Strategic Future-proofing for a Changing Industry

By Dan Ferguson, Executive Vice President, Strategy

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Broker-dealers are living through an era of change. The move towards investment solutions like unified managed accounts (UMAs), the ongoing transition to fee-based rather than commission-based services, and new demands from investors and advisors have broker-dealers looking to make smart bets on technology and strategy that will enable them to thrive.

For an allegory, think about the wireless communications industry. Service providers know what customers want – more speed – and must place bets years in advance on what kind of network they will build to be able to offer it at a retail level. They need to figure out what it will cost as well as what consumers will pay for it. And they need partners to build the infrastructure and devices to support it. The 5G phone in people’s hands today would be useless if wireless companies hadn’t started planning and building their networks years ago.

The same principle applies for broker-dealer firms, and by extension, Vestmark. We’re always trying to keep an eye on the trends leading us into the future to make sure we have a platform that is well-positioned to support our clients as they pursue their long-term strategic goals.

The consolidation of the industry – the number of FINRA-registered broker-dealer firms has declined by 23% in the past decade – has been dramatic, but not surprising. As the broker-dealer industry has evolved, efficiencies of scale have rewarded larger firms with greater profits. This has led to a pair of trends: an emphasis on organic growth through service and efficiency, and consolidation through mergers and acquisitions.

Driving growth by empowering advisors

Size has become important to broker-dealer firms as the industry has shifted from commission-based to fee-based services, narrowing margins and rewarding scale and efficiency, which larger firms can better deliver.

One of the biggest and longest-lasting benefits happens when we can help advisors gain back time. To an advisor, less time spent on administrative tasks, inputting trades or rebalancing accounts means:

  • More time to offer their clients the personalized services they expect
  • More time to prospect for new business
  • The ability to manage more clients simultaneously

A firm that wants to grow organically by attracting more advisors and help those advisors each support more investors not only needs to be able to address scale, but needs flexibility to create their own unique, value-added solutions for advisors (and by extension investors) and an overall experience and level of support they can’t get elsewhere.

All of this adds up to more opportunities for advisor success – which is key to a broker-dealer’s success. It’s why we see firms that value service, and whose strategic plan calls for attracting and retaining the best advisors, invest in best-in-class advisor tools. If a firm can help their advisors succeed, they will be able to attract and retain the talent needed to not just survive but thrive.

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Protecting profitability through back-office efficiency

Efficiencies of scale are becoming table stakes for the home office, where a firm can realize cost savings with automated processes. These can include automated tools to enable the operations group to onboard new clients, perform daily reconciliation, corporate actions processing, performance calculations, and others. It often also includes automated workflows to scale the centralized trading and overlay team responsible for home office-managed programs and portfolios.

Compliance with regulations also rewards scale – a large firm can invest in the tools to streamline and enhance compliance, while smaller firms may find the cost of evolving compliance requirements prohibitive as margins shrink.

Keeping strategic options open with flexibility

Having an efficient, scalable technology suite also puts a firm in a stronger position when it comes to evolving their business models or engaging in acquisitions.

First, efficiency helps improve a firm’s bottom line, which can mean it has more resources to pursue strategic transactions.

Second, a system that can scale to take on a major influx of accounts seamlessly allows a firm to continue operations without interruption during a post-acquisition integration. If you can be ready to absorb those assets and quickly take on new programs and books of business, you can be nimbler and more opportunistic in identifying acquisition targets. And equally as important, you can be more effective in seamlessly integrating the acquired firm’s operations, programs, advisors and clients.

The VestmarkONE® Platform: Designed with the future in mind

And finally, a system that makes it easy to create and deploy new solutions for advisors allows a firm to be nimble, offering investors the kinds of advice and investment management they want in a personalized and responsive manner. This can enable a firm to grow by tapping into new markets or attracting assets from competitors.

For example, like the 5G phone example noted earlier, the VestmarkONE platform was designed with the future in mind; it has optimal plumbing needed for UMAs, and we’ve continued to refine and strengthen that capability. As we see these programs growing more in popularity and flexibility, we are confident our clients will be able to exploit that trend as it plays out over the next five or ten years.

In whatever form upscaling takes, mergers and acquisitions or organic growth, broker-dealers need to be ready to manage more advisors, more accounts, more flexible solutions, more assets under management, and more simultaneous transactions and reporting. This starts with having a robust managed accounts platform that is proven under real-world conditions to be able to handle the numbers involved – and that’s where you can count on Vestmark.

By Dan Ferguson, Executive Vice President, Strategy