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A group of 150 gathered virtually on February 10, 2021, to engage on the topic of Trading vs. Investing and the Influence of Fintech. Hosted by the CFA Women’s Network, this POWER Series event featuring speaker Tricia Rothschild, CFA, president of Apex Clearing, couldn’t have been timelier given the recent focus on retail trading platforms due to the GameStop stock frenzy. Jennifer Aronson, CFA, moderated the discussion regarding the nuances of trading vs. investing, the influence and evolution of fintech and where the industry is heading.

Rothschild is responsible for the overall growth and development of the company and its three core business lines, which support direct-to-consumer financial-services disrupters, asset- and wealth-management incumbents, and institutional investors. Prior to joining Apex, Rothschild spent 26 years in a variety of roles at Morningstar where she served as chief product officer and co-head of Global Markets, overseeing a team of more than 1,500 product developers, product managers, designers, and business leaders.

Jenifer Aronson, CFA, is managing partner with Mosaic Fi, LLC. Aronson has over 20 years of experience with some of Chicago’s most recognized investment firms, including Northern Trust and UBS Brinson Partners. Most recently, she worked with family offices and ultra-high net worth individuals advising them on their investment portfolios, tax and estate planning, and other financial related matters.

Following an introduction, Aronson set the stage for the discussion by highlighting that the word fintech has become a catch all phrase encompassing many facets of the technologically enhanced financial world including robo advising, online lending and banking, back-office operations as well as retail trading—to name a few. Most recently there has been a big focus on online retail trading from the perspective of clearing houses which provide the platforms allowing for that.

Rothschild began by sharing that unrelated to the events of recent weeks, the topic of fintech as it relates to investing versus trading has been on her mind prior to and since joining Apex last summer. She feels there is a pervasive intersection of the two that has a lot to do with technology and demographics and how digital natives and the younger generation engages with the world and their money. She approaches the topic with a lot of optimism despite the recent tension and disruption, leading to the title of her first slide: Dramatic change occurs when market power shifts… which is the premise of her thinking.

Rothschild used the idea that people orient themselves to the world in different ways, such as beach person versus camper, dog person versus a cat person, or prefer an office environment versus being a work from home person. She thinks of trading and investing in a similar way and personally identifies as an “investor” given her many years and roles at Morningstar. Having started as a closed end fund analyst without a background in investing, she didn’t think of herself as one until she learned how to fundamentally value companies and their ability to build long term wealth.

Since becoming president of Apex, Rothschild increasingly began to think about trading and investing and what underlies each.  Trading is often associated with Wall Street under the following labels – short term, quick returns, traders, self-directed, and buy/sell, while investing is generally viewed as having a longer-term time horizon, involving an advisor or consultant, being goals based and in more recent years as having ESG awareness.

Through these thought processes, she began reflecting on the convergence between trading and investing and next wondered “why is that intersection happening and what is driving it”? Rothschild views the following trends as responsible for the evolution:

Demographic and Regulatory Shifts – There’s $68 trillion of wealth slated to be shifting hands over the next 10 to 15 years as the older generation passes away and that wealth transitions to the younger generation. They’re digital natives and engage differently with their money and that’s where innovative and tech forward apps are already shaping the future. Women are another aspect of the demographic as they control $10 trillion (one third of U.S. household assets) which is projected to triple over the next ten years. Women are living longer and need to take additional control of their futures; they are also more goals based and think differently about risk so there’s a lot to materialize on this front in terms of investing options and apps.

Scale vs Boutique – Consolidation in the industry has been high – last year there were 553 financial services M&A transactions (259 of which were retail banks) and 186 M&A deals involving investment management firms. There’s a need for both firms of scale and niche players which fintech can facilitate. Larger firms need to enliven or energize their base and niche players can use tech in native ways to enhance the investment process and expand their reach cost effectively, while firms in the middle may see a shake out.

Paradox of Choice – This is really more of a conundrum, similar to what could have been said about Mutual Funds at their peak; there’s that same element of overload with fintech apps. In 2019 there were 5,800 fintech start-ups in North America with that number increasing to 8,775 in 2020.  While two thirds of consumers have used one or more fintech platforms worldwide—double what it was in 2017—sorting through this sea of choice can be overwhelming to advisors and individuals.

Wall Street Moves to Main Street – Rothschild’s sense of optimism is derived from where the investment industry is heading. For example, the mutual fund movement was a tremendous development in democratizing investing in the equity and fixed income markets and providing better diversification at lower price points than previously available to individuals. Both the innovation in tech capabilities and the activities of Wall Street are driving further advancement in this area.

From the Wall Street perspective, you see firms like Morgan Stanley buying e-Trade, Goldman Sachs buying United Income, and Blackrock acquiring a custom indexing solution called Aperio as they think about how they can continue to offer cost effective investment information but also provide personalization at scale. Rothschild is interested in seeing how this trend continues as she views this as the future evolution toward more custom indexing solutions which will lead to better investor outcomes.

Rothschild highlighted that the commonality across investment apps is access to the user’s paycheck. Historically a business would tap into that by building an app specific their product or service; however, the silos are converging and becoming more integrated. For instance, a bank might start with a banking app and later decide to add investing, then realize lending is a natural addition. Having amassed so much information about customer spending and cash management behavior, consumer and retail firms are now stepping in to take advantage of this intersection. In January, Walmart announced that it will launch a fintech start-up with Ribbit Capital, one of the investment firms behind Robinhood, to develop and offer modern, innovative and affordable financial solutions.

In winding down her formal remarks, Rothschild suggested that rather than thinking of investing in one bucket and trading in another bucket, the convergence of these two behaviors, fueled by fintech, is causing all of us to adapt. As friction in investing is reduced, she challenged us as CFA charterholders and industry participants to think about the role we play in promoting better behavior, making sure investors understand the risk they’re taking and ensuring there are appropriate “guardrails” in place.

Finally, Rothschild closed with the notion that “change happens at the speed of trust,” a quote from Stephen Covey. Given there’s less trust in our financial institutions than we’d like and considering what occurred with recent trading volatility around GameStop shares, it’s extremely important for the industry to regain that trust and fuel innovation, but they shouldn’t be mutually exclusive – they’re definitely interdependent.

The conversation transitioned to Q & A and Aronson began by asking some prepared questions from the CFA Women’s Network.

Q: The Game Stop situation happened six months after you joined Apex. Having spent 25 years at Morningstar on the front-end of the business, what’s your point of view from the custody and clearing side of the business?

From her personal experience the biggest take away has to do with education. She’s been in the industry since she was 26 and has three kids who are 25, 22 (working at Morningstar) and 16. Other than her son who now works in the industry no one has ever wanted to talk to her about what she does. 

The fact that’s there’s been so much interest in individual securities and trading and why it happens that way and who is benefitting and who’s losing has been intriguing – it’s not how she thinks of investing and certainly isn’t how she would advise people to put their money to work. Rothschild is happy that this ignited conversations and that she learned a lot from 25-year-old and his observations, but here’s a massive delta between the value of a business and herd mentality around trading and market mechanics so there’s definitely a need for more education.

Aronson shared that she had similar conversations with her 20- and 22-year-old stepsons who are both engineers and owned five shares of GameStop so wanted to know what they should do and where the market was going. For her, this raised questions regarding whether it was good or bad that young investors are participating in the market this way and creating such volatility.

Q: Given what happened and where we’re going, how much influence do retail traders have on market?

Rothschild informed us that they’re more than one fifth of the U.S. stock market volume and liquidity has increased given the 2020 retail trading frenzy. She feels “influence” is a strong word to use but thinks the engagement will continue given demographic shifts and technology reducing barriers to entry, so again, we need to educate investors in a way that’s relevant to them. 

Q: In terms of your comments regarding reduction in friction, what’s your opinion on “pay for order flow” versus commission trading? This was game changer for retail investors – is that positive or negative for them?

Rothschild said we should pay attention to this and encouraged the group to educate themselves on the topic as there’ve been some headlines that aren’t quite telling the full story. Pay for order flow isn’t perfect but it isn’t the root of all evil. Some of what’s imbedded in the rule is price improvement for retail investors, so they have benefitted, but she thinks it’s a practice that can be improved however is not inherently flawed or conflicted and the data proves this.

Aronson followed up by expressing her concern around transparency – the commission used to be stated (i.e., $9.95), but how do you know the cost of the trade when it’s commission free? Rothschild thought this was a great point and was one of reasons she joined Apex. Having been on the other side of the trade, she realized she had no idea what happened under the water line. She informed herself by reading After the Trade is Made: Processing Securities Transactions by David M. Weiss and emphasized that what happens after the trade is critical to the functioning of markets.

Q: In light of the attention the industry has gotten over the last month, what regulatory changes do you see coming through?

It’s hard to prognosticate on regulation but unrelated to GameStop, Rothschild thinks one of the things that will be overturned under the Biden administration is ESG regulation as it relates to retirement plans. There were restrictions going to be imposed but having those overturned will be better since investors will be able to invest along their sustainability preferences and that will be made more transparent within the context of retirement plans.

Q: You have an impressive background and career; what’s something you can you tell us that we’d be surprised about?

Rothschild shared that she got married around the same time she started at Morningstar and as they built their family, it was really important to her to raise her kids so managing some sort of work life balance was necessary. She didn’t set out to have a massive career and didn’t think of herself as super ambitious, but she was always interested in the industry and found it intellectually stimulating so it doesn’t seem like work. On a different note, she said she’s very organized with processes, logistics and her schedule but not with paperwork – her office and backpack are always a mess!

Q: In the investment management industry, companies spend a lot of time and money on diversity, with good intention, but have we gotten where we need to be over the last ten to twenty years?

No, not really, it’s sad to say because she generally looks at bright side. Rothschild is happy there’s more conversation around it, that both more men and women are understanding of the issue, and that there’s much more that needs to be done. She thinks we’re missing a lot of value because of the self-imposed barriers over the years. Ten years ago, she felt more alone, but today we’re more collectively aware of the problem and that it’s everyone’s problem. Aronson highlighted that CFA Society Chicago struggles with female membership which today is around 13%.

Q: Do you have an example of anything that’s helped in this regard?

Yes, within Apex, who’s parent is PEAK6 and still run by its co-founders who together launched Poker Powher which aims to bring more risk taking and confidence building skills to women through the game of poker. While not actually gambling, you’re at the table betting, taking risk, winning and losing and learning from and owning your mistakes and moving on from them. Rothschild still sees too many women in support roles and wonders where are the P&L owners, asset allocators, etc.

Aronson next took questions from the audience.

Q: What’s the prospect for greater expansion of direct indexing technology and it’s impact on the mutual fund and ETF industry?

Rothschild said while not to make this a commercial for Morningstar but one of its greatest assets was its index business – there are few independent index businesses in the world and direct or custom indexing allows for moving past inefficient packaged products. ETFs evolved this a bit, but custom indexing allows for managing tax implications and increasingly more important the ability to tailor to your own values and personal situation, more like a separately managed account. It does require the right type of rebalancing, better reporting, etc. but there will be more personalization while still diversified and cost effective. She feels if a portfolio is more relevant to you, you’ll stick with it and not just fire a manager because they missed a quarterly target.

Q: How has the recent fintech progress effected resources required for the front/middle/back office?

It has led to a proliferation of choices such that you can choose best in breed solutions from a front-end advisor workflow perspective but in her opinion once the single point solutions are input into the system, they aren’t consistent on the back end so there’s a clog in the pipes – the front end has moved faster than the back end allows. This is actually one of the reasons Rothschild thought Apex was an interesting place at this point of her career; they’re looking at things from the back end to make the front end a better experience.

Q: Why did you decide to go to Apex, what’s their future, differentiation, competitive landscape?

Rothschild shared that she left Morningstar in December 2019 and had intended take time to think about her career and next move but reconnected with Bill Capuzzi, CEO and began doing consulting work for them around how Apex as a custody and clearing firm could provide value in the advisory and wealth management space which is outside of their roots in supporting robo advisors and self-directed brokerage. Innovating from the back end was very appealing and here she is today.

Q: Do we need to protect the new traders/investors from the risk of investments that are likely to be highly volatile?

In her opinion, from a cultural aspect in the U.S. we haven’t come from the perspective of “protection”, there’s not a tendency that we need to protect or regulate. Of course, things should be transparent and there should be accessible and relevant education and we have an obligation to create awareness, options, understanding, trade-offs, etc. as investing is as much behavioral as anything to do with math.

In concluding the conversation, Rothschild offered that Apex has a variety of open roles in Chicago, Dallas and Portland so interested individuals should reach out to her via LinkedIn or elsewhere.

Post event note:

On February 22, 2021 Apex issued a Press Release announcing: Leading Fintech Apex Clearing Holdings to List on NYSE Through Merger with Northern Star Investment Corp. II

 

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