Broker 2.0: It’s Now or Never for Firms to Stay Relevant and Avoid Extinction

By John Omahen, Head of Securities Processing, FIS

With record trading volume and a new generation of tech-savvy investors to acquire, the future for the brokerage industry looks bright. There are new customers entering the market with decades of potential activity ahead. But this has been a boom unequally spread across the market. For smaller and mid-sized firms, which currently account for 90% of the American market, that future looks decidedly more treacherous. 

The latest FINRA statistics set the scene. In a ten-year span, the number of registered brokerage firms has dropped 25% to 3,435. That means since 2010, over 1,100 firms have either closed down, been acquired or merged with other firms. For smaller participants, the threat of going out of business is very real. But consider the Roman philosopher Cicero: “that last day does not bring extinction to us, but change of place”. A new market is a chance for transformation and ultimately rebirth for America’s small and medium sized brokerage. This is a chance to reimagine the brokerage model through technology modernization, a new model I call “Broker 2.0.”

One area of opportunity for brokerages lies in the changing nature of investor needs and behaviors. This shift was no more evident than during the height of the COVID-19 pandemic. Restricted to activities from home and easy access online investing platforms, a new generation of investors turned to  stock market volatility to generate income. Many of these investors – certainly the loudest ones – used complex financial instruments such as options and bragged about investments on online communities such as Reddit. This is not necessarily the demographic or behavior of the future. Regulators may tamp out some wilder strategies, while changing market conditions mean chasing the VIX isn’t necessary a sustainable strategy. But what the maelstrom of last spring created was a new group of people open to learning how to invest and with evolving needs around financial advice. 

Many of those investors will soon be richer. We are in the process of the biggest wealth transfer in history. An estimated $68 trillion will move from boomers to their primarily millennial descendants. This new generation are very different in their investing preferences and are just as likely to own cryptocurrency as stocks and bonds. In fact, a survey from Piplsay found that 49% of millennials own cryptocurrency compared to 38% of Gen Xers and 13% of GenZ. Cryptocurrency and digital assets will be a beneficiary of this wealth transfer.  

Broker relationships will not always be passed down as well. During FIS’ EmeraldX conference, Hilltop Securities’ Anton Berend revealed that two thirds of wealth recipients will fire their parents’ financial advisers soon after receiving the wealth. Brokerages must strike the right balance of providing modern functionality, such as a variety of products and asset classes to trade with and intuitive risk analytics, to self directed investors, and those seeking more hands on advice. They must act the way all wealth management firms do, in addition to being a platform to buy and sell securities. Providing holistic financial advice to new clients on how to deal with their newfound wealth, as well as tax advice, will be essential to retaining clients and attracting new ones. 

Firms must optimize the strategy that best suits their business. Smart and efficient decisions must be made. A strategy that achieves operational efficiencies through consolidation of tech infrastructure is a good starting point. According to FIS’ 2021 Readiness Survey, 40% of brokerage respondents will prioritize making operational efficiencies in order to pursue growth over the next 12 months. Furthermore, 38% said they would consolidate IT infrastructure to fewer but more strategic tech vendors to improve competitiveness, the highest out of all factors assessed. Working with the right vendors, who have already gone through a series of tech iterations and the learnings and corrections these bring, can provide significant strategic long-term value. Firms who successfully implement these two strategies will create a strong foundation to then build a strong digital ecosystem on top. 

To address which areas to consolidate, upgrade or rip out all together, identify the reasons why a current technology stack may stand in the way of progress. With the DTCC proposing a two year roadmap to shortening the settlement cycle to T+1, firms must be on alert for the impact and strain this will place on tech systems. T+1 should act as a trigger point or catalyst for many firms to finally upgrade systems. This will impact trade affirmation, allocations and global settlements, including FX, securities lending, settlement errors and fails, prime brokerage, IPO and secondary markets, corporate actions, batch cycles, ETF creation/redemption and match-to-trade. 

With the basic infrastructure requirements in place, then firms can push into advanced technology deployment such as machine learning and artificial intelligence. To be blunt, some ‘advanced’ technology for brokerage also includes cloud or SaaS-based systems that are now standard elsewhere in the financial sector. But the opportunity exists to leapfrog over intermediary steps towards deploying new systems that improve operational efficiency and negate the need for expensive upgrades. 

These systems can also enable seamless remote work, something 46% of brokerages in the FIS Readiness survey said would be a major operational challenge in the next year. Regulators are ratcheting up requirements around security of customer data – at the same time attempted and successful attacks are on the rise. What is considered the ‘bare minimum’ keeps rising. The punishment for leaving data exposed or underprotected could be serious fines and lack of trust from current and potential customers.  

The pandemic showed that brokers – like those in so many industries – now have the tools and capabilities to rapidly transform their businesses. Those that embrace the opportunity will be the ones to find new business models that allow them to thrive in a quite evolved investment environment.