High Line Advisors LLC

management ideas for banks and broker-dealers

Posts Tagged ‘strategy

Why does the firm context matter?

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[Part 3 of Equities Context and Content]

There are five bank or broker-dealer businesses that can significantly enhance a firm’s Equities business. The capabilities and resources “owned” by these other business units can provide a competitive advantage in attracting equity investors:

  • CORPORATE BANKING
    Direct lending and corporate finance can produce two of the resources most valued by investors: new issues and access to corporate management. The Equities business can in turn provide market color on previously-issued equities and related derivatives to bankers and their corporate clients, earning mandates for share repurchases and block trades. The two business units can also share the cost of Research within applicable regulatory limitations.
  • PRIVATE WEALTH MANAGEMENT
    Retail can be a powerful contributor to an Equities business through the direction of order flow and stock loan balances. A captive source of liquidity and commissions provides a boost to the sales and trading unit, and a unique supply of hard-to-borrow securities can differentiate the prime brokerage unit. A retail distribution network may be viewed favorably by both corporate clients awarding new issues and block trades, and asset managers seeking capital.
  • TRADING IN OTHER GLOBAL MARKETS ASSET CLASSES
    Trading capabilities in complimentary asset classes can provide research, market color, and occasional trade facilitation for equity investors. Single-name credit products such as corporate bonds and credit default swaps can provide investors with deeper insight into corporate capital structures. Index, currency, and rate products offer investors a means to hedge macro exposures in their portfolios. Commodities trading expertise can also provide macro insights as well as deeper understanding of companies in the energy, agriculture, and metals sectors. Broader trading capabilities can provide solutions for cash and liquidity management in repo, government securities, and corporate commercial paper.
  • CUSTODIAL/TRANSACTION BANKING
    Custodial Banking can strengthen relationships with both corporate and investor clients. On the corporate side, credit lines, treasury services, cash management, and payments processing can lead to increased access to management and participation in new issues. On the investor side, clearing, collateral management, custody, securities services, and fund administration can result in operational dependencies between the firm and its investor clients. Banks with a deposit base may enjoy a higher credit rating, thereby enhancing the ability of an Equity business to compete in prime brokerage and over-the-counter derivatives.
  • ASSET MANAGEMENT
    There are a number of regulatory constraints and perceived conflicts that weigh on the synergies between an Equities trading business and a related Asset Management subsidiary; however, a percentage of agency order flow from the Asset Management arm may be directed to the Equities business, and access to stock loan supply can support its prime brokerage and derivatives trading efforts. Partnership in the creation of equity-linked ETFs and structured notes can generate product supply for retail and wholesale investors. Apart from trading, Asset Management provides a means to monetize Research, in some cases alongside of investor clients.

Figure 1 illustrates some of the contributions of these five business units to the traditional business of Equities and its clients:

Figure 1

Figure 1: How Firm Context for Equities Enhances Investor Value

Clients care about what a bank or broker-dealer can do for them overall, without concerning themselves with a firm’s internal product boundaries or management organization. When broader capabilities are called for, collaboration with other internal business units becomes critical to the success of the Equities franchise.

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What do investor clients really want?

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[Part 2 of Equities Context and Content]

The needs of investor clients are complex and involve much more than the execution of orders. By convention, clients rely on their execution commissions (and, in some cases, financing balances) to obtain additional resources from their brokers. As clients ascribe less value to pure execution, they are directing the bulk of their commissions toward more valuable services and scarce resources.

Table 1 shows the capabilities of a bank or broker-dealer, some or all of which may be meaningful to an institutional investor:

Table 1

Table 1: Components of an Investor Client Value Proposition

The table also illustrates two challenging aspects of Equities businesses: First, that there is no direct revenue associated with many of these resources and services. Second, that these resources and services can lie beyond the traditional purview of Equities management. A successful Equities business must deploy the full capabilities of its firm and direct them at investor clients to access all potential sources of revenue, direct and indirect.

Equities Content and Context

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We are launching a series and associated white paper entitled “Equities Content and Context: Comparative Business Models Among Banks and Broker-Dealers.”

“Don’t get involved in partial problems, but always take flight to where there is a free view over the whole single great problem, even if this view is still not a clear one.”  —  Ludwig Wittgenstein
“What you see is what you get.” — Flip Wilson

Article at a Glance

Declining revenues and pending regulation are forcing firms to review their Equities businesses. Competing Equities businesses differ greatly from firm to firm in the breadth of capabilities. As a result, some firms may be unable to access revenue pools that make competitors appear more successful in comparison. A closer look at how a firm’s strengths appeal to specific client segments can reveal why an Equities business is underperforming relative to the market or its peers. An understanding of “boutique” models can provide insight for large banks and smaller broker-dealers alike, whether they are contemplating further investment or a pull-back.

The value of an Equities business to investors is largely dependent on the capabilities of the firm in which it operates. Despite an advantage in breadth of capabilities, large firms that fail to deliver a wide range of products may end up with boutique-like results. Small firms forced to compete on a limited product set can still distinguish themselves in specific market segments.

This article explores the following questions as they relate to managing an Equities business:

  • What do investor clients really want?
    What are the products, resources, and services that are most valuable to their business?
  • Why does the firm context matter?
    How can other business lines contribute to the success of an Equities franchise?
  • What constitutes a “full-service” Equities business?
    What do the largest, mature Equities businesses offer to clients? What additional revenues do they capture?
  • How is client value converted into revenue?
    How are products positioned as client solutions?
  • How do Equities businesses align with investors?
    Which clients is the firm most likely to attract?
  • What are the partial or “boutique” Equities business models?
    How do firms successfully differentiate? How can a regional or sector-based strategy succeed?
The article and its diagrams will be provided here in subsequent posts. If you can’t wait for the serialization, download the full article here.

Streamlining Equities

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High Line Advisors has published an article entitled Streamlining Equities: Ten Operating Strategies for Competing in Today’s Markets. A PDF of the article is available here.

“Whosoever desires constant success must change his conduct with the times.” — Niccolo Machiavelli

Article at a Glance

Equity sales and trading (“Equities”) is a core business for many banks and broker-dealers, on its own merits and because of its synergies with corporate banking and wealth management. Like all capital markets businesses, Equities under increasing pressure from electronic trading, reduced leverage, increased capital requirements, regulation of over-the-counter derivatives, and limitations on proprietary trading.

New operating conditions call for a leaner operating model to protect revenue and maintain growth, starting with a reevaluation of the product silos that require so many specialists. Profitability also depends on the firm’s ability to deliver resources to clients and capture trades with greater efficiency. Success requires re-thinking the entire legacy organization, looking at new ways to combine or expand roles, and reevaluating the skills that are needed on the team.

These ten initiatives in sales, trading, and operations, can help management streamline the Equities organization for greater top line revenue and increased operating leverage:

  1. Recast “Research Sales” for delivery of all products and firm resources
  2. Create “Execution Sales” to maximize trade capture across products
  3. Rebalance Coverage Assignments to foster team selling for client wallet capture
  4. Fortify Multi-Product Marketing to maximize product penetration and client wallet share
  5. Deploy Sector Specialists to generate alpha and raise internal market intelligence
  6. Implement a Central Risk Desk to consolidate position management and client coverage
  7. Merge Secured Funding Activity to manage collateral funding and risk
  8. Centralize Structured Products to eliminate redundancy and internal conflict
  9. Reengineer Client Integration for speed and control of non-market risks 
  10. Normalize Client Service to eliminate duplicate processes and improve client experience

Finding New Revenue Opportunities

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[part of a series on hedge fund sales coverage]

Existing client revenues may be sustained or even increased in a bull market, but a firm stands a better chance of achieving growth even in bear markets if planning is deliberate and focused on specific opportunities. Fortunately, new revenue opportunities may be found through direct client feedback and some basic marketing.

Sales managers need a minimum amount of useful data that can be acted upon for maximum impact on revenue. A practical client plan must be succinct, easily prepared and easily understood. The planning must be done by the salespeople who know the client best, but supported by data and standards for comparison. Many client planning processes either have too little data or become frustrated in their attempts to collect too much detail. At one extreme, plans based on salesperson intuition are not robust and may be clouded by incentives. At the other extreme, it is impossible to collect precise data from clients who are unwilling to disclose the details of their product utilization or spending to the broker community as a whole. Industry-wide surveys and fee pools may be directionally useful but are not specific enough to optimize the unique relationship between an individual broker and client.

Developing Client Plans

In our experience, a basic but useful client plan consist of three items: an organization chart of the client at the fund level, a budget showing revenue expectation at the product level), and one or more action items required to achieve the budget.

At a minimum, an organization chart for an institutional investor should indicate:

  1. assets under management (using size as a rough proxy for revenue potential)
  2. allocation of assets among various investment strategies (using strategy as an indicator of product and resource needs)
  3. decision makers for each strategy (to identify whom to target for relationship building)

It is best to ask the client directly rather than to rely on assumptions that may be incorrect or incomplete. A map of the client organization can expose any misconceptions regarding their investment activity and lead to the discovery of new revenue opportunities. For example, a convertible bond salesperson may not register that the client also has a distressed equity fund until the salesperson is asked to map the entire client organization. The investment strategies used by the client immediately suggest product utilization, which can be confirmed in subsequent discussions with the client. Existing relationships can provide the introductions needed to open up new trading lines. Simply “connecting the dots” in this way does not require elaborate planning and can yield immediate results.

The next step is to identify potential for revenue improvement. We suggest that detailed knowledge of a client’s wallet are not necessary to manage a successful sales effort. Instead, only a few key pieces of information are needed, and these may be readily extracted from the clients themselves:

  1. What is the firm’s rank with the client? For each product the client trades (i.e., single stock cash), where does the client currently rank the firm? #1? Top 3? Top 5? First tier? Second tier? Allow the client to define the way they rank their brokers.
  2. Is it possible for the firm to do better? (i.e., move up in the client’s ranking).
  3. If so, what would be required? Ask the client what actions it will take for the firm to move up. This can be anything from senior management attention, more outgoing calls from analysts, changing sales coverage, or raising capital. These become the action items.
  4. What would it be worth to the firm? Ask the client to estimate the incremental revenue opportunity to the firm in each product if the the actions are taken. The sum of historical revenues plus these incremental amounts becomes the client budget.

The questions may be posed by sales people or independent persons or who are not conflicted over critical feedback. It is in the interest of the client to answer these questions, as they seek honest feedback and express a willingness to improve. Once the feedback is provided, an implicit contract is created between the client and the firm that if requirements are met, revenues will follow. It is equally important to find out if the client intends to reduce product trading, or if there is no way for the firm to do better.

When combined with historical revenues, the answers to these questions comprise a business plan for the client: prior revenues (reflected in the initial segmentation) may be adjusted by the amounts indicated by the client as potential increases or expected decreases. The plan must also document the actions or resources needed to achieve the budget. Clients with greater potential for increased revenues may receive higher tiering in the next iteration of client segmentation than suggested by their historical revenues alone.

Marketing From a Product Perspective

While the interview process seeks to uncover opportunities from a client perspective, a product-driven process can yield additional results. Each product area should have its own view of the client base that covers existing clients as well as prospects, and the priorities of the product areas can be represented in the segmentation discussion. A two-pronged analysis that covers the market from both client and product perspectives leads to a more thorough capture of opportunities. The matrix approach also improves governance.

The “product walk-across” report is very powerful for highlighting new revenue opportunities arising from introducing a client to additional products. Some opportunities are suggested by gaps in expected trading patterns: for example, hedge funds that trade ETFs may be candidates to trade index swaps; clients who trade cash and options in the U.S. but cash only in Europe are candidates to trade European options; clients who trade cash electronically may also be candidates to trade options the same way; macro investors who trade futures may be candidates to trade ETFs. Products that are similar or interchangeable may be new to the client or simply traded with another broker.

Product marketing is a process of identifying target clients and managing a concerted effort or “campaign” to introduce the targets to the product. Product marketers can identify candidates from gaps in the multi-product revenue report, and also draw from anecdotal market information and industry surveys that highlight clients who are known to trade in specific products with other brokers.

Clients are more likely to try a new product if it solves a problem for them. The product on its own merits may be undifferentiated, but the broker may be able to add value by identifying an application for the product in the client’s portfolio. Solutions-based marketing creates “demand-pull” which can superior to “product-push” in stimulating or accelerating product utilization. Clients are also more likely to take a meeting on portfolio themes than product presentations. Common thematic campaigns include risk management and hedging, emerging markets access, and tax efficiency.

The opportunities uncovered though product marketing may be cross-referenced and added to the client plans. The product-driven effort may reinforce findings from client interviews, but should also find potential opportunities that the client itself may not have recognized, as well as identifying clients who are not otherwise covered by existing relationships.

Hedge Fund Coverage

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Our recent post on Team Selling as an alternative to cross-selling prompts a larger series on hedge fund coverage. In future blog posts, we will provide some proven techniques for managing complex institutional investor clients across multiple product areas of a bank or broker-dealer. While these techniques have been applied successfully in a global institutional equity business, they may be extended to fixed income or other multi-product businesses that serve the same client.

UPDATE: High Line Advisors has published an article on this topic. Hedge Fund Coverage: Managing Clients Across Multiple Products is available upon request.

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“Team Selling” Over “Cross-Selling”

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[part of a series on hedge fund sales coverage]

Cross-selling” initiatives have always struck us as weak efforts to encourage client-centric behavior in essentially product-centric organizations. Incentives often work against the intent, as sales professionals understand their compensation to be driven by revenues in one product line, and annual bonus discussions fail to reinforce broader behavior.

Most broker-dealers are organized by product. The best aspects of product-centric management are risk discipline, operating efficiency, domain expertise, best-of-breed products, and an excellent client experience. Product-centric management works well when there is a 1:1 relationship between clients and products, as was the case historically. Modern asset managers, hedge funds in particular, are not so well-behaved, and may deploy many products or asset classes within a single portfolio. Without a means of communicating horizontally, product-centric organizations can miss overall client activity and related revenue.

What is needed is an approach to balance product discipline with client coverage across multiple products. This requires a “1:many” solution for covering clients and measuring revenue across products. We call the process of coordinating sales coverage of one client across multiple products “Team Selling.” The team is collectively responsible for covering a client, and collectively responsible for maximizing share of the client’s “wallet,” rather than market share for any particular product.

Harvard Business Review recently conducted an interview with Admiral Thad Allen, USCG (Ret.) (ref. “You Have to Lead from Everywhere” by Scott Berinato). Admiral Allen’s comments on crisis management can be applied to the coordination of multiple product specialists in covering complex clients:

“You have to aggregate everybody’s capabilities to achieve a single purpose, taking into account the fact that they have distinct authorities and responsibilities. That’s creating unity of effort rather than unity of command, and it’s a much more complex management challenge.”

In the context of institutional sales, “unity of effort” implies coordination among separate individuals from different product areas covering the same client (or multiple buying centers at the same client institution), and the “single purpose” they are aiming to achieve is to maximize the profitability of that client.

Using a hedge fund investing in long/short equity as an example, three buying centers can be defined by the investment decision (what to buy), the execution decision (how to buy or express the investment), and the financing decision (how to pay for it). In general, these decisions are made for the fund by different individuals or groups, with the portfolio manager, chief investment officer, or analyst consuming resources to determine what investments to make; the head trader or derivatives specialist deciding how orders are executed, and the chief operating officer or chief finance officer deciding how and where to source financing or borrow stock.

investor client wallet

Traditionally, institutional equity sales teams have been comprised of Research Sales professionals covering buy-side analysts and portfolio managers, Sales-Traders and Derivatives Sales people covering buy-side trading desks, and Prime Brokerage or Stock Loan professionals covering the fund’s COO and CFO.

These client-facing professionals tend to be grouped by product, with Research Sales and Sales-Traders associated with cash, Derivatives Sales with derivatives, and Prime Brokerage and Stock Loan sales people associate with those financing products respectively. In a product-centric organization, these sales groups tend to focus on maximizing the revenue in their respective products, without regard for or regular communication with sales people in the other product silos, even if they cover the same institution.

Without breaking the product-centric organization, management can encourage coordination or “unity of effort” across product areas in covering the same client, simply by empowering teams with information on client revenue across all products, (in addition to the traditional reporting of product revenue across all clients). With the common goal of maximizing wallet share and profitability, a client team can work together to make introductions, deliver resources, solve client problems, and fill revenue gaps across the product spectrum.

While easily piloted, the first challenge in team selling is scalability. Scale is achieved when the same team of sales people from different product areas cover the same set of clients. When this occurs, the number of virtual teams can be fewer and their team meetings can be less frequent and more efficient. Rebalancing coverage assignments is difficult but can be rewarding over time: the organization can over a large number of clients as teams operate independently and simultaneously. Team selling is also a compliment to any key account management program, with team leaders corresponding to relationship or account managers. The larger the account, the more senior the team leader. Armed with the right information, anyone in the organization can contribute to or even lead a client team.

Culturally, teams must believe that they will be rewarded for overall increase in profitability of the clients they cover, not only the revenues in the product they are associated with. Client revenue production, product penetration, and profitability can be added to traditional sales metrics in the determination of compensation.

While cross-selling is a product-centric behavior that is by its nature a secondary priority for sales people, team selling encourages client-centric behavior and awareness of the maximum revenue opportunity from each client that the organization covers.

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