Today’s capital markets industry is severely capital constrained, and this is likely to get worse over the next few years. Internal deployments of new or improved solutions will become harder to resource (both in terms of cash and manpower), and managed services will be the preferred way to improve operations. Furthermore, managed services that offer to improve process and/or vendor management will have a preferred seat at the table.

There is widespread consensus among industry participants (capital markets firms, regulators, and analysts) recognizing the need for aggressive cost takeout. Many of the efforts to date are partial solutions that lack either or both the STP or process industrialization elements that would make cost takeout across the entire value chain possible. Examples of partial cost control efforts and the risks they incur include:

• Reduction of market liquidity: market makers require large securities portfolios to make markets. Reduction of portfolio holding costs reduce overall costs, but at the cost of increasing liquidity crises in the future
• Exiting less profitable lines of business and/or less profitable customers: capital markets are inherently cyclical. While in the short-term exits reduce cost, over longer periods of time costs of reentry are likely to outweigh short-term savings from exits. Customers are underserved both in the long- and short-term
• Improving cost efficiency within operational silos: while easy to implement, ultimately cost reduction may not be achieved, as linkages across silos reduce the value of in-silo savings
• Running lean operations: under resourcing operations without improving operational execution often leads to costly operational failures.

A major source of operational cost for capital markets firms is trading costs for asset portfolios. Post trade expenses include: exchange, clearing, settlement, and regulatory fees associated with executing a transaction. Depending on the type of portfolio these fees can run from 10 basis points (BP) to 100 BP, often averaging 50 BP.

To date, vendors looking to service the need for trade expense management have offered:

• Software: e.g. Qlik (QlikView), Fiserv (Portfolio Management and Trading), Broadridge (REVPORT)
• Platform-independent KPO: e.g. Infosys, TCS, Cognizant
• Custodians: BNY Mellon, State Street

Software requires capital markets firms (who are capital constrained) to invest in operations delivery. Platform-independent KPO vendors can work with any client, but are limited to client selection of solutions to create the data requiring analysis. Custodians, while perhaps best positioned to provide this type of analysis, are in fact creating many, if not most, of the trade expenses under review.

Vendors are looking to enhance the level of support they provide capital markets firms in controlling their trade expenses. One example is a recently launched BPS from Broadridge. The service is built on Broadridge’s 15-year old REVPORT software platform, which provides functionality for wealth managers and capital markets firms trading securities, including:

• Fee billing and expense calculation
• Invoice validation and reconciliation
• Revenue and expense calculation
• Revenue and commission sharing.

REVPORT is able to conduct these analyses and matching across:

• Multi-currency
• Multi-asset classes
• Over 50 fee types including: taxes, commissions, management performance, administrative and advisory, fund rebates, wrap fees, and revenue-sharing.

The REVPORT solution currently has 150 clients across the entire size range of wealth management and capital markets firms.  

To date, industry standard practice is to conduct trade expense validation audits by sampling ~5% of invoices. Broadridge’s managed service uses computing power and algorithms to enable the service to sample ~100% of invoices (minus any invoices with no documentation or rate card to put into the system). Broadridge claims cost savings for clients from 5% to 8% of total trade costs. Audits can be conducted retroactively to recover expenses from prior years.

Implementation and full operation of the managed service is sufficiently quick to start recovering monies within nine months. In addition, due to the highly automated nature of the managed service, clients can pursue recoveries on fees which have previously been considered too small to be worth pursuing individually.

The managed service supports clients in their quest to improve the efficiency and standardization of trading processes. The service automates data/fee capture, stores rate cards and creates a taxonomy of fees to support clients trying to understand complex fee systems and in negotiating fees with securities trading vendors. 

Broadridge targets fees for the managed service to run at ~30% below internal operations. The pricing of the service is a combination of:

• Fixed fee for base service
• Additional fee for meeting SLAs
• Percent of recoveries received (after a base level of recoveries and capped after a negotiated level).

Broadridge officially launched the service on April 13, 2015 but has been working with two clients for six months. The clients have been REVPORT software clients, and have generated cost savings to date that validate the business case. The pipeline is strong, based on the existing 150 REVPORT clients and non-REVPORT clients who have expressed interest.

Is this managed service of value to the market?

Broadridge has the financial strength, IP (REVPORT since 1999), and operations staff (both on- and offshore) to create a combined offering of technology and operations which can deliver significant cost savings to clients. Tier one capital markets firms have a trading spend of ~$1,000m to ~$1,500m. Anticipated savings for them from this type of service would be ~$50m to ~$120m. Broadridge currently has tier one clients for both the solution and the managed service.

Key benefits of this service include:

• Cost savings from improved vendor management
• Improved process efficiency and discipline
• Increased transparency of expenses.

In the next few years, capital markets firms under increasing cost pressure will need to turn to managed services like this one to help improve operations and manage vendors much better than has been industry practice to date. Capital markets firms that fail to do so, or who choose vendors unwisely, will face an extreme cost disadvantage.