Data and transformations in the European fixed income markets

Ran Pieris

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Mar 2nd, 2015

The 2015 AFME European Market Liquidity Conference saw two important Keynote speakers with Martin Wheatley and Andrew Hauser but for me the most interesting discussions were around the common leveraging of data to provide greater liquidity to the Fixed Income (FI) Markets and to analyse and optimise Transaction Cost Analysis (TCA). The ongoing discussion for the requirement for E-Trading platforms had moved on to the type and number of platforms that will be needed. In the latter point we are at a colonisation phase where many new platforms are created but not all are likely to succeed.

Data is playing a more transformative role in the thinking of the optimisers in Capital Markets with the sell side and financial service providers expressing the use of it to optimise FI trading and allowing greater liquidity and automation. Interestingly the discussion on TCA also revolved around the greater use of data to automate trades but the general consensus was that although 95% of trades may be automated via TCA algorithms it is the 5% that fail that can be the most costly. It is interesting to note that the ex-ante use of data for TCA was discussed by Celent in a 2010 report and the adoption of it by the sell side appears only to have started in the European FI markets. However given the lack of liquidity mentioned the use of full automation is some time away and maybe applicable only to the most liquid FI securities.

Celent has already discussed the emergence of electronic platforms in previous reports such as 2014 European Fixed Income Market Sizing: Electronic Strikes Back being the latest and the general consensus for electronic trading of FI via central Limit Order Books (CLOB). For a view on CLOB see this report. The question raised now was how many FI platforms would be needed with the sell side agreeing a greater number of platforms while the buy side seeing the requirement for less platforms with greater liquidity. Maybe the multiple FI liquidity points can only be overcome by greater cooperation from both the buy and the sell side which is already on the table with Project Neptune.


Crunch time for conflicted retirement investments counsel

Will Trout

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Feb 24th, 2015

The White House has issued the latest salvo in the debate over applying fiduciary standards followed by RIAs and trust companies to the financial services industry broadly. The brokerage world, whose commission-based margins have shrunk in recent years, is to no one’s surprise crying foul. This is rather rich since the proverbial little guy has been taking it on the chin from Wall Street for years, in no small part due to the “conflicted advice” that the report seeks to address.

Perhaps less predictable is the effect on RIAs and other fee-based business that affiliate or engage with brokerage firms as part of their retirement focused business. Will they have to cut ties with these firms? Or will brokerage firms look in the mirror and willingly adopt the retirement investing standards proposed by the White House? Brokerage fees have said that the fees paid by investors on retirement products represent the costs of packaging and selling their product. If so, they should find a more efficient means of distribution. They might even take a page from the book of the automated investment advisors, firms that target the very investors that the brokerage industry purports to defend.

Will top down Fidelity embrace bottom up investing?

Will Trout

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Feb 24th, 2015

In my last post, I commented on the leadership transition at Fidelity and the firm’s tie-ups with firms like Betterment, LearnVest and eMoney.

Here I look at some of the obstacles that might get in its way as it heads down the digital path.

These obstacles relate to the firm’s legacy practices; specifically, Fidelity’s historical focus on product and performance and its top down marketing orientation. Can a firm like Fidelity really change from within, even when a new leader mandates it?

Corporate cultures are resilient and resistant to change, unless, of course, they are focused on driving that change itself. Google and Amazon are firms that constantly reinvent themselves. Fidelity’s core businesses, on the other hand, remain rooted in some very traditional thinking. Despite launching several passively managed ETFs over the past few years, the firm still hews to the legacy of active management embodied by Peter Lynch and his Magellan funds.

This is not to criticize active management per se; as I’ve noted before, I do think that betting against the market can make sense for investors. The issue for Fidelity is that active investors define themselves in terms of beating a benchmark, or at least, achieving some sort of absolute return. This is a far cry from the goal oriented thinking espoused by investors today.

The fact that we still think of Peter Lynch today underscores the fact that Fidelity is a marketing juggernaut. Decades and dollars have been spent promoting the proprietary and third-party funds Fidelity sells to investors. This top down approach has its roots in the macho sales culture of the retail investments sales business, and reflects the need to differentiate product in a very crowded universe.

Automated investing, on the other hand, is a bottom up phenomenon in which client demand drives adoption. Does anyone think for a minute that CEO Abigail Johnson woke up one day and decided that the Betterments of the world would have an impact disproportional to the miniscule share of assets they’ve accrued to date? Far more likely that comments from the retail investor base floated up through the Fidelity advisor network to headquarters in Boston, i.e. when is Fidelity going to offer an automated investments platform?

Whatever the genesis of this mindshift, it is refreshing to see Fidelity embrace 21st century modes of investing. But how deep does desire for change really run? Is there enough internal support to change the underlying sales culture? As countless firms have found out, it is hard to fly when you cling to your roots.

FinovateEurope 2015 – What’s in it for Wealth Management?

Feb 23rd, 2015

Last week Celent attended FinovateEurope 2015, great place to hear about new technologies and what companies will be launching in the upcoming months. While usually the main focus is banking, this year we saw a number of initiatives from a wealth management perspective.


1. Personal financial management and money management– lots of technologies to target the retail investors

2. Client onboarding — improving the process

3. CRM – creating value with data at your hands

4. Video graphics

5. Social media/mobile

6. Crowdfunding

7. Security — data privacy

8. Gamification – using games to attract younger generations to save and invest


In summary, vendors are putting their efforts on a number of areas, focusing on both the advisor and the retail investor. And it’s all about enhancing the customer experience. Very strong focus on CRM and financial planning. We are currently covering and will be covering many of the areas above. If you are a vendor that is interested in briefing us on their solution in any of the categories above and you are targeting the wealth management industry, please reach out to us!

Are record profits a harbinger of trouble at Fidelity?

Will Trout

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Feb 19th, 2015

I’ve taken a few shots at Charles Schwab on this blog, so perhaps it is only fair that Fidelity should fall into the cross hairs.

In my last blog post, I questioned some of the logic behind the eMoney Advisor acquisition. Here I probe Fidelity’s own take on its performance in 2014.

As noted in the firm’s annual report, this past year saw Fidelity achieve some big milestones. In a strong market, the firm scored unprecedented profits, topping $2T in AUM and $5T in administered assets (largely retirement funds) under new chief executive Abigail Johnson.

And the Boston-based broker custodian is hardly resting on its laurels. The eMoney acquisition and strategic partnerships with automated advisor Betterment and the online financial firm LearnVest show the firm is moving with gusto into the digital advice business, with a particular focus on the high value, goals focused planning function.

I’d say give kudos to new CEO Ms. Johnson, but it is hard to say how much initiatives like these reflect a changing of the guard, or the startled reaction of a technology giant being hoisted on its own petard.

I’ll share with you detailed thoughts in my next post, but to me, the recent flurry of activity suggests a little fear down on Summer Street.

Newfound financial freedom – pension reform in the UK

Feb 16th, 2015

The UK pension industry will undergo significant regulatory changes in less than two months time. From 6th April, millions of savers aged 55 years old will be permitted to take the cash from their pensions and will no longer be herded into buying annuity products.  Historically, savers had the freedom to take 25% of their pension in a tax-free lump sum, then were encouraged to buy an annuity with the remaining 75%.  However, pension reforms will now enable savers over the age of 55 to take out smaller lump sums (in each case 25% of the sum will be tax-free). The government has also changed rules around the 55% inheritance tax rate.

What are the implications of this newly instituted “financial freedom” that impacts millions of Britons?  This historic change will bring about opportunities and challenges to the wealth management industry and raise questions among retirees about tax consequences, suitable products and fees, life expectancy calculations, and wealth transfer and estate administration, for example. While these liberties provide retirees with control over their financial destiny, one must ask if they are properly suited and prepared to make wise investment decisions that will impact the rest of their lives, as well as that of their heirs, and who among wealth managers are poised to help them? Perhaps this an opportunity for automated investment advisors and traditional wealth managers to join forces.


Fidelity buys eMoney Advisor, but is it too much to chew?

Will Trout

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Feb 3rd, 2015

The wolves have been circling eMoney Advisor for some time now. But it is Fidelity Investments,  and not some pinstriped P/E firm, that has gobbled up the financial planning lamb. Should we be surprised? For the past few months, the Fidelity strategy team has been working overtime to buttress the firm’s position in the shifting wealth management universe. The announcement of a partnership with automated investment firm Betterment last fall was followed quickly by a tie up with online financial planning firm LearnVest. Now the boys from Boston are diving into the real-life planning space by acquiring a top-tier vendor. For Fidelity, the logic behind the acquisition is unassailable:

  1. Fidelity gets an important new touch point to the end-client, thus making the firm and its advisor network more relevant. As I discuss in my previous blog post,  financial planning software has given new life to the advisory relationship by allowing clients the means to input data and visualize its impact on their financial trajectories.
  2. Financial planning has become a core offering as demographics and the embrace of goals-based investing post-crisis have brought issues of retirement income and wealth transfer to the fore.   The software plays a key role by helping advisors to tell clients how far along they are to their plan goals at any given point in time, and to adjust client portfolios in response to changing needs.
  3. In our digital age, data has emerged as an increasingly strategic asset, and what better way for Fidelity to get a leg up on rival custodians? Do we really suppose Fidelity will not want access to the information submitted via client portals? Or a peek at the holdings of the 3/4 of RIAs that use eMoney but don’t custody with Fidelity?

The rub here is that these RIAs may not take the acquisition lying down. They may feel like second-class citizens under the new regime as well as pressured to move their assets. Such sentiment represents a real risk to Fidelity. Because if eMoney client firms vote with their feet, then what is the acquisition worth?

Changing times for exchanges

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Feb 2nd, 2015

Lackluster trading volumes in equity markets have not only hurt revenue of trading firms, but also have impacted revenue for stock exchanges. Equity trading revenue has traditionally been the main source of income for the exchanges, but exchanges worldwide have been looking to diversify their revenue base for some time now to reduce reliance on a single revenue source. Falling volumes in recent times have been a catalyst for exchanges in upping their games in this regard. A few recent initiatives by leading exchanges indicate that this trend is well underway.

Technology provides many developed market exchanges a solid opportunity for growth. Many of the world’s emerging markets are still at a very early stage of development, particularly regarding adoption of electronic trading tools and technologies. The adoption of electronic trading in the emerging world started just before 2008 but was somewhat set back due to the crisis; it is growing again. Some of these emerging market exchanges lack the wherewithal to develop required systems and technologies to support growing electronic trading volumes. The developed exchanges like NYSE, NASDAQ, Deutsche Borse, CME and their technology arms have been active in helping these exchanges in upgrading and modernizing their systems. At a time of stagnating trading volume and revenue, this provides the developed exchanges additional revenue stream. The developing exchanges gain superior technology, and at times the scope for easier integration with the developed market exchanges through such partnerships. Many examples can be found supporting this trend but it is not just an emerging exchange phenomenon as the recent news of NASDAQ providing a new trading platform for Japan’s biggest derivative exchange group suggests.

Another noteworthy trend has been exchanges looking for horizontal and vertical integration opportunities. In the wake of new regulations mandating central clearing of standardized derivative contracts, some exchanges, such as the Hong Kong Exchange, are looking to grow vertically by adding clearing capabilities. Furthermore, exchanges and exchange groups are also looking to expand geographically to seize new opportunities created by evolving regulations.

Exchanges are also looking to add capabilities supporting newer products and asset classes moving beyond just equities. Recent examples of the Swiss exchange launching a bond trading platform, or BATS exchange moving into the FX space are indicative of this trend. The growing adoption of electronic trading in these asset classes is helping in creating exchange type centralized trading venues moving away from traditional bilateral or OTC model. In addition, cross listing of products is another strategy that is being tried by some exchanges.

Along with product and technology, exchanges are also looking to capitalize on their data business. Recent acquisition of Russell Investments by the London Stock Exchange highlights this trend; other exchanges are likely to take this route to attract new revenue stream. One driver behind this would be to penetrate and gain foothold among buy-side players. Exchanges traditionally have focused solely on the sell side, and buy side presents a vast untapped potential for them.

All in all, busy time for the exchanges!

Toward a new definition of discretionary

Will Trout

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Jan 29th, 2015

The Unified Managed Account (UMA) has served since inception as a lightning rod for conflict between the sponsor firm and the advisor. Nowhere is the tension between customization and scale more acute. While the advisor may seek to customize a portfolio to justify his fee, the interests of the UMA sponsor typically are skewed towards scale.

Underlying this conflict, of course, is the question of who owns the client. In recent years, this age old issue has been complicated by the increasingly active role of the client in the investment decision process. The effect of firms seeking to get closer to the client has been increased client engagement, to the point where “discretionary” no longer means “hands-off”. The millennial tweaking assumptions around her self-serve, automated investments platform here represents one extreme; at the other end of the spectrum is the elderly bank trust client who has unquestioning faith in her advisor and may only occasionally glance at a statement.

I’d be interested in hearing if advisors have noticed the trend to greater engagement, and about the impact on their advised relationships. I’ll share any feedback and my perspective on the matter on this blog next week. In the meantime, perhaps we need to reassess our understanding of “discretionary”?

On the cusp: regional integration in Asia

Neil Katkov

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Jan 26th, 2015

It’s 2015, the mid-point of the decade and a good time to start looking at major trends in Asian financial services over the next five to ten years.

One of the major themes will be regional integration, which is another way of saying the development of cross-border markets. There are at least two important threads here: the ongoing internationalization of China’s currency, and the development of the ASEAN Economic Community (AEC) in Southeast Asia.

RMB internalization is really about the loosening of China’s capital controls and its full-fledged integration into the world economy. And everyone seems to want a piece of this action, including near neighbors such as Singapore who are vying with Hong Kong to be the world’s financial gateway to China.

The AEC is well on its way to becoming a reality in 2015, with far-reaching trade agreements designed to facilitate cross-border expansion of dozens of services industries, including financial sectors. While AEC is not grabbing global headlines the way China does, we see increasing interest in Southeast Asia among our FSI and technology vendor clients.

From Celent’s point of view, both trends will open significant opportunities across financial services. In banking, common payments platforms and cross-border clearing. In capital markets, cross-border trading platforms for listed and even OTC products. In insurance, the continued development of regional markets.

Financial institutions will be challenged to create new business models and technology strategies to extract the opportunities offered by regional integration. It’s the mid-point of the decade, and the beginning of something very big.