In this wide ranging conversation with David Moffatt, Chair of TEX and Chief Client Office at SS&C, we cover the industry response to Covid-19, the resilience of financial advice businesses, the financial stability of platforms. Dave calls on platforms to differentiate based on features and functionality – not just price.

You can listen to the full interview below.

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Transcription of conversation

Heather  0:34

Hi, everyone, it’s Heather. Today you’re going to hear an interview I did with David Moffitt Chair of TeX and Chief Client Officer of SS&C. Dave’s an industry veteran who’s incredibly knowledgeable about platforms, asset management and the wider investment industry. We cover a lot in the interview, including the shift to remote working, the types of firms that might emerge stronger from the Coronavirus pandemic, the resilience of small advice firms and financial stability of platforms. I think you’re going to enjoy it.

David, thanks for joining us on the podcast.

David  1:06

Good Morning Heather. Thanks very much for the invitation.

Heather  1:09

So, David, you’re the Chair of TeX and the Chief Customer Officer of SS&C, can you just give listeners a bit of a background of what those two organisations are and your role,

David  1:20

Of course, I took over as Chair of TeX, which originally was built as a TISA  exchange until two years ago and our role very much with the industry. We’re a not for profit group in this case. So, we handle a lot of work now around the whole aspect of transfer of assets between financial service providers. So that’s fundamentally platforms, wealth managers, SIPP administrators and the others in this case and we set the rules we run a contract club that allows that whole function to move much more smoothly without lots of any kind of paperwork being involved.

My real daytime job however is I’m the Chief Client for SS&C, that’s an entity which a number of your listeners may not necessarily come across, but that’s an entity from the States that bought the interest that was previously IFDS. So, we provide a range of services primarily  in the area, supporting asset management companies running mutual funds, we do all the client touch on the trading settlement and reconciliation functions for that. Plus, we do a number of wealth management related services too. I guess that the launch date and really, I guess what we’re talking here today, however, is that give between the two of those gives me the privilege of a much wider understanding of the financial services industry and how we’re coping in these very interesting times.

Heather  2:41

Absolutely. And  I think that when we were talking, you know, a couple of days ago about this conversation, and one of the things that you were talking about that was really interesting was just how well the industry has responded. And I think you’re absolutely right, and I’d love to hear a little bit more about how SS&C responded. It’s been a herculean effort on a lot of companies to get laptops, get everybody set up for remote working, but you have multiple sites that you’ve had to deal with in multiple jurisdictions. So it would be good to hear a bit about that.

David  3:15

No, absolutely. In this case I don’t think SSS&C have any sense of uniqueness in this. I think you’re absolutely correct that the financial service industry as a whole has done, actually a remarkably good job. I’m going to say. Everybody  talked about disaster recovery plans, evidently.

But the reality is one of the few scenarios I suspect that anybody has really tested is the idea of what happens if suddenly you’ve lost, really the class to have your staff come together, collectively, and that’s really the challenge we faced. And what we’ve seen is just one example of that vast amounts of effort being put into really, relocate services that were previously provided in glass offices in this case to really enabling staff to actually fulfil the functions from home. And I think in large part that’s been achieved with a massive level of disruption is a huge credit to the industry as a whole. And taking SS&C is merely one example we, we were faced with the challenge of permitting literally in a matter of day’s notice and the ability to have 2,200 staff in the UK, another 1,200 staff in Mumbai in India, in a position to basically have all the functions and capabilities to do their jobs from home and to do so in a highly regulated, highly secure environment. And that’s involved that massive movement of care and equipment and comms lines and changes of process and procedures and security policy and everything else that goes with it. Literally in a matter of days. And I think, as I say, we’re not particularly unique.

I think we’ve seen a few but a relatively few organisations had to degrade the service somewhat and cut off taking telephone calls for a while and we certainly didn’t have to require doing that. And we’re doing it against the background of the stock market that was clearly going through massive levels of disruption and change and falls itself, which understandably, was meaning adding to the volume of activity in the throes of conducting all this change and all this relocation was significantly spiking up as well I think the fact that there has been no massive outcry and no large elements of the investment client base in this case suffered significant detriment or, or suffered any aspects of not be able to get to the finances or get the information they need, I think real credit to the industry.

Heather  5:36

Yeah, I agree. I had the virtual meeting, as we’re all doing these days, with some heads of platforms a couple of weeks ago, and it was fascinating because they are they’re having unprecedented volumes of activity and they all had business continuity planning in place everybody has to, but much of that was relying on remote work centres, not people working in their homes and I think if people had thought about this kind of, you know, everybody goes through these sort of scenarios and on boards and executives think about how they would respond. Is the number of people who would have gone that through that kind of scenario to see how their firm would respond would be minute? So, the response has been really, really strong. And I agree that there’s a few that have had to do outbound calls only or doing online chats, but they’re the minority and even that they’re still servicing their customers, amid unprecedented trading volumes and activity. So yeah, not a real, you know, you never want to pat yourself on the back because there’s always more people, always dangerous, but as an observer and a commentator in the industry, I can say it. I’ve been really impressed, and I know a lot of people have been.

So coming on to a little bit about how this might impact the Coronavirus pandemic and this situation of working from home in the uncertainty, market volatility, market declines all of this coming together, how that might impact on the industry and we were talking about you know, the question about what sort of companies will do well. If you look at the tech companies that have done well, it’s the really big tech companies, Google, Amazon, Facebook, and they’ve done incredibly well, in the short run out of this. A lot of people think  that will continue. And then there’s, you know, smaller upstarts like Zoom, which isn’t really small anymore, became quite large quite rapidly.

But if we think about it in the financial services industry, I think there’s a question about whether, one of the things I’ve been thinking about is, will big firms be more able to take advantage of some of the government support because, you know, I run a very small business and micro business, and you know just sitting on hold with my bank for three hours, is about all the time I have in a day, and that’s just trying to find out what I need to give them to be able to get the loan application, right. So, it’s hard to see how small firms will be able to take advantage of some of the support that’s available. So, does that then benefit the bigger company? But then they’re less able to adapt might have bigger capital costs, property, things, fixed costs that they can’t flex as easily as some smaller firms. And I know you had some thoughts about the study of the sort of the flight to quality.

David  8:13

There are several different things going on here simultaneously, I guess, Heather, so there is a clearly pronounced disrupted stock market background, and that has got clearly winners and losers within it, that we’re seeing emerging already in this case.  I think, if anything is it’s that certainly ratcheted up the already pre-existing flight to from active to passive, I think, again, certainly certain sectors of the active market are shown themselves to be somewhat led footed. In this case, it’s fair to say that absolute return this, this was exactly the scenario why a number of conservative investors were using absolute return vehicles and again, they’ve been shown to be pretty led footed collectively, there’s been one or two exceptions but in large part they have not lived up to their building of absolute return in any meaningful sense. So, I think maybe we’re seeing the end of that. Maybe we have to call the busted flush on an absolute return as a concept at this point.

I think looking at things, though, I think there’s a natural inclination, I think, on behalf of consumers in all sectors, to the financial service is not by any means just asset management or platforms or whatever in this case. But if you are feeling that your life is now less certain than it was before, it’s a natural human condition to seek greater levels of comfort. And I think comfort does to an extent come from scale and size and presence and balance sheet robustness and I think that probably emerging from this you will see a large consumer inclination to probably go more towards larger, well capitalised players just because of name awareness.

I think that’s not to say that there aren’t considerable opportunities at the other end of the scale for disruptor providers, particularly in the FinTech space to use the opportunity of a, just a world in thrown completely up in the air, that’s a real opportunity for change. And people won’t necessarily settle back into the same consumer and behavioural and buying patterns that they perhaps did before. That creates an opportunity for small disruptive players to enter particularly with, with models, which can be seen to be probably less reliant on human servicing and more reliable on technology. That’s a logical conclusion is where you would go from this.

But I think you’ve got a number of different dynamics all pulling in different directions. So, I think there’s a lot to play for everybody. But I think the big winners are either going to be well established players who have handled themselves really well within this particular current crisis, and have merged from it, if not necessarily stronger, certainly emerged for it without evident damage. The other end of the spectrum. as you rightly said before, in this case, there’s an opportunity here for the small newer players in this case, take advantage if they can identify a specific niche they can present themselves in the post  Coronavirus world that we’ll all have to live in that they’ve got some real strengths that the current market doesn’t provide for.

Heather  11:09

Yeah, it’s that classic barbell thing. Right. So, thinking about financial advisors, I think the latest stats from the FCA where the 89% of advice firms have five or fewer financial advisors in the business. So, it’s a very fragmented market with lots of small players and the FCA in their business plan that they recently published that they’re going to be focusing on small firms where they probably haven’t had the resource to do that as much in the past. You also have PI providers looking at that business plan, but then also looking at how well these small firms are capitalised, you have the constant increases in FSCS fees, the levies that came last year and are expected again, it’s hard to see how we can continue with this fragmented market but people have been saying that for years, and it’s never really changed, right?

David  12:03

You’re, you’re almost taking the words I was going to say my mouth there. I mean, the transfer device industry in the UK is immensely resilient, it’s shown it time and time and time again, between different regulatory environments and approaches and products and styles in the marketplace. It always comes back to the other side of the chasm largely unscathed. It may be. It may be bigger, it may be slower, but it fundamentally remains a robust industry.

I think many certainly advisory businesses in this case, again, pay tribute I think coped incredibly well. I mean, I think a lot of them started out ahead of the game and that a lot of them actually had already moved to a degree of remote working in a way and if not necessarily the full time basis, they already had the bulk of the staff able to work from home rather than in a large call centre. So, they benefited from my kind of infrastructure already largely being in place, but equally, I mean of course is that a number of advisors have to accommodate. And this is a challenge is that of course, now means that you can only conduct your functions and activities remotely from your clients. And that makes certainly working with new clients, I’m sure a real challenge, let’s be clear. A lot of what financially advice  is about doing is reading the comfort level and the nonverbal responses from your clients, when you’re going through the whole financial advice process, and when that’s been removed from  your armoury, so to speak, because you’re having to do it remotely in a telephone. It means that you have to be probably a lot more avert in terms of some of the questions that you may, and it probably makes the process more rather than less lengthy. So, I mean, the strains here, up and down the whole of the value chain, so to speak. I think there’s finance advice community will come up with this. Again, I think uncertainty and market disruption plays to people’s understanding of the need for good quality financial advice. I think it will come at the stronger for it.

Heather  13:59

Yes, and that’s such a good point that you end on it’s about good quality financial planning advice and whether that’s small firm, big firm, there’s always room for that. So, this is a bit mean of me, but I think it was about a year ago you did an interview with my former colleague Miranda Seath. And one of the comments you made in that article in money marketing was that platforms have done all sorts of great things. But one of the things they’ve really failed to do is make platform businesses, any money. And so, you know, having just seen asset valuations decline, these firms are reliant on asset-based fees. Are you worried about the financial resilience of platforms? Do you think it’s something that the advisor should be looking at more closely?

David  14:43

I think to an extent they probably were already well aware of the fact. I mean, there are some notable exceptions in this case, Heather, as we are both well aware of, that the sector as a whole to find those investment platforms distinct from wealth manager. I appreciate the distinction begins to blur at the edges, but fundamentally the platform centres all these fairly significantly still lost making 20 odd years into the whole process of the starting off. So, I think there is a definitely a challenge there. Clearly, with the stock market being what broadly as we speak today 25 ish percent down, I guess from the level it was two months ago, when this disruption started. Vast majority of these platforms, their fees are linked to volume. And hence their equations here will see them making a great deal less money today in absolute revenue than they were doing a month ago or two months ago.

That being said, I don’t think any of them to my mind in this case are showing over regard for the immediacy, I think they’re doing all that they need to do and clearly this is costing more money to be able to continue to support their clients and do it with the need to do. So, it’s a bit almost like the wider macro economy and the political environment, in this case, people have not paying huge regard for the immediate impact of the long-term finances, they’re much more worried about just keeping the lights on and doing your job. But at some point, I think you’re right to flag up, we’re going to come towards the end of hopefully a lockdown period and with the market begins, and the economy begins to return more back to normal. And it’s difficult to see how the stock market will necessarily be back at the level it was a couple of months ago. And difficult to see how the financials of a lot of platforms is going to necessarily be where they were at the end of last year. So that’s the challenge. There’s no way around it.

Heather  16:37

Yeah, and I think one of the interesting things that hasn’t necessarily been looked at and perhaps should be in the assessment of financial strength of these businesses is the reliance on recurring revenue versus new because that’s the  other question is how much new business is going to be written on these platforms? Q1 was a really strong quarter for everyone, I think across most firms across the industry, there is always going to be some that miss out. But you know, the outlook isn’t great. So that distinction between revenue from recurring business and new business I think is an important one.

David  17:11

I think one of the parts, which I’m sure the commercial directors have a lot of platforms will have to be looking at is that in the past, to an extent because their propositions have allowed themselves to become so similar. The primary competitive landscape ground that they have chosen to fight on was one of the prices of the platform service. Now I think that’s a shame. I can understand why we’ve ended up where we  are now in this case, but I’d much rather frankly platform should arrange matters so that they compete in terms of functionality and proposition and brand and everything else. But the problem is that fighting your landscape ground based purely on I will be marginally cheaper than the next guy is a kind of a bigger your neighbour style scenario in this case and we’ve seen that really over last five years that the primary competitive grant has been cutting your fees for your particular tools and market segments to track the particular type of business that you want. And that’s led to the market becoming more and more atomized with the individual platforms chasing narrower and narrower niches of the market as a whole. If we walk over this current situation we’re in with by at large reappraisal by a number of the commercial managers of platforms saying we’re not basically going to just try and compete on that and that alone I think that within its own right, be a very major win if that were the outcome.

Heather  18:36

Yeah, and I am hoping that that competition on price will start to wane a bit because prices have come down a lot. A lot of people think they’ll come down further, but advisors in the NextWealth surveys say that platforms get top marks for value for money. But that’s partly because advisors have pushed so hard.

David  18:55

In fairness that is part of the job. It’s not that they’re trying to be problematic . But that’s part of their job on behalf of their clients at the end of the day.

Heather 19:03

Absolutely. Thank you so much for your time, David, really, really interesting conversation.

David  19:09

Real pleasure. Thank you, Heather.

Heather 19:12

Thanks for listening. I thought Dave’s perspective on the industry response was so important to hear. And to have it said, there’s always more we can do. But the market is still functioning despite massive disruption and a huge spike in volume of trading activity. It’s always tough to pat ourselves on the back in the midst of a crisis, but I think the industry has responded really well. His comments about the financial stability of platforms were fascinating and his call for firms to differentiate and functionality and features, not just costs are incredibly relevant. Feedback and comments are welcome. Thanks for listening.