25/01/2021 by Dominic Hobson 0 Comments
The data business a global custodian can run
It was a State Street CEO who first opined in the late 1990s that global custodians were in the data business. 20 years on, one of his successors is leading a bank that is updating that idea for an asset management industry awash with data but plagued by inefficiencies from the front office to the back. Alpha, the open architecture data management platform State Street has built for asset and wealth managers, is led by a former PwC partner called John Plansky who joined the bank four years ago. He told Dominic Hobson the story of how Alpha came about, where it is going and why it is all about data, not technology.
Big Data was the opportunity that preceded the Blockchain Bubble of 2017-18. Back in 2014 there was a lively debate in the securities services industry about how its denizens might profit from re-packaging the settlement and assets-in-custody data created by clients and accumulated by custodian banks in the normal course of business.
Since then, the quantity of digitised data has only increased, and the custodian bank view of how they can help buy-side clients make use of it has evolved considerably. In 2014 the question was whether custodians could re-sell data created by client activities, in the same way as Facebook or Google. Now global custodians are planning instead to become not data re-sellers but data managers.
A data platform is different from a data vendor
State Street has the clearest and most advanced strategy of any global custodian. In December the bank announced that it had built a data warehousing and management service called Alpha Data Platform for the asset and wealth management industries in conjunction with Snowflake (as a data warehousing specialist) and Microsoft Azure (as a native Cloud service provider).
The purpose of Alpha is to ingest data from any source; filter it for the use of a variety of constituencies from the front office to the back office; and deliver it to decision-makers at asset management firms so they can act on it.
“Data is at the heart of Alpha, our front-to-back platform, and we are committed to providing the leading data platform within the investment management industry,” said John Plansky, global head of State Street Alpha, at the time. “Institutional investors and wealth managers today are challenged by the depth and breadth of data available to them. They need new, innovative tools to manage and interpret this data at scale.”
The Alpha platform will grow internationally
State Street has already signed up a dozen asset managers as clients of the Alpha platform, and the bank says its pipeline is full to bursting. As befits a global custodian bank which earns half of its revenues outside the United States, the platform is designed explicitly to attract and support asset
“Some of the largest deals in our pipeline are in Europe,” says Plansky. “In Asia, similarly, we have got good traction with firms in Australia and Japan.” But he is at pains to point out that Alpha is not simply a re-platforming of existing client business. It is an entirely new way of doing business.
Data, not technology or efficiency, is the lodestar of Alpha
The goal is not to make the client captive with technology applications, or by lower prices, or even through superior service quality. Though all three are written into the Alpha master-plan, the value they create will be a by-product of the principal activity of the Alpha platform: integrating the data that flows through any asset management firm, and through any application used by any asset management firm, irrespective of where it comes from or which system it is passing through. Since that data comes from multiple sources, only some of which are controlled by State Street, the Alpha way of doing business mandates an open architecture.
“At the heart of our platform is data,” explains Plansky. “We are providing enterprise data management to clients so that, whether the data originates from State Street, or a third-party fund administrator or custodian, or a third-party data provider such as Bloomberg or FactSet, our software and services harmonise it and make it available to the client in a data warehouse. They can then use it in other applications that they have for, say, performance measurement or risk management, or they can use it in entirely new applications of their own that they write themselves, inside our native Cloud-based warehouse.”
The hottest topic of the day in asset management, namely, Environmental, Social and Governance (ESG) compliance, has become an early use case of the Alpha platform. “The asset managers said to us, if you can put all our ESG data into the Alpha data warehouse, we can decide if we want to have State Street provide ESG reporting to our clients, or do it ourselves in a more bespoke way,” says Plansky. “Our platform aggregates the data and allows it to be expressed in different forms by us, or by third parties, or by in-house teams.”
This emphasis on data, as opposed to technological superiority, or cost savings, or operational efficiency, or service quality, is a measure of how the digitisation of data has made the distinction between information and technology redundant. And what has made that possible for State Street in particular is the 2018 purchase of Charles River Development, a Boston-based supplier of portfolio management (PMS) and order management (OMS) systems to institutional asset and wealth managers.
“State Street would never have had a chance of playing the role of data platform provider to asset managers without Charles River,” explains Plansky. “Unless you are in the front office as an OMS and PMS solutions provider, you have no idea of the complexity of the challenges of managing data. It is extremely hard to be up at the plate in a baseball game and not know what kind of ball is being pitched at you.”
The acquisition of Charles River Development was counter-intuitive but crucial
Yet the acquisition, announced in July 2018, was a far from obvious move. It took some explaining to shareholders and clients.
The idea at the heart of the acquisition – to combine the front and middle office software as a service (SaaS) capabilities of Charles River Development with the trading capabilities as well as the middle and back office asset management servicing capabilities of State Street to create a comprehensive buy-side platform – is much clearer now than it was then.
And persuading a trust bank board to spend US$2.6 billion on a software company turning over US$300 million entailed a lot more than a good strategic idea.
“A lot of the ideas, which we are now implementing with Alpha, State Street Chief Operating Officer (COO) Lou Maiuri and I were talking about as far back as 2011,” recalls Plansky, who was then running the technology practice at Booz & Company, three years before the firm was acquired by PwC.
Alpha is not the turn-of-the-century lift-out reinvented
Maiuri was then at BNY Mellon where, among other responsibilities, he chaired Eagle Investment Systems. Eagle is an asset management technology firm acquired by Mellon Financial way back in 2001 as the foundation of its bid for business in the then raging asset management back and middle office lift-out boom.
State Street pioneered that boom, with the decision by PIMCO to outsource all its investment operations to State Street in May 2000. But the difficulty of scaling lift-outs led to many unhappy, and mispriced, deals between global custodian banks and asset managers.
It took an asset manager, BlackRock, to chart a different path. The firm turned Aladdin, the asset management operating system the firm originally developed to manage its own business, into a service for sale to other asset managers.
In the light of that precedent, the wisdom of the Charles River Development acquisition became a lot more obvious. Paradoxically, the hefty price was also reassuring. A bank whose stock trades at 2½ times revenue paying 9 times revenues for a software firm indicated that turning a global custodian bank into a technology-based data manager for the asset management industry might be good for shareholders.
Persuading the senior management of State Street that integrating the front and middle office capabilities of Charles River Development with the middle and back office capabilities of the bank took rather more work.
It helped that State Street Global Markets, which Lou Maiuri also led in 2017, already provided investment research, trade execution and financing services to asset managers across equities, fixed income and FX. To that extent, State Street was in the front office itself already. But to be truly convincing, the Alpha team had to prove that their vision could be implemented.
Alpha is work-in-progress not a finished product
Implementation set two principal challenges. The first is to combine the front, middle and back office capabilities of Charles River Development and State Street in a way that enables asset managers to reduce operational costs, by reducing the number of systems, service providers and data records they maintain.
The second challenge was to lift the financial performance of asset managers by providing them with a data management platform that aggregates and standardises data from multiple internal and external sources and uses the results to make the process of manufacturing, distributing and servicing asset management products cheaper, faster and better.
In the end, State Street decided to take the risk of buying Charles River Development because, if the integration worked, the new platform would not only make State Street more relevant to its existing asset management clients but give the bank access to additional revenues estimated at the time to be worth US$8 billion.
The acquisition transpired quickly. The owner of Charles River Development was persuaded to sell, the acquisition was announced in July 2018, and the deal closed three months later. John Plansky took over as CEO of Charles River Development the same month.
Plansky has since ceded that role to Spiros Giannaros, who worked at Charles River for 15 years before going to IHS Markit in 2014. This has freed Plansky to lead the team charged with building the envisioned front-to-back platform ever since, working closely with the Asset Servicing and Global Markets divisions of State Street as they endeavour to bring the vision of Alpha completely to life.
Anxieties and expectations of existing clients had to be addressed
An immediate priority was to reassure the clients of Charles River Development, since founder Peter Lambertus chose to move on immediately. The US$80 million State Street has invested in Charles River Development since the acquisition has helped, but the concept of the platform had to be explained and communicated to them as much as to the senior management of State Street. A marketing campaign was launched, under the Alpha brand, in the summer of 2019.
Inevitably, existing clients of State Street (for whom front office services were being added to back) shared with the clients of Charles River Development (for whom back office services were being added to front) an anxiety about what to expect. They also had one demanding expectation of their own, which had to be met if the Alpha platform was to succeed.
This was that State Street must maintain market leadership across not just across its traditional strengths in custody, middle office and global markets but in the front office where portfolios are managed and orders originate as well. “The platform obliges clients to go all-in with State Street for what is typically a ten-year contract,” explains Plansky. “It is a big commitment for these clients to rely entirely on State Street.”
If an asset manager had to carry on using other suppliers because they are superior to State Street the platform would fail for another reason: it would be impossible to reduce costs through scale economies. “What gets clients at the CEO and the CFO level excited are market-leading capabilities creating a steadily lower price point,” says Plansky. “Alpha has scale and that scale will increase over time.”
Alpha is a (controlled) open architecture platform
That said, it is of course impossible for Alpha to be the best at everything. State Street, even with the addition of Charles River Development, does not have all the solutions, let alone all the solutions to a market-leading standard.
This prompted the open architecture – the most radical of all the decisions State Street has made about Alpha. “When we launched the platform, we made a commitment that we were going to be more open than closed,” says Plansky. “We were going to be inter-operable, and we have lived up to that. It is in our interests, and our clients’ interests, that we allow firms other than State Street to provide services.”
This openness might be uncontroversial in some other industries but in a securities services industry that has for decades used technology specifically to make it hard for clients to defect, the decision to allow buy-side firms to work with third-party technologies, vendors and service providers is a commercial revolution.
Of course, a completely open platform, in which any client could use any technology, vendor or service provider in any way they liked, was not an option for Alpha. Instead, State Street admits only those vendors it deems suitable to develop services freely on the platform.
In March 2019 Axioma – which was re-branded as Qontigo after its acquisition by Deutsche Börse a month later – became the first vendor to be admitted to the Alpha platform. It supplies risk management, portfolio construction, performance attribution, regulatory reporting and custom index design services to users.
“The admission of Qontigo demonstrated to clients and potential clients straight away that Alpha was going to embrace leading solutions that integrate at the data level,” says Plansky. “It was a proof point that we were committed to the idea of working with third parties strategically. It also gave to Charles River Development capabilities they did not have and that clients were able to integrate themselves into the service they preferred.”
MSCI followed, as a preferred provider of risk and performance measurement services, further enhancing the Charles River Development offering. SimCorp joined the Alpha platform in October 2020, with the aim of allowing insurance companies using its Dimension application to access middle office and custody services from State Street and front and middle office services from Charles River Development.
On 7 January 2021, State Street announced it had invested in HUB, a London-based joint venture led by PIMCO, one of its asset management clients, in conjunction with Man Group, IHS Markit, Microsoft and McKinsey. Like Alpha, it is promising not only a new Cloud-based platform for asset managers that cuts costs and risks in the middle and back office but a “`data-first approach’” [that] will break down silos and friction between systems and data.”
The fact that HUB might easily be construed as a competitor to Alpha confirms that State Street is genuine in its commitment to openness. “We want Alpha to be a global platform that integrates third party services and service providers,” explains Plansky. “Our goal is to have leading industry initiatives integrated with our platform.” Some of those relationships might, as with HUB, be sealed by a financial investment.
Links are now in place for Charles River Development clients with fixed income trading platforms such as MarketAxess and Tradeweb. Work is also in hand to add private assets and wealth management capabilities to the Alpha platform. The purpose of all such partnerships is the same: to make the underlying data as clean and consistent as possible, so it can be used with equal confidence by portfolio managers, risk managers, operations staff and in client reports.
“When a client decides to go with Alpha, they know they are not just working with State Street,” says Plansky. “They actually have the benefit of other leading companies that have embraced the idea that data is critical, that want to eliminate reconciliations, and that want to ensure we operate from a common, clean and consistent set of data.”
Alpha works with rival global custodians
The principal test of openness is the willingness of State Street to work with rival global custodians. Integrating lesser custodians with Alpha is relatively straightforward but admitting major competitors that provide many of the same services that are available from Alpha is understandably trickier.
After all, BNP Paribas offers outsourced dealing to asset managers as well as custody and fund administration, and BNY Mellon offers a Cloud-based data platform based on the Eagle Investment Systems technology that competes in some areas with Alpha: data management, investment accounting, investment book of record (IBOR), performance measurement, ESG analytics and so on. In January 2021 the bank announced an alliance with the Amundi ALTO data platform.
“As you can imagine, there was a degree of nervousness on both sides,” explains Plansky. “But the other banks soon realised that Alpha is a separate team from the custody team they compete with every day, and its role is not to compete with them but to deliver data to their end-client.”
Yet the Alpha strategy still means that State Street must be prepared, for example, to enable a client that wants to use Charles River Development in the front office and State Street Asset Servicing in the back office, to continue to use BNP Paribas or BNY Mellon or J.P. Morgan or Northern Trust in the middle office.
“We have to be open to that possibility, because the last thing we want to do is restrict the opportunity for our platform,” says Plansky. “The solution we are offering depends on taking in data from anybody – including all the other custodians and all the other fund administrators – and putting it into a data warehouse where clients can leverage it without having to invest in data management tools of their own.”
He is not unaware of the potential long-term implications. “Will other service providers start to use our platform as the basis of their services?” he asks. “We are constantly being approached by firms that want to use our software. It is a compliment, in the sense that, if our platform is so competitive that our traditional competitors now want to use it, clients can see the platform is working. But it does mean we are working with firms that are complementary now but which may one day be competitors.”
Plansky insists, however, that no other global custodian offers as comprehensive a vision and service strategy as State Street. “We are putting a priority, and a tremendous amount of investment, into the role of being the core data standards bearer and data platform for the industry,” he says. “Few of our competitors in the trust banking industry have made that type of commitment.”
It helps that Alpha is the only bank-owned platform for asset managers, because being owned by a bank matters in terms of the service proposition. The BlackRock Aladdin platform cannot offer middle office outsourcing or custody servicing.
Competitors such as BNP Paribas and BNY Mellon and Northern Trust obviously can, but it is hard for them to streamline and standardise because they do not own the equivalent of Charles River Development. Lacking access to the front office, where the work completed by the middle and back office originates, makes it hard for them to deliver a seamless service.
The front office is hardest to convince of the benefits
That seamlessness still depends on the ability of State Street to integrate the front, middle and back office systems and data flows. The task is non-trivial. Often, each portfolio management group within a major asset management house will have its own portfolio and order management systems to capture stocks and flows, its own price and other data sources, and its own performance measurement data sources and methodologies. Even within a single firm, different strategies and asset classes live and operate side-by-side in separate system and data silos.
Then there is the cultural chasm that separates the front office from the back. “We are in the early days of getting the front office professionals to support the idea of a common data platform,” says Plansky. “The typical Alpha client is looking to rationalise and consolidate front office data sources and systems, because they know they can achieve economies. And we can show them, unequivocally, that Alpha is less expensive. But portfolio managers like the tools they are used to and they are also used to being the decision-makers.”
In 2019 State Street set up an “instrument engineering” team to work out how to get front office data from Charles River Development clients (such as order management and portfolio management data) into the back office and how to get back office data from State Street clients (such as reports of cash from redemptions handled by the transfer agency department) into the front office. Being able to show the front office their cash and positions, intra-day, has proved persuasive.
“One of our value propositions to clients of Alpha is that, when you work with a custodian and fund administration firm such as State Street, they should expect us to have engineered the platform to deliver cash and positions to the front office, on an intra-day basis, in a way that is advantageous to the front office,” explains Plansky. “It takes a lot investment to do that well. It takes a lot of work to make sure the data is accurate and complete. But we have done it.”
Data vendors and index providers are an obstacle to achieving economies
Some of the data and index providers the front office uses are proving less amenable to the Alpha proposition. Denying State Street the right to re-distribute their data makes it more difficult to realise scale economies on purchasing external data sources.
“When it comes to pricing, data and index providers are tough negotiators,” admits Plansky. “But we think that, if we keep investing in data management, we will be able to help Alpha clients arbitrate that really well. Over time, we will be in a position to put a dent in the data costs of our clients.”
Alpha is already working with Bloomberg on data, as well as MSCI on indices. “We are not there yet, but we are getting closer to breaking the stranglehold of the data vendors,” says Plansky. “At some point, index and data providers are going to have to wake up to the fact that 70 per cent margins and price increases every year are unsustainable for something that we will be able to show is more commoditised than data vendors like to think.”
Multiple data formats and lack of standards complicate integration
Data may be commoditised, but it is not standardised: data exists in a wide variety of formats that have to be mapped and normalised before they can be integrated and delivered. While it is relatively easy for State Street to standardise the data controlled by its own custody and fund administration businesses, it is much harder to persuade third parties to send data to Alpha in the format they would like to see it.
“Dictating standards is really hard,” says Plansky. “But if we are right about the value of this data platform, we will have more and more clients adopting Alpha. That means more and more of the sources of data will work with us on aligning their data models with ours.” He adds that integrating different data models with modern technology of the kind supplied by Snowflake is already much easier than it was in the past.
Gradual alignment of this kind was pioneered by Aladdin, which published to global custodians the formats in which it wished to receive data from them, and the clients of the global custodians pressed the banks to adopt the formats. A new platform such as Alpha will have some of the same gravitational pull as it grows.
“Is there going to be a published set of data standards that everybody follows?” asks Plansky. “I do not think so. Ultimately, there is going to be a set of data models which will progressively align better, so we have less manual work to do, and the client has less manual work to pay for. But there will always be clients and third parties who send us data in formats we do not like, so there will always be a need for manual intervention. But the Alpha platform will act as an agent for reducing manual work by gradually aligning data models among the members that use it.”
“We would love to dictate how we receive data from third parties but we need to be realistic, and enable third parties to send us data even it is not in the ideal format,” continues Plansky. “We have a lot of people, all around the world, who do nothing else but manage the ingestion and transformation of data. When clients outsource to us, we become their agent in sourcing their data, so we have a tri-party relationship in which they have told non-State Street custodians, administrators and data providers to work with us.” The client gets involved only when the data fails to flow.
That is only sensible. After all, the whole point of the Alpha platform is to cut the costs and improve the experience of the client. But these are still early days for Alpha. The true test of the concept of a from-front-to-back data capture, integration, management, delivery and presentation service for asset managers lies in the future, when the number of clients and the range of asset classes supported by the platform has increased markedly.
“It takes time to convince asset managers to join Alpha because it is a big deal to turn over that role to a third party,” says Plansky. “People sometimes say, `Why don’t you call anyone who is a Charles River client or a State Street client an Alpha client?’ That is not what we are talking about. The Alpha client is not the one that is still doing all the work. It is the one that has turned over to us that core responsibility. The firms that have become Alpha clients have made long term commitments for us to become an essential provider of data management solutions for them.”