How Broker-Dealers Are Evolving: Pershing

An emerging generation of clients wants less personal interaction and favors data insights, push messaging and simplified decision-making.

The capital markets industry is facing a significant period of challenge, according to a new report from Bank of New York Mellon’s Pershing. Many broker-dealers currently face both short- and long-term strategic pressures.

The largest institutions are capturing a greater share, with the top 10 firms by revenue globally accounting for more than 50% of the equity capital markets global market share and 41% of the debt capital markets.

Costs have grown 37% since 2012. Regulatory and compliance demands are affecting small to midsize providers, limiting their ability to invest in their operating model and innovation.

In the U.S., the number of Financial Industry Regulatory Authority-registered firms shrank by 1,200 over the past 10 years, a 25% decline.

Drivers of Change

The study identified five factors that are driving structural and systemic change.

One is shifting market structures and foundational change. Industry leaders said changing competitive dynamics are creating new lines of engagement and, in turn, leading to new touchpoints with clients and the capturing of bigger shares of data and revenue.

In addition, the settlement cycle is shortening as electronification accelerates. Settlement models and principles that are proven in the equity markets are migrating to the fixed income and foreign exchange spaces, driving greater efficiency and boosting the velocity of cash and securities.

A third factor at play is the emergence of distributed ledger technology. At present, only small pockets of broker-dealers have adopted DLT, but many leaders say this area is reaching critical mass.

A second driver of change is the proliferation of data, which broker-dealers are struggling to manage and make effective use of. By 2025, the amount of data generated daily is expected to reach 463 exabytes (two to the 60th power bytes or roughly 497 billion gigabytes). Seventy percent of firms in the survey said they intend to increase their investments in data, across integration, connectivity and analytics capabilities.

Business leaders see securities are one such data-rich area. Asset- and market-level data, as well as less traditional financial data, can provide insights into investments and client needs.

The third driver of change identified by BNY Mellon is evolving client demand. Both retail and institutional clients have increasingly high expectations for their overall experience.

BNY Mellon said the shift to platform interaction was a key theme in its research. An emerging generation of clients wants less personal interaction, instead favoring data insights, push messaging and simplified decision-making.

A separate BNY Mellon analysis found a clear separation in asset flows based on a broker-dealer’s digital adoption: strong digital adopter assets grew by 130% compared to a decline of nearly 40% for weak adopters. Nine in 10 larger institutions in the study outlined plans to increase investments in digitizing their client experience.

A new talent profile is the fourth driver of change. The study showed a shift in broker-dealer talent requirements as a more digitized landscape, with algorithmic, data-driven, electronic trading strategies and DLT on the horizon, demands new skills.

As a result, firms today are looking for people who not only understand the market, but are also digitally native, data literate and technically savvy. Study respondents cited competition for talent among their top three headwinds inhibiting growth.

The fifth driver of change is regulatory headwinds. The volume, speed and complexity of regulatory change are creating new obligations for broker-dealers, and meeting new requirements often demands limited resources that they could otherwise invest in growth. In 2021, financial institutions spent some $210 billion on compliance, up more than 15% from the previous year.

The study found the weight of compliance has a larger effect on smaller firms, with 71% highlighting regulatory demand as their primary headwind against growth, compared with 54% of larger firms.

Reaching for the Future

As broker-dealers compete for clients and market share, they have several options for navigating these changes by rethinking their priorities and adapting their focus to new realities, according to BNY Mellon.

One option is to re-examine product and solution sets, identifying the capability set required to capture value within target revenue pools.

Another is to automate and digitize their processes.

Broker-dealers can redefine the target market by asking which client segments they have the strongest positioning and relationships with.

Reshaping hiring and retention is yet another option, identifying the next-generation skill sets they need. Eighty-three percent of respondents plan to increase or maintain headcount.

Archetypes for Success

BNY Mellon has identified five operating archetypes it says will define broker-dealer strategies between now and 2030.

The Alliance Builder will have specialized product or technology capability, be agile and flexible, have rapid access to leading capability and enhanced expertise and resources. Its primary areas of investment focus:

The Digital Driver will have proprietary technology, digital enablement, data-driven decision making and lean structure. Its main areas of investment focus:

The Product Sophisticate will be characterized by a narrow but highly specialized product set, focus on niche client needs, specialized knowledge and resourcing and purpose-driven technology and processing. This archetype’s primary areas of investment focus:

The Regional Champion will be the dominant/market leader in one region supporting local market and inbound needs, have a product set built around local market needs and offer a localized provider network. Its primary areas of investment focus:

The Global Giant will have a global footprint, a broad product set, a broad client base, significant capital/balance sheet capacity, extensive data access and scaled resource and infrastructure. This archetype’s main areas of investment focus:

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