Today's interviewee is Eric Bernstein, President of Investment Management Solutions at Broadridge. bobsguide sat down for an exclusive interview with Eric in the summer, three months after taking the role.
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.
In conversation with clients, is the general consensus that asset management firms are moving away from a stage of panic when it comes to PSD2?
There was panic in the market when I joined Broadridge earlier this year.so we looked at the issue pragmatically and asked ourselves which fields the regulation required us to capture, which fields we captured already, and where there was a gap.
We discovered there wasn’t a gap, so the question then became purely one of how to generate the right reporting.
Now when clients ask us what we’re doing for MiFID II and we explain it, they feel better about it. We don’t have to do anything monumental to change our processes, we have protocol to send through our trade and transaction reporting capabilities, and that concept has resonated because it’s logical.
So is MiFID II actually nothing new?
Absolutely. History is littered with examples of regulatory bodies thinking they’re doing something very unique in their jurisdiction but in reality a parallel piece of regulation has been implemented in another jurisdiction years before. In the US, 15 years ago firms were changing the way they reported, and had hard dollar and soft dollar research so you could delineate how you were paying your broker dealer for the research they were providing. I was doing that in an Access Database in 1993.
Do you think that during the Trump Administration we’ll see any regulation changes in the US that will have an important impact?
I get the feeling that the Trump administration may relax some of the regulations, but time will tell. The Democratic Administrations, Clinton and Obama, really tightened regulation; not that that was a bad thing, but there was a lot of regulatory change during those times. Trump is a bit more capitalist, more investment oriented because he’s an entrepreneur. But I don’t foresee any major regulatory change.
We are already pretty comprehensively regulated in the US, so I can’t imagine where we could regulate more. Every industry is looked at; insurance, private equity, hedge, capital markets, asset management are all regulated now.
Is there any chance of a significant relaxation of regulation rather than a minor one?
A huge relaxation would be a bad thing, you don’t want chaos. The Trump Administration is smart enough to know that it doesn’t make sense. And I don’t think any of the regulation currently in place is super restrictive per se.
You moved into fintech from being a trader yourself. Do you think that it is a growing trend in the industry that people with experience on the buy-side are moving across to work for vendors?
There are definitely more practitioners entering the technology space than 20 years ago. That being said, still when I visit clients, we talk about the fundamental issues they are faced with and they are pleased that I understand them.
Is bringing more practitioners into your team a priority?
Yes, we are hiring more practitioners. I’m not a believer in hiring people that don’t know the domain; you can teach people technology but it’s hard to teach them the business. People have claimed to have learned the business in a couple of weeks, and I tell them it’s taken me 25 years. We do hire fresh-out kids who are tech savvy or finance savvy and we can teach them both, but that’s a longer investment.
In addition to consolidation and the squeeze on asset management, do you think there’ll be any new trends in the industry we will see in the next 12 months?
We’ll see the consequence of what’s happening now in 12 months. As firms get squeezed they start to look at how they can diversify themselves or specialise in areas where they can substantiate their existence more.
When you have commodity-based services, your willingness to pay is going to shrink, because as a service becomes a commodity it’s no longer something firms specialise in. Businesses in this position that find themselves offering a common service and then have to specialise in new ways, and that’s what you’ll see in asset management. As an example, private equity firms in general are either institutions, pensions or require very wealthy people to invest. But you could create private equity funds that are retail based and diversify, enter a new market and attract new investors. So you’ll see that kind of innovation.
Additionally, from an innovation perspective, asset managers are looking at AI and machine learning as a way for making up the squeeze in the margin by reducing costs through efficiency. Outsourcing i.e. switching from a fixed cost model to a variable cost model for elements of manpower is also something asset management firms are looking at. Both of these are areas of interest to Broadridge.
We’re looking at proof of concepts to transform how we operate, especially as an outsourcer. It’s very helpful in the day-to-day business, but when you’re outsourcing you’re taking on the same problems from other people so you need to make sure you’re also innovating and being efficient.
What are your defined goals at Broadridge for the foreseeable future?
What I’m trying to do is build the organisation and infrastructure, and then the brand. Broadridge has such a great brand in the capital markets space and I want us to mirror that in the asset management world. My goals over the next year are to put the pieces of our business together in a material way; I see a lot of companies that buy assets and have them sit alongside each other and claim they’re integrated and they’re really not. I want to be sincere about it, if I’m going to connect the dots, I’m going to do it in a meaningful way.