Financial services businesses depend on complex information technology and expertise in design, development and administration of regulated transactions. The basic business framework is complex due to the mathematical nature of finance and its intrinsic complexity, as well as the complexity of applicable compliance requirements.
This complex business and regulatory environment has created a complex ecosystem of outsourcing to customize virtually all levels of operations. Indeed, outsourcing is “pandemic” in financial services and broker-dealers because it enables small firms to tailor information technology and telecommunications operations to the individual marketing, investment and trading strategies.
Broker-dealers serve as financial advisers to investors and execute trades of securities and commodities on exchanges. As investment portfolios diversify, broker-dealers need to enable dealings in investments internationally and continuously. Also, investment bankers, who finance and restructure businesses for financial purposes, need to have a broker-dealer’s license to earn “success fees” for services in connection with the sale of securities to a large number of investors.
Broker-dealers regularly hire outsourcers to assist in key business functions such as
- Economic research into markets and firms in the markets
- Valuation analysis
- IT infrastructure
- Telecom infrastructure
Smaller broker-dealers rely upon larger ones to serve as clearing brokers to assume administration of the financial aspects of trading on exchanges. In essence, the clearing brokers serve as outsourcers for the smaller brokers, who lack the capital and technology investment to administer the execution of trading activity. Clearing brokers support many different types of other broker dealers, including those engaged in institutional investments and capital markets, securities and commodities trading, wealth management, prime brokerage (for hedge funds), fixed income (for bonds and other debt instruments) and international firms seeking a local presence in the clearing broker’s locale.
- Client administration (set-up, integration, conversion)
- Private-Label Client Solutions (“broker-dealer in a box”) support for a broker-dealer’s investor customers, including
>self-service to access trade confirmations, statements, tax reporting forms, balances, transaction history, cost basis, tax lots and gain/loss information.
> online cash management services, including check writing, debit card, online bill pay and investment capabilities in one account.
>Monthly Statements.
- Clearing, execution and settlement, including telecom connectivity to markets for domestic and international equities, options, mutual funds and fixed income portfolio products, as well as access to electronic trading platforms that allow execution of algorithmic trading programs
- Custody
- Operations
- Technology, including unified Web-enabled telecommunications access to the entire range of data used in the financial services industry, detailed account information, performance reporting, fee billing, trading reports, money-transfer tools for cash management, recordkeeping and archiving, risk analytics, investment planning and asset allocation
- Financing of portfolios, including margin trading, restricted securities and securities lending for short sellers
- Wealth Management and portfolio administration including analytics, asset allocation and portfolio management
- Call centers and client sales representatives to support the clients.
The industry depends on software, telecom and personal attention. It is no wonder that B-D’s use outsourcing to leverage their own capital for back office and middle office operations.