Pershing Limited: share the burden – Frank La Salla
Although the worst of the recession may be over, almost all of the economic data coming from North America, Europe and the Middle East suggests that everyone is in a period of economic slowdown. Profitability has shrunk across developed countries, with growth still slow and interest rates lingering around zero.
Such times of crisis pose significant dangers for today's businesses, but they also present opportunities to reassess and transform some of the ways businesses function.
"The message that we give to financial services firms is that if you want to survive over the next three to five years, you will need to change your business model," says Frank La Salla, chairman of Pershing Limited.
As businesses respond to declining margins, increased regulation and left-over debt, many are looking to transform themselves operationally, starting with their cost structures and expenses.
"If you're a CEO or anyone in a C-suite right now, you can't just sit there and wait for this storm to pass," La Salla says. "At Pershing, we're actively engaging with people at the top level to talk to them about how they can continue to reduce expenses."
An open mind on outsourcing
For La Salla, this willingness to talk is one of the most eye-opening aspects of the current recession. For many years, the larger self-clearing firms had rejected the outsourcing model on the basis that what you don't own, you can't control. But that is now changing.
"The slowdown is, in a sense, very conducive to the strengths of our model," he says. "One of the most interesting things for us has been the way senior management, particularly on the institutional side, but also on the wealth and retail side, are now actively engaged. They want to have these discussions and are looking for partners to help them change their business."
That open-mindedness has a lot to do with the way outsourcing has changed over the years. The level of service that providers now offer is markedly different to what it was ten years ago. Organisations like Pershing can provide a clearer, more consultative approach for their clients than the industry was able to when it first emerged.
Information plays a key part in that. The company has developed a series of tools to help people get a clear understanding of where their costs are, empowering the decision-making process for firms. For La Salla, it is no longer enough to go from fixed to variable cost. What is important is producing the relevant front and back-end solutions that will help firms make the right decision.
"As the tools and methodologies get more sophisticated, being able to let go is a little easier for today's firms," he says. "People are embracing it. At Pershing, we're engaged with more self-clearing firms today than I can ever remember. CEOs have got to make tough decisions and decide how they are going to develop their business service in this tough environment.
That's our message to wealth managers and institutional firms: embrace the change, understand the model and give it a chance."
Cost of risk
The numbers certainly bear out La Salla's enthusiasm. According to recent figures published by the New York Stock Exchange, profitability among its member firms has shrunk most dramatically at the larger, self-clearing firms. The figures are far less stark at smaller and mid-tier firms that already outsource most of their infrastructure to a third-party provider.
"The numbers validate our thinking about the model in an indirect way," La Salla says. "That data may be US-centric, but it provides a good litmus test for the rest of the world."
The logic here is relatively simple. Larger firms that own their own infrastructure tend to have very high fixed costs. While that may not be such a big problem during an upswing, when volumes and interest rates are so low, organisations begin to face major problems.
"It's about sharing numbers with our clients and them telling us what their fixed costs are to run the business," La Salla says. "It really comes down to this question: is the delta between their fixed costs and what a variable cost model would offer enough for them to take the step of converting to a third-party platform? It can't be a 5-10% delta. It needs to be dramatic enough to make that change worthwhile."
New rules, new technology
Apart from serious operational challenges, today's financial firms face an onslaught of new rules and regulations. For those intent on absorbing the burden themselves, it means a huge investment in new technology. But there are alternative ways of dealing with the weight and Pershing is confident it can help.
"We have more than 120 clients in the UK," says La Salla. "All of them have to comply in one shape or form with the regulations that are coming out. They can decide to make that investment themselves, or we make it once and deliver it out to everyone else. That's the beauty of the model.
"From a regulatory risk standpoint, we have the most amount of value, and we're the most up to date. We're not just reacting to the regulatory change, we're actually informing it and trying to guide it in a direction that we think is good for the industry and, ultimately, good for end investors - and we do that regularly."
Pershing spends nearly $350m a year on new technology, a good part of which is designed to help its clients manage regulatory risk. It's also designed to improve their confidence in the future as the regulatory burden grows.
"It's not just that we can satisfy regulatory requirements today," La Salla says. "We are going to keep on top of things whatever comes down the line. That cost for firms is only going to rise. With Pershing, they can have the confidence that people are working on the next thing coming.
"We want our clients to focus on the crucial front-office functions. Any business is about having a set of client relationships. By saving money and recycling capital into the front office, you can improve and grow your business."
Pershing: open efficiency
Through Pershing's open architecture solution, advisers can access almost any investment.
"From the beginning, we designed our solution to provide choice to all of our clients," explains La Salla. "We service as many asset types as possible, whether it's equities, debt or options. And we're constantly adding more securities."
Pershing, a systemically important financial institution, is part of the BNY Mellon group, which has recently been named one of the safest banks in the world by regulatory authorities. Endorsements like that mean the company cannot afford to be complacent.
"Being held in such high regard creates greater expectations and even higher standards," La Salla says. "It's not a brand name we've just stuck on the front of our door - we've had to earn it."
On the operational side, Pershing intends to continue upgrading its solutions, and developing its processes to maximise efficiency. As businesses look to consolidate their balance sheets in the wake of serious economic uncertainty, having access to third-party providers like Pershing has become more crucial than ever.