By Jon Evans, Head of BT Private Wealth Markets.
The next logical step in the evolution of execution services is to their application in private banking.
The progression of extracting value from trade execution has followed quite a remarkable course within a single generation.
In the mid-1990s, fund managers were grimly hanging on to their entitlement to place orders directly to broker sales desks. As the complexity and intensity of that role escalated and the increasingly burdensome requirements of risk and compliance took hold, this jealously guarded function was prised away.
The solution lay in specialist “central dealing” teams who interpreted and translated fund manager intentions into concise dealing instructions that were conveyed over telephone lines to sales trader desks for execution.
Paper tickets and spreadsheets gave way to order management systems and pre-determined broker panels. Physical time-stamps and manual recording of instructions and trade executions gave way to email and platform messaging.
The rate of change that followed was nothing short of breath-taking. By the end of that decade the finance industry was not only in the grip of the dotcom bubble but was looking for a connectivity solution of its own. The answer lay in the establishment of standard protocols by which machines could speak to each other.
Although there was widespread awareness, it was a struggle to grasp the magnitude of what had happened. For the first time, orders could be electronically routed from institution to broker and almost immediate updates flowed back to the buy-side trader. This development was a watershed.
With this enhanced level of oversight came greater responsibility. The buy-side trader began moving away from the fund manager’s clerk and started to add real value by executing well and preserving portfolio alpha. That efficacy previously provided by the sales trader swiftly moved to the institutional desk and, as their internal recognition grew, buy-side traders demanded more visibility and better tools.
What followed was unsurprising. Commissions and broker staff numbers declined, the reliance on automated trading technology grew. It was only a matter of time before the fully connected institution demanded direct access to the algorithms that had been provided by the sell-side and had made the magic happen.
This shift led to a rapid increase in the quality and level of specialisation on institutional desks as the more professional buy-side trader lobbied for solutions to the limitations raised by incumbent exchanges. The established model was broken and needed to catch up to a new world order of data-crunching trade cost analysis and rapidly declining latency. Expenses fell, leading to a proliferation of exchange traded funds, online retail platforms and, most recently, robo-advisers.
Migration to wealth management
Furthermore, individual investors grew more confident in their ability to access financial data and many decided to move away from their reliance on the professional fund manager and began more closely scrutinising whether the returns and fees represented good value. Those investors, who were wealthy and sophisticated enough, wanted to direct the nature and tempo of their investable assets.
Nowhere was this shift more apparent than in Australia where high and ultra-high net worth individual wealth amounts to over $1 trillion and the levels of superannuation per head are among the highest in the world.
However, investing your own money is not easy: it requires skill and patience, and when it comes to that point where your money meets the market, it requires a high degree of specialist knowledge. The upshot is that, arguably, the migration of those buy-side attributes has at least one more leg of the journey: the private bank.
Increasingly, wealthy individuals insist on the same level of execution capability from their private banker as the institutional fund manager had previously. Specialist trading desks that service these clients now seek to deploy institutional grade execution processes directly to the private investor.
Often these people run multiple entities: self-managed superannuation funds, family trusts, foundations and charities – so the size of their assets can often match those of an institutional investor. Naturally, they’ve done their homework. They demand access to an experienced execution specialist, algorithms, alternative venues, block trades and new issuances. And just as the institutional buy-side desk stood by their fund manager, private bank clients want un-conflicted market intelligence that’s delivered on their terms.
Nor are these requirements limited to equities. Increasingly they extend to fixed income, hybrids, foreign exchange, structured products and international markets.
Frequently, the investor seeks to reduce concentration risk in a specific instrument and requires bespoke protection or cash extraction derivatives written and delivered over the counter. Although the tilt to self-direction in the industry is clearly progressing, it’s not a matter of choosing automated services or bespoke services: it’s about getting the right mix.
It is common for a high touch service to be supplemented by online and ultra-low touch offerings such as robo-advice to satisfy client needs for personalised support and self-direction. Existing broker relationships are retained to complement the process.
However, one overriding consideration prevails: there really is no substitute for having access to high end execution capability. It is essential to have a trading desk with the best available people and processes if you’re serious about investment performance. Just ask any fund manager.
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