencies, it also threatens
the ability of a firm to maintain flexibility and options going forward.
Finally technology spending will be reduced, and firms have to balance the
need for new systems with cost. However, cutting too deep will leave a
firm at a competitive disadvantage coming out of the current economic
downturn.
9) Disaster recovery.
Business continuity has traditionally been a high priority for brokerage
firms. The events of September 11 tested these plans like never before,
and firms have voiced overall positive comments regarding the plans they
have in place. After an event of such magnitude, however, firms will
inevitably re-examine policies, procedures, and systems they have in place
in order to further maximize their effectiveness. Firms will invest in new
disaster recovery and back-up systems as necessary and redefine procedures
to ensure they are adequately positioned in case of new types of
emergencies.
10) Risk management.
While disaster recovery can be viewed as one form of risk management,
there are several others. Trading and exposure risk must be thoroughly
reviewed and managed as firms begin to trade more globally and even
domestically, with a wider array of counterparties. Risk management
systems will be evaluated for their usefulness as well as for their
ability to interact with the rest of a firm’s trading operations on a
real-time basis.
Retail Brokerage
1) Customer
segmentation. Recent market
activity has shown firms that in order to succeed, they must provide more
focused products and services. This requires extensive segmentation work,
and subsequent delivery of niche-focused products and services. Examples
include wealth management features and active trading components, both of
which are designed to draw a fairly narrow, but lucrative, customer base.
2) Multi-channel
delivery. While improving customer
service is a basic tenant for any firm, for those involved in the
financial services industry, sufficient customer service is directly
connected to the ability to reach your client in as many ways as possible.
This includes traditional methods such as direct meetings, the telephone,
call centers, and email, but also newer mediums, such as wireless, or via
online collaboration tools.
3) Advice
distribution. In an effort to
provide additional value-added services to their client base, as well as
lure new accounts, many retail firms, both full-service and discount, are
developing ways to provide advice to a growing number of clients. Here a
question emerges. How do you properly allocate advisor resources given
different levels of assets among your client base? To answer this, firms
must develop self-directed advice capabilities, such as online
collaboration tools via the web, to compliment higher-end face-to-face
advisory services for clients with higher asset levels.
4) Account aggregation.
There is a trend among firms to introduce technologies meant to increase
the loyalty of a customer, or the difficulty associated with switching
brokers. Account aggregation is a key technology for reducing churn. While
the technology has not been adopted at rates once expected, it is
nonetheless providing firms with a basis upon which to build a strong
customer retention program.
5) Cross-selling. Still in its infancy, the ability to cross-sell
financial products and services has been a goal amongst executives in the
industry for years. To make this more of a reality, firms must strike
prudent, productive partnerships or mergers that bring together
like-minded organizations. This will not be easy, as firms in different
verticals in the financial services industry have vastly different
attitudes toward risk, technology, and aggressiveness. Also, firms must
train their sales forces in this new discipline, a process that will take
considerable time and effort, especially for those branch sales people
entrenched in a singular discipline.
6) Consolidation. Recent
market activity has spurred acquisitions, some from foreign firms. This
puts those remaining firms in the position of deciding whether they have
the capacity to maintain as they are, or if they should also find a
suitable partner. This process is exasperated by recent trends towards
downsizing and cost savings, where firms are not currently geared towards
aggressively moving towards market opportunities, and instead are
contracting.
7) Depressed trade
volumes. While retail
firms cannot single-handedly boost trade volume, they can incentivize
their sales forces and clients to trade¾via
reduced commissions or the introduction of new instruments, such as
options or single stock futures. This will provide a long-term effect.
When the markets do begin to rebound, and investors again become more
active, they will have been given the tools to bump their previous trading
levels up.
8) Improving internal
communications. The need
to increase communication among different areas of a firm, whether it be
the branch network or trading desks, is evident. Firms are developing
connectivity to their outlying branches, for instance, via virtual private
networks (VPNs) designed to provide cheap, effective means for voice and
data flow inside the organization. This should provide benefits in terms
of efficiency, and also provide new trading opportunities. It will be come
possible, for instance, for a firm to internalize orders more effectively
if it is able to manipulate branch trade data on a real-time basis.
9) Back office
automation (STP). Executives see the need for better operational
efficiencies to offset, to some degree, reduced volumes. For a retail
firm, this means bolstering links between front office trading systems and
the centralized back office operations most firms use, via middleware
applications, for instance. In this way, trade data can run in real-time
into the back office allowing continual position updates and increased
risk management capabilities, as well as reduced trading costs.
10) Centralized
e-commerce strategy group. As part of the overall effort to reduce
costs, many firms are trying to centralize their e-commerce activities.
The belief is that it is much better to develop and implement technology
across the organization than it is to allow disparate, homegrown solutions
to pop up. It is the intention that all departments of a firm will work
together so that a newly developed technology solution in one area can be
fully leveraged to support the services of other areas. The danger of
course, is diluting the versatility of a technological innovation in order
to serve it up to the firm at large. It must be a central mission
statement that functionality will not be sacrificed for the ability to
leverage across areas. This raises the bar of technological innovation and
should help to produce practical, cost-saving applications across areas.
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