Wayne Gretzky famously said, “I skate where the puck is going, not where it has been.” In Novarica’s first Broker-Dealer Technology Research Group of 2021, Mitch Wein and I discussed where broker-dealers are in terms of technology adoption and where they are heading in an environment characterized by seismic shifts in technology and demographics.
Platforms
One of the key areas of discussion focused on vendor platforms that support mission-critical functions for broker-dealers—specifically, Broadridge. The group discussed Broadridge’s emerging strategies based on its recent acquisitions (e.g., M&O, FDS-Caesar) given aging technologies and increased demand driven by business needs and compliance requirements.
Broker-dealers receive and process data from a variety of sources. One participant expressed that they spend significant time moving data between systems and today are leveraging short-term fixes. Data often arrive in several formats; broker-dealers need to transform the data they receive into consistent, consumable forms so the organization can process it through compensation, compliance, and operations and then populate locally managed books and records platforms. One participant expressed satisfaction with the quality of the data feeds from Broadridge but noted that the vendor’s acquisitive nature could mean fewer choices will exist for future-state technology solutions.
We discussed several vended solutions across different platforms (i.e., brokerage vs. direct subscription) as potential alternatives to options available directly from clearing firms (e.g., NFS). One participant mentioned that there was another option they had explored as they framed an internal technology roadmap. The company in question was Impact Financial Systems, which is now part of iPipeline.
Further discussion on these subjects is already planned, including an off-cycle session ahead of the next quarterly meeting to review issues related to the books and records/compensation platform issues. A combination of business needs (e.g., the growing importance of the RIA space) and compliance issues are raising the interest in this space, particularly as organizations prepare for heightened scrutiny from the SEC and FINRA.
Cloud Data Storage
Next, we discussed cloud-based operational data stores (ODS). Mitch emphasized the enhanced flexibility, security, and cost management benefits associated with cloud ODS and contrasted this with the inflexibility associated with on-premises storage.
Not all forms of cloud-based storage are created equal. Unlike multi-tenancy cloud, which may not be as secure, single-tenant cloud-based data stores can offer greater security than most insurance companies or broker-dealers can provide internally. Broker-dealers need to ensure that their cloud storage approaches are (1) auditable, (2) utilize an appropriate framework, and (3) meet SEC requirements. The cloud and its advantages are desirable if it meets these three conditions.
APIs
Turning data into actionable information is foundational to many business activities under the financial services umbrella. Given the high frequency of investment decisions and transaction volumes, broker-dealers are particularly aware of the importance of effective operational models. APIs are becoming increasingly crucial for integrating with third parties, text ingestion, and digitizing core business processes.
As a broad rule of thumb on the deployment of advanced technologies, retail banks generally operate five years ahead of the leading edge of the insurance industry (i.e., P/C insurers), which is roughly five years ahead of life/annuity insurers. Given the nature of what broker-dealers do, this can put them at odds with general deployment patterns in their parent life insurance companies.
The pandemic has motivated some life insurers to speed up their digitization efforts in fundamental ways; broker-dealers can position themselves to take advantage of these efforts. Beyond the expanded use of APIs, this extends into other emerging technologies, including chatbot and RPA offerings.
The speed at which emerging technologies become widely adopted depends largely on technical integration, which is influenced in turn by the maturity of APIs and data. Older recordkeeping systems may not be able to support APIs, thereby limiting their adoption. However, there will be more pressure to build out APIs if proprietary and non-proprietary products continue to be sold.
As broker-dealers develop APIs, they should work to orchestrate processes in ways that are customizable for the specific needs of their businesses. A review of key findings from recent Novarica research on Emerging Technologies in Insurance applied against the retail investment space was particularly helpful as the group shared experiences and expectations for the future.
Novarica’s Broker-Dealer Research Group is a moderated forum open to insurance-carrier-owned broker-dealers. We are looking forward to our next session, scheduled for April 8, 2021.
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