Reinventing the Relationship: Institutional Brokerage Profitability

Executive Summary

The change within the asset management and hedge fund industry has been on fast forward since September 2008 and, if the volume and volatility of 2010 is any indicator of long-term market behavior, the rate of change is only going to increase. Buy-side firms must assure that their product offerings are aligned with the changing needs of the investment community and that the performance of those funds meets or beats their benchmark. The pressure exerted on the buy side is quickly transferred to the sell side. The value proposition of a broker is under constant review by its clients, who are looking for unique ideas, a robust underwriting calendar, superior execution tools, and deep pools of quality liquidity across multiple geographies and asset classes.

The opportunity to offer a full-service value proposition is back. Brokers need to deliver value on both the execution services side and the investment decision-making side. While doing so, they are also challenged with increasing revenues while keeping costs down and maintaining a lean operation. This means effectively managing commission structures and margins on newly- demanded buy-side services. But this undertaking has become much more challenging than in the past. In today’s data-driven era, brokers who still rely on flawed intuition and back-of-the-envelope estimates risk falling prey to well-informed competitors. The most successful brokers are automating their cost-capture process, aggregating client data across the enterprise and intelligently allocating research and pricing liquidity accordingly.

Brokers must implement a client analytics infrastructure that is both flexible and on-demand. While a number of the bulge bracket brokers have built client analytics platforms internally, it is a resource-intensive task that only a few brokers can effectively in-source. However, there are a number of nimble technology solutions available today that can streamline client profitability analysis by automating the following critical processes:

  • Data Aggregation
  • Customizable Analysis
  • Information Sharing

Any broker that does not have a robust set of controls that oversee revenues, execution costs, commission management, and compensation is at risk of losing clients. Over the coming years, it will become clear which firms were able to adapt their business models to a new market structure and which headed down the path of least resistance, finding themselves irrelevant.

The TABB Group Vision Note on Reinventing the Relationship:

Institutional Brokerage Profitability provides insight into the increasingly complex needs of the buy side and how brokers are responding to those needs while maintaining their bottom line. The report also takes a look at how brokers can more appropriately allocate their resources and services using a more efficient method to track client profitability. Finally, we look at why swiftly automating the client analytics process has become more critical than ever in today’s market.