Earlier this year Broadridge appointed former Wall Street trader and fintech pioneer Eric Bernstein to the position of President of its asset management solutions division. In an exclusive interview with bobsguide, Eric discusses his take on the future of asset management, including why he believes the industry has overreacted to the impending implementation of MiFID II and the Trump Administration’s apparent desire to relax regulation in the US, and how his former life as a trader has given him a unique perspective on the pain points of his customers.
Did you have any notions what Broadridge’s USP was in the market before you joined and have you discovered newer USPs?
What I’m finding in the hedge fund space is that there are far fewer launches every year i.e. people leaving existing hedge funds or capital markets trading desks to set-up a hedge fund with $10-50m. That was a plentiful market, but that is not the case now.
The launches we are seeing tend to be more material, not fifty people with $50m, more like ten people with $200m, so that was a little bit of a surprise. The bigger surprise, however, was that a lot of existing mature hedge funds are looking to adopt a single technology supplier such as Broadridge and leave the multi-system world (where you have five or six systems cobbled together to a form a single platform) behind. I was starting to see that in certain industries, but now you’re seeing it in hedge funds, which is great news for us. It’s interesting because I didn’t think the change would be so evident in the short-term.
What are the recurring pain point themes that keep cropping up in your conversations with clients?
First and foremost, asset management firms are being squeezed in terms of newly introduced fees and costs. Second, the operational costs are still high so margins are being squeezed. The consequence of that is that firms are saying to us:
a) Can we adopt technology that will make us more efficient and thus lower our costs?
b) Are there things we can outsource and therefore avoid employing the manpower ourselves?
These pain points are pervasive in asset management right now and will only increase in the next 12-18 months, with some likely consequences: Firms will shut down, there will be consolidation in the market, or outsourcing will continue to become more prevalent.
The way I looked at the world is that if I’m an investment manager, I know how to manage money, and I don’t want to be an expert at managing data. So I’ll outsource and focus on my core competency.
Do you think that consolidation has already begun?
Yes. It was visible in the banking space years ago. As margins were being squeezed, banks were merging or buying competitors, because once your margins are thin you look at innovation i.e. how do I be different to everyone else and thus charge higher prices? But in a world where there is a lot of commoditisation, volume can win too.
Will there be any reversal from the squeeze on profit margins?
I don’t think so. The same thing happened 15 years ago in capital markets. In the 90s people were paying 6 or 7 cents a share for every trade, which fell to five cents, three cents, two and a half cents, and then electronic trading launched and people were paying fractions of a penny. What you also saw was a reduction in manpower because technology was facilitating trade, and you saw consolidation. I don’t think it ever bounced back. Trade prices went up briefly and then stayed pretty much the same or fell, but they haven’t ever fully bounced back.
What format do those initial questions with clients usually take?
When a company approaches us saying something isn’t working well, the first thing I ask is: “How important is that to your day-to-day operations?” If they say that it’s not very important, I advise them to focus on things that are supercritical to the day-to-day business: How are those processes working? How is technology adding value to you in those areas? How can it add more value or perform in a way that you haven’t even thought about doing?
To your mind, how has the industry reacted to MiFID II?
MiFID II is similar to a lot of other regulatory change. People always prepare for the worst but it’s never that bad. Look at the US markets in the 90s and the Limited Order Display Rule and research unbundling, and how commissions were being categorised and how research was paid for.
You had the same post-internet bubble in the hedge or IPO world and the derivative space world in 2007-2008. We saw it with private equity and fee disclosures when Mitt Romney was running for president -- people started questioning how people were making money and operating a pension plan for line workers or automobile workers. Regulation arose then, you had to disclose management fees and how the fees were being paid. It’s the same with MiFID II, the regulation is all about the unbundling of the commissions and making sure it’s being reported to a regulatory body.
In general, firms have to comply, but what’s interesting to ask is: “What is going to be done with the reporting?” Will there be stacks of paper created that no one is going to read? Or are people really going to consume the data?
The SEC and other regulatory bodies can audit and control but you can’t consume that data with a finite number of people. MiFID II is requiring firms to report but I don’t foresee the regulatory bodies quadrupling staff to consume that data. I think the regulation is instead going to provide a level of maturity in firms as they know they are now open to audit, which is very good for the business but nothing revolutionary.
For the majority of this year 80% of asset managers have stated in surveys that they won’t be ready for MiFID II, or that they are still unsure how to interpret the regulation. Do you think there is an answer already in the market?
I am relaxed about MiFID II because we’re already solving it. We have clients beta testing our solutions right now, which will delineate data, and we’re also pushing it out through message automation so that the pipes are there and the data capture sites are ready. Client concern on the asset management front is that they might not have the data points.
With any kind of regulatory change, some firms’ initial reaction is to ignore it. As it gets closer people begin to panic, and then as the deadline approaches people start to relax a little bit. We are seeing with MiFID II that there has been a transition now to relaxing, especially because there appears to be some flexibility with compliance. And I think there’ll be subsequent releases of interpretation of the regulation that will relax certain areas.
Read part two of our interview with Eric Bernstein, where we talk about asset management legislation and the Trump Administration, the benefits of ex-traders working in fintech, and future trends in the asset management space, here.