Clients’ needs best served by common standards regime

Private wealth managers who resist electronic messaging standards like FIX are missing out on operational efficiencies and opportunities to better service their clients, according to a number of industry practitioners. “FIX, common standards, are not greatly used currently in the private banking arena, and I think there could be improvements that they could deliver to their clients if there was greater use of it,” says Stephen Taylor, sales and marketing director at MBA Systems, the wealth management technology vendor. “Private banking is all about delivering service and good private banking is about active investment management, meeting the clients’ investment objectives.”

Unnecessarily complex

With volatility in equity markets currently high, there are challenges for active managers looking to rebalance portfolios. The risk of prices moving away during delays in the process is higher, and those who have unnecessary complexity or high-touch manual intervention in their dealing and trading process can suffer as a result. In March, MBA Systems installed its TransFIX product, which translates proprietary messaging formats into FIX, within the KBL Group in Luxembourg. Trades originated in the KBL Group are sent to KBC Peel Hunt, having been translated into FIX. The trade is executed and the FIX confirmation is sent back to KBL and Brown Shipley, where it is retranslated to the original format. “[The private bank] generates some orders in a non-FIX format and we then take that proprietary format and convert it into FIX,” Mr Taylor says.

“Once it’s into FIX, that opens up a whole new arena as to where the execution of those transactions can take place. Pretty much all execution destinations now are FIX-oriented. So, as far as the private bank is concerned, and the private bank’s clients are concerned, it really does open up much greater potential in the way of liquidity and the way to execute that business,” he adds. Gary Linieres, director at Third Financial Software, agrees that there is a lack of standards in the wealth management industry.

“Faxes and emails still make up most of the confirmation traffic,” he says. The institutional buy-side and the sell-side are “light years ahead in (€320m) and 20 or 30 clients, that actually investing in technology to effectively communicate in a standardised format is very hard [to justify],” says Mr Linieres. He does not believe that it makes sense, at least for the time being, for all wealth managers to adopt trading standards. “Even when markets are volatile, the levels of trading, unless you’re in a tier one private bank, is not significantly high,” he says. “These guys might be trading on portfolios once or twice a week.” The cost benefits of this communications technology fall in step with the number of orders that it will be expected to process.

Cultural divide

Another stumbling block has been the cultural divide between the trading and banking sections of the industry, and between the standards bodies that serve them, according to Chris Pickles, industry relations manager at BT Radianz. “Because [private wealth managers] operate in a banking-type environment, there’s almost an information wall between banking and trading… In the banking world, all everyone talks about is ISO standards, because those have developed with the help of Swift, which is owned by banks.” ISO standards are primarily targeted at the back office, rather than the trading arena.

“Now, there was a falling out between Swift and FIX, both standards bodies, about four years ago,” Mr Pickles says. “They both agreed to work on harmonising as much as possible the standards that they work on, then unfortunately Swift then went out and told everybody that standards were all going to converge on ISO and FIX was going to disappear.” This led to a continued fracture between the two standards, and likely slowed down the adoption of FIX. Despite these setbacks, MiFID, and the requirement it places on wealth managers to understand the trade cycle and rate their brokers, could increase awareness of electronic trading efficiencies. It is important to remember, Mr Pickles notes, that whether or not their clients demand that PWM firms look at their trading costs and infrastructure, the regulator now does.