Sibos 2020: View from the Top with Ronald O’Hanley, Chairman and Chief Executive, State Street

[Music] so [Music] [Laughter] [Music] foreign [Music] [Music] hello i'm dominic cobstone co-founder of future of finance my guest at cyboss today is ronna hanley chairman and ceo of state street corporation ron you've been in the asset management business 30 years now you began your career at mckinsey where you founded the asset management practice uh you've held leadership positions in asset management at bny mellon fidelity as well as of course at ssga before making the switch to asset servicing so you in the course of those 30 years have seen the rise and rise of asset management you've seen its impact on asset management revenues you've seen state street in fact overtaken despite being the inventor of etfs uh in terms of aun by some of its competitors and you've late seen asset management multiples dip below those of asset servicing uh companies so to an outside observer it looks like a great time to have made the switch from asset management to asset servicing but what was your thought process in making the change well dominic first of all it's it's good to be with you here and i'm glad that we're actually able to do this at least virtually i don't necessarily view this as a switch dominic and maybe it's because i think that increasingly the line between asset management and asset servicing is becoming increasingly blurred if you go back much earlier in my career there was a very clear delineation and much of asset servicing was essentially about serving the funds so you know somebody managed the funds and somebody administered the funds and there was this neat little demarcation i think that's less and less so and if you think about the challenge that managers have to uh to add uh alpha and to do so on a persistent basis um much of that is about uh about their data and i'm sure we'll be talking about data a lot but much of that is about their data and their ability to marshal data in a way and if you think about who's best positioned to do that and enable the asset manager to perform better it is the asset servicer so for me um i saw this line becoming increasingly uh blurred i uh saw my colleagues uh in the industry uh some of them running you know extraordinary firms increasingly challenged by these operational data and technology issues and for me it seemed like a logical transition to uh help because in the end we all have the same purpose we're here to help our investors serve their clients and to create better outcomes for their but their clients whether we're actually managing the money for them or serving the assets it's all about that same purpose so for me it doesn't feel like a switch you describe the line as blurred but asset management asset servicing are of course intertwined uh right free compression in asset management finds its way into decompression then in asset servicing as well now state street obviously is heavily invested in both those industries and indeed cost cuttings been a very large part of the answer in asset servicing in recent years and state suite itself has had a series of cost cutting initiatives in recent years are we reaching the point now where the error of cost cutting if you like is over and a whole new era of opportunity is beginning and if so um how can those opportunities best be seized by state street are you looking at diversifying into new areas are you looking at making acquisitions for example so dominic you've asked a lot in that question let me try and parse it a little bit i think in terms of um of what what the nature of the opportunity is opportunities get defined by what clients need and certainly our clients are always looking for a an attractive fee but increasingly now what they're looking for is how do you help us with our operational and technology needs if you think about this from a let's start with an asset manager asset managers uh particularly the largest ones been around for a long time they have built a technology and operational stack that basically reflected the way they grew they started out with a narrow set of uh of assets serving a narrow set of asset classes they expanded so you know they might have started inequities they added fixed income they added a new order management system they added new risk analytics and you're left with this kind of very complex operating model and technology stack that doesn't talk to each other that by the way if you work your way through the investment process starting with the decision to actually buy or solo security you've got these various books of record the trade book of record the best booker record the accounting book a record there's lots of reconciliations in there and the ability to employ data you're generating enormous amounts of data but data is useless if it can't be employed properly so for us uh i mean certainly we will always be focused on lowering our unit costs and being able to deliver at a lower cost and there's lots of tools that we can use there but it's much more now about value in delivering value whether that value is helping these firms consolidate come up with a new modernized operating model whether it's helping them manage that data and employ that data i mean in in many respects the very best data is sitting actually with our clients everybody talks about getting big data or unstructured data from elsewhere some of the best data is right there but how do we get it uh marshall that to them and get it so that it can be employed and used in the investment process that's the big key question and that's increasingly what our clients are asking of us you've talked about data as a big opportunity now what's the what's the competitive edge that that state street has in the security services industry over say aladdin and uh perhaps a supplementary to that what sort of areas of asset management do you think the data is going to make most difference is it going to be in investment performance or is it going to be an internal efficiency or will it be say in fund distribution yeah i mean i think that the data has value in in all the above but let me start with the first part of your question with uh with the edge um if you think about it dominic that the challenge in this industry has always been that uh given these different books of record and given the the process from you know when a a trade or an investment is a kernel of an idea right through to when it is actually reported to whoever the beneficial owner is um that data gets used and transformed repeatedly and every time it's transformed this reconciliation and every time there's a reconciliation there's a danger in fact that the data is is has lost its purity and therefore can't be reused uh further upstream back in the investment process so the advantage of actually being having a view on this process from front to back is along these data lines because we're involved in the reconciliation uh in each step of the way uh we can take that data as it comes out the back and and put it back into the investment process so if you think about the data journey that the industry has been over under i mean where most of the effort has been around is let's try and reduce these reconciliations or automate these reconciliations so that we're not spending as much on that the the newer frontier here is how do we take that data on a near real-time basis and inject it back into the into the investment process so we have a client that runs a very large uh quantitative global equity portfolio and the way they operate is the way many others operate right there's a there's a model uh that's uh that's driving what trades are going to happen uh that this that trading kind of gets set in the beginning of the day and then gets executed throughout the day across time zones what we've been able to do with this client is again using their data and marrying it to what's happening in the market to be able to feed back into the model here's what's changed intraday and may in fact have relevance on trades that you'd plant to let's say in hong kong or in london so it's those that's an illustration of the kinds of ways that you want to be able to take this data and enable it to be employed in a way that actually adds value to the investment process and it's very hard to do that if you don't have um some line invisibility on the data from the front to the back now i've been around long enough to remember one of your predecessors march carter describing state street not as a bank but as a an information business and having had this conversation when cybos was last in boston back in 2014 i think big data would have been a very large part of our our conversation then as well the barriers seem to be as you pointed out today that the data is inside your clients it kind of belongs to the clients does that put constraints on your ability to use the data to create valuable products and services for the clients in other words is the asset servicing side of the business constrained by the fact it's not really your data yeah i mean in the end at least the data that you're referring to dominic is the client's data so part of this is is is an education in terms of uh where is this data how can we unlock it how can you use it and what does it take for us to help you unlock it and those tend to be fairly easy conversations more broadly there's the aggregation of data and in that case uh you know it's a bit of a mixed bag some want their data included in the aggregation some don't i mean interestingly most want to see the output of the aggregated data they just don't want to contribute their data to it so uh you know you have this free rider issue that sometimes develops but i think you're seeing a deeper and deeper understanding of data and also a greater ability to safeguard data than there was in the past i think that uh clients are making nuanced decisions on this i mean they're they're doing that cost benefit trade-off obviously the data needs to be protected uh to the extent to which there's privacy elements to it that has to be protected absolutely but um i think that clients increasingly are understanding that what they get out of the data is very much function what they put in now you've you've described very well this new data driven service model but you did something a couple of years ago which was very interesting you spent 2.6 billion dollars acquiring charles river development which is a front office provider so you're making a move out of the back and middle office you're looking to extend your services uh not just to to the asset owners of the traditional clients of state street but to other asset managers are you looking to create here like a one-stop shop uh for asset managers or are you looking to do something else yeah i think it goes beyond a one-stop shop um again if you go back to where we started in this conversation historically the asset services really have been about the extreme back of the process the back of the back office fund custodians fund accounting basically services for vehicles you know be they funds collective trusts increasingly the challenge that asset managers and by the way asset owners have is their own management company right how they're managing how they're managing data as we've been talking about the management of their operations how they put in place this whole technology and operational stack and have an efficient uh an efficient operation in place and for us uh state street has been on a near continuous journey from the back office towards the front office as you know we're the largest middle office provider now in the world and the middle office is essentially providing back office functions or service uh being an outsourced provider of back office functions for asset managers the front office was the missing piece it goes back to the data conversation we talked about earlier but it also goes back to if you're really trying to comprehensively help our clients overhaul their operation and technology you have to have that front to back view in terms of a one-stop shop i mean short to the extent to which the various services that we have fulfill what the client needs we're more than happy to do that but for us there's we we do understand that there's a lot that goes into that front to back um and there's very specialty uh needs that some clients might have so we we built it on two principles one is that it would be interoperable interoperable with other custodians interoperable with other providers such as aladdin such as bloomberg and then second is open architecture right we'd be the first to say that we do not have a monopoly on great technology so we built it as open architecture we've created a number of partnerships with key technology and data providers and where it operates seamlessly so think about it less as a one-stop shop and much more as a platform upon which uh really good services can be attached to it to help customize it as a client might need or to bring in specialty capabilities that we might not have you've described you're describing here the the alpha platform and you you just mentioned it's open architecture one of the principles behind it and again had we had this conversation 20 years ago the answer for asset managers was to lift out their back and middle office and state street pioneered that that process but all those transactions proved very difficult and had to be repriced and rethought as time went by i think quite a lot of your competitors as a result of that started rethinking how they work with with asset managers as well and we're seeing uh some of those competitors um forming partnerships with with blackrock uh aladdin for example uh and uh they are i suppose looking to to compete with with what you're doing by a different route what's different about your open architecture alpha platform and the sort of partnerships they're forming with aladdin yeah i mean i think the difference is is that we have architected and owned the platform front to back and that we're providing interoperability or open architecture provision of services um i think many of these partnerships at least the ones that i understand uh in effect the custodians providing a limited number of services so the overall kind of the ability to provide a comprehensive solution to a complex asset manager is fairly limited when you don't have that full architecture that full front to back architecture and second just the available revenues to you but again i'd go back to um the a lot has been talked about about the you know this competition uh between aladdin and charles river latin and bloomberg and charles river the biggest competition is not actually um in our minds is not them it's actually the installed base of what's in an asset manager it's probably the biggest competition as an excel spreadsheet because if you look at the way a lot of these things have been built in some of these large uh long-lived investment managers again as i was saying earlier it's a very complicated set of things that have been pieced together over decades and it's how you make sense of that uh going forward um in terms of partnering with others i mean we also partner with aladdin we're proud to do that they're very uh we're proud of what we do with provider aladdin so this space is going to get resolved over time i think that to be able to operate in this space you can't just be a custodian and fund servicer you have to have a view and a capability uh on front to back what happens in an asset manager or an asset owner and to be able to provide some or all those services some would would say that the risk here is is at risk being concentrated operationalists getting concentrated with one or a small group of providers creating single points of failure what do you say to asset managers or indeed their clients the asset owners who argue that their providers should be diversifying those risks by working with multiple providers i'd be very interested to hear what experience your clients have had during the covid19 pandemic because i guess it's given a test of those plans with live ammunition over the last six months so what's the answer to people who say you're concentrating risk i mean to your point of coven 19 pandemic the associated economic and then market crisis that occurred in late march and early april was certainly a test of resiliency and as far as i can see i think the industry passed quite well i mean you you heard of some things out there but they tended to be episodic and periodic listen uh these institutions uh first of all they're highly regulated most of the custodians are gcips uh you know so they're they're subject to the highest level of regulation there's a lot of time spent on regulators by regulators on operational resiliency having said that it's a legitimate concern and again it goes back to this idea of open architecture and interoperability for example we have clients that in fact are migrating uh to this alpha front to back platform but are going to continue to have more than one custodian in there and that works we can do that custody uh moves these days i mean these used to be things that everybody feared um they're actually pretty easy to do now um so the ability to provide um to provide backup to provide an asset manager to have its own resiliency plan uh in place is actually pretty clear and straightforward and as long as these platforms are built so that they are interoperable and that you can have that kind of change that i think that this risk is manageable and do you just before we leave the subject of covet 19 in the pandemic do you feel that the experience of asset managers during this period you just mentioned that they seem to survive it pretty well do you think it has changed their attitude towards how they run their operations are they looking to accelerate things they were going to do anyway or are they saying well that worked pretty well no need to change now um first of all i was referring earlier to the custodians in terms of how they performed i think asset managers uh if anything this trend towards how do i think about my operating model has been accelerated in this there was maybe a brief pause is the call it what you want the hurricane or the tsunami kind of hit us in march and into april but all of the conversations that we had started before the pandemic have continued some new ones have started even though we can't see each other and can't work these transitions uh physically some new ones have started and i think it's accelerated this idea that we need to have a scalable future-proof kind of operating model that we need to as an asset manager to focus on what is our edge as an asset manager what can we do and is you know running our back office or running our technology stack or you know having our own order management system really part of the edge or should we be putting our money elsewhere so i mean we we have the you know the good fortune and the honor to be working with some of the largest most successful asset managers in the world and oftentimes the conversation is around it's not that we can't do this or that we can't afford to do this it's just not a good use of our money and more importantly our share of mind that we need to be focused on one how are we going to create more alpha and invest return for our clients and two how do we think about the changing world of distribution and that's where we should be putting our effort in you state street we need you here as our operations and outsourcing partner and i think that's a fundamental change for the uh for the asset servicing industry again we for years were so focused on the funds and the vehicles and we still need to be because ultimately uh uh efficient funds and high integrity funds are what keeps uh keeps investors coming but beyond that we also need to be able to serve asset managers in their cooperation one last question really which is kind of about where we go from here but i'd like it to have a technological flavor if it can you know the the back and middle office operations which state students specialized in up to this point uh do lend themselves in theory very well to higher rates of automation and uh progress on that front through robotic process automation through ai machine learning uh maybe blockchain networks maybe sometime in the near future even quantum computing is going to affect this industry uh in a very substantial way so if you were looking i don't know five years ahead i wouldn't want to go further ahead than that it's very difficult to see even that far what do you think the the securities custody fund accounting industry you knew when you entered the industry 30 years ago how different is that going to be uh in five years time it's a great question dominic and even if you think five years back 10 years back we've made extraordinary progress um you think back to when we both started in this industry and you know there's a whole lot less paper than we started in settlement times or a whole lot uh or a whole lot shorter uh but having said that i think that uh our the potential is far greater than our progress at this point there's extraordinary technology there uh we're all employing robotics to some extent but service robotics is actually harder in most cases than in manufacturing robotics but we're all getting better at it we're all getting better at saying okay i understand how this job works let's not just automate the job but let's figure out how it fits in the process and maybe we can even kind of take this particular task and eliminate it by changing the process so just the analytics and the speed at which we change things we're seeing it ourselves in terms of the robotics we're employing uh blockchain digital ledger technology again we've only scratched the surface there what's interesting to me about that is um we've done a lot of work and a lot of pilots in this area and in theory and in practice the technology can work but we work in an ecosystem so it's not enough for the asset servicer to say here let's do it this way i mean a great example of that is bank loans and syndicated bank loans i mean to the extent to which you could get the whole ecosystem and value chain moving to a blockchain form of syndicated back bank loans so that each time a trade and it was trading trading on a digital ledger you take a lot of settlement time out of it but you got to get everybody in there and i think um to do that at some point the the policy makers are going to need to have a view here i mean frankly some of the things that have uh spawned the most technology have been when policy makers have said we're going to shorten settlement times and you know we've seen that happen progressively over the years in equities we probably need to see that elsewhere to put that kind of pressure on it would actually force some of this technology to be employed because you know it's the reality is there usually are people that are making money on the old system and are therefore reluctant to see that go so um it's how do you get the whole ecosystem together to move things forward but i think that you're going to see uh much progress on this i think that um for all of us what that means is we've got to pivot and many many have pivoted i mean if you think about the uh the data scientists the the kind of software engineers that are employed by this industry they're as good as anywhere else certainly anywhere else in the tech industry so i think you see i could see a very bright future for asset services combined the incumbents are the ones that are under the attack but they're also the ones that know how to do this they have the data so they're the ones that need to uh recognize this brave new world make the changes bring in the people recognize they have a broader role than just fund services and move forward but i'm very optimistic about the about the fund services in the asset servicing industry for those incumbents whether they're forced to change their technology by regulators or whether they choose to do it themselves will the human factor will client service be more important in that world or less important i think client service has never been more important and will only continue to be so um i think what's changed is its client service at all levels i mean again if you go back as recently as five or ten years ago asset servicing was relegated in the eyes of the client so yeah let my ops person take care of that or let my fund treasurer take care of that this is now about fundamental business models and the ceo and the chief investment officer are now involved so that client service obligation needs to take place at all levels in the within the client ron allen thanks very much for taking the time it's been great to talk uh thanks for joining us at cyboss well dominic i look forward to the next time where i hope we do this in person thank you very much thank you bye-bye

Channel: SibosTV

Views: 422

Rating: 5 out of 5

Keywords: Corporates, Technology

Id: lulQwuNlQ5A

Length: 27min 32sec (1652 seconds)

Published: Mon Mar 29 2021