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Broadridge’s Daly: The future of Wall Street is technology

8 min read

Modern Money

Broadridge President and CEO Rich Daly

“Without financial services, nothing else happens.” So says Broadridge President and CEO Rich Daly. SmartBrief caught up with Daly on the sidelines of the 2015 Milken Institute Global Conference to discuss how financial services firms can turn technology challenges and operational burdens into competitive advantages.

What do you think about the potential of financial utilities?

I have heard this idea for a long time. The elephant in the room is that nobody in the history of the world has ever taken a single-entity platform and successfully converted it to a multi-entity platform. I am not saying it is impossible, but no one has ever done it. It is like taking a studio apartment and saying you want to convert it into a sports arena. I guess you could do it, but you are starting with something that is entirely different to begin with.

The answer is trying to take the infrastructure we already have and using technology to re-engineer it so it is truly less costly for everyone.

Today we have 26 clients on a managed service platform, meaning it is our technology and their individual clearing numbers, but they are sharing one set of back-office resources.

Right now, one of the large pain points for the industry is fixed income. Our brokerage platform processes 60% of U.S. fixed income volume and over $5 trillion in North American fixed income and equity trades per day. We serve 16 of the 22 U.S. primary dealers on the platform.

So we are already a multi-entity platform serving the diverse needs of 16 entities, so we are going to engage the industry on what a financial utility could mean. It is not just the back-office costs; it is all the undifferentiated common costs. It doesn’t take a lot more scale to have a utility. We at Broadridge will be pragmatic because it means our business model will likely change. At the same time, the industry needs to be pragmatic and recognize that if we are going to get to a more efficient model, then there are a number of things that will have to be balanced in that decision process.

What I would encourage people to do is start with something that is real versus something that is theoretical. This industry is far too complex to be coming up with theoretical answers.

How can communication channels and methods be improved?

Let’s start with the biggest opportunity. It is going to be driven by opportunity tied to a realistic, non-theoretical ability to execute. The opportunity for our industry is two-fold. For example, PwC put out a report that found financial institutions, including broker-dealers, mutual funds and annuities are still spending $20 billion a year on paper and postage. That is the first aspect of the opportunity. The second aspect is that a bulk of the paper communications generating this $20 billion in cost just doesn’t deliver a good customer experience. Technology-driven activities can get people to better decisions by helping them understand more information more easily.

The SEC is aligned with the industry. In 2014, they created the Enhanced Broker Internet Platform (EBIP) rule. In that rule they say that with the customer’s agreement, brokers can send customer information digitally because the more information investors get and look at, the better off they are going to be.

With regard to the idea of layering documents, we have eliminated 92% of the full prospectuses for mutual funds. Ninety-two percent of them are summary prospectuses. Eight pages is better than 80 pages. You can actually get through 8 pages and pick something out as opposed to 80 pages. God help you if it is a commingled prospectus that covers more than one investment, then you are really dead because then you don’t even know if what you are reading about affects you.

Getting to this $20 billion as the economic opportunity, technology is the answer but we have to be simultaneously investing in two things.

One is better content. Sending static content online is not a good experience. Trying to read a brokerage statement online feels like you are in a scrolling penalty box.

The next part is the war for the consumer. Financial services is important to consumers, but they want to live their lives without having to go to every website they ever do business with. They want to go to sites that interest them. Broadridge is enabling our clients to interface with those channels in a way that it is still their experience with their customers, but customers view it as a journey to a place where they can follow things they like or interact with people they like.

We are going to be sending content to channels like Amazon Cloud, Evernote and Dropbox in the fall. We are ahead of the game because we are ISO 27001 compliant and follow the NIST framework.

What are the biggest concerns you are hearing from clients with regard to cyber?

The industry faces challenges because there is a need to interface in so many ways with the public and there is a need to do transactions with the public. At Broadridge, there are very few transactions that happen directly through us. That being said, every day we are adding more resources and more monitoring to counter cyberthreats.

From our clients’ point of view, it is a very consistent dialogue. They want to protect themselves today and understand what they can do going forward to be part of the new economy without adding risk that is unacceptable.

C-suites stay awake at night worrying about three issues: There is the very real issue itself. There is the issue of fines. And there is the very real public relations issue.

How does Broadridge look to change third-party risk into third-party advantage?

I met with the CIO of a very large global bank and he told me he deals with 300-plus vendors, 100 of which are meaningful, but he has to get it down to 30 or less. He told me that any way he looks at it, Broadridge is going to be one of the 30 because we “check the box” in terms of what he needs. Vendors are at a disadvantage if they don’t have the wherewithal and the infrastructure.

The cyber landscape is going to enable trusted players out there – and I put Broadridge in that category — to win more market share because as firms struggle internally, they are looking for who can provide more of what they need. And the cyber and data security component is a large part of what they need.

Only a small number of entities related to financial services are ISO 27001 certified and Broadridge is one of them. That allows me to tell clients that when their data is with us, it is as secure, or more secure, than when it is with them. That checks a very big box for them in terms of the next step in the dialogue.

What are some of the other boxes that clients are looking to check?

The industry is very focused on shortened settlement. One can debate, whether you are retail or institutional, what that shortened settlement means, but time does have a relationship to risk.

When you talk about the utility model going forward, if people are in the same place on the same platform, then it is going to be pretty easy to acknowledge trades on T. Some people go to great efforts today to do that, but it is costly. I am saying that going forward, that effort can be met with a far lower cost with an industry utility model.

Do you think we will go from T+2 to T+1 or T?

I was on the early working committee when we went from T+5 to T+3. I think the transition from T+3 to T+2 is going to be easier than T+5 was to T+3. I think the sooner we get to a utility model, the sooner we will get to T+1 or T, just as part of a natural evolution.

What kinds of trends are you seeing in the retail space?

We just bought three businesses that are all tied to getting information to retail investors. RIAs and bulge-bracket firms are pushing content in front of investors. Our Forefield business provides content that allows advisers to better engage clients in dialogues about investing. Our Emerald Connect business is enabling small and large FCs to build websites with fully compliant content. And we just bought Direxxis, which enables people to go online and identify a local financial adviser that fits their needs.

We talked on the panel here at Milken about this whole concept of “robo-advisers”. I think that is a misnomer. I call them “bionic advisers.” People aren’t going to ask Siri to help them pick stocks. Half the time Siri can’t even dial the correct phone number I want to call. The idea that technology is going to entirely replace the adviser relationship is false.