We recently had the opportunity to chat with John Plansky, Global Head of State Street AlphaSM. In our conversation, we explored the challenges facing institutional investment and wealth managers and how John’s team has been working to co-create solutions with easy access to aggregated data, analytics, and real-time insights.
Operating model simplification became a key theme for the asset management industry 4-5 years ago and in the years since, it seems like this has become an industry-wide priority. What do you think the turning point or key factors were for investment managers to embrace this strategy?
John: I’d like to say that our offering has had something to do with paving the way for this industry trajectory but ultimately, margin compression, changing investor preferences, increased regulation, and the growing cost of maintaining siloed legacy systems were major factors. We saw the challenges our clients were facing, did a lot of research on platform business models, and recognized that the ability to react to market changes via a simple and efficient operating model is crucial to achieve growth. Not to mention, the brisk pace of industry consolidation over the past five years underscores the need for firms to either reduce operating costs or engage in M&A to achieve scale.
In this environment, asset managers are differentiating their value proposition to investors by focusing on their core competencies, either by creating innovative new products, generating uncorrelated returns, or expanding their asset class coverage. More than ever, non-core activities that detract from that focus are ripe for outsourcing.
There has been a lot of discussion about building front-to-back serviced operating models. How would State Street define the ideal candidate for this kind of strategy?
John: We see this type of model as an opportunity to add significant value for existing clients, new clients, and across global markets. I’d say that the common thread is that these firms recognize the choice between transformation or the inevitable loss of AUM to leaner, better positioned competitors.
State Street has been a leader in custody and middle office services for decades and with the acquisition of Charles River for front and middle office technology, we are uniquely positioned to implement a front-to-back model. Though clients were always at the forefront of the State Street Alpha strategy, it was this unique breadth of offerings that made an open and interoperable platform from a single provider possible.
What we’ve observed is that front-to-back is compelling to any investment manager wanting to leverage efficiencies like timelier views of investable cash, encumbered collateral, FX exposures, or pending corporate actions. Taken together, this information drives timelier, better informed investment decisions in the front office. And on the operational side, front-to-back accelerates straight through processing and reduces manual reconciliations.
The industry has undergone quite a bit of consolidation in recent years—both on the vendor and service provider side but also in investment management. How does State Street advise clients to think about their future state operating model on the back of a merger or acquisition?
John: Going back to my earlier point, I think consolidation is a major factor in the drive for operating model simplification and is one of the drivers at the core of the State Street Alpha value proposition. Establishing a strong and flexible operating model is critical, whether investment firms are being acquired or plan to acquire. This supports their expansion into new asset classes, markets, or domiciles with a more seamless integration post-acquisition. Partnerships that increase scalability—both from a unit cost perspective and by providing access to new capabilities—will enable organizations to focus on launching and distributing new investment products that differentiate their value proposition to institutional and retail investors.
We’ve seen in the news that State Street recently committed to acquire Brown Brothers Harriman (BBH) Investor Services, a firm that in some ways, has a very different outsourcing philosophy than State Street. Can you talk at all about how State Street plans to integrate BBH’s focus on configurable services within the context of a front to back strategy?
John: Sure, we think that BBH’s services and expertise complement State Street’s competencies in a way that will be incredibly valuable to our clients. We expect the acquisition of BBH will create the largest asset servicer globally, expanding geographic coverage which in turn, enhances client experience. In particular, we’re excited about BBH’s deep expertise in cross-border, alternatives, ETFs, and other high-growth asset classes. Through this acquisition, we’re augmenting our leadership position across a range of services, augmenting our position in several key markets, growing relationships with many of the leading global asset managers and owners, and increasing our capabilities and scale.
And to your point about outsourcing philosophy, BBH’s approach to middle office outsourcing will provide us with added flexibility to deploy our Alpha platform in modules and augment our capabilities (e.g. corporate actions, intermediary services). Not to mention, BBH Investor Services brings us strong talent, particularly in service excellence and quality execution.
We’ve described outsourcing in a series of generations, with the third generation representing the move toward front office services. Once State Street is fully integrated in the front, middle, and back office, how do you plan to continue building on your value proposition? Will there be fourth generation outsourcing, and if so, what is it?
John: I think the ability to fully leverage massive volumes of investment data defines fourth generation outsourcing, and it is well underway. Relatively recent innovations in cloud- based data management now enable firms to capture, curate, and analyze data across the front, middle, and back office in near real time. Managers can then enrich that data with analytics, ESG scores, and other third-party sources to drive deeper insights. This ability is game-changing for managers with a vast array of data who have been waiting for the solution that will help them harness new investment insight. Which is a good segue into mentioning the State Street Alpha Data Platform which offers both outsourced data management and seamless access to a growing ecosystem of data providers. Our platform removes traditional barriers that left critical data either inaccessible or underutilized, and ensures the organization is operating from a “single source of truth.”
We think of State Street Alpha as a holistic platform and services for traditional investment managers. How is State Street investing in Alpha to bring it to clients that fall outside of that bucket such as asset owners, insurance companies, and private market investment firms?
John: State Street is taking a three-pronged approach, consisting of partnerships, acquisitions, and internal development, supported by an annual R&D investment of $250M+. Our acquisition of Mercatus, a front-and-middle-office solution provider for private market managers augments Charles River’s existing public markets capabilities, enabling clients to manage both public and private portfolios on Alpha.
For asset owners and insurers, we’ve partnered with providers like MSCI, Solovis, and Simcorp to support sector-specific requirements on Alpha, including liability-driven investing, accounting, and ESG workflows.
BBH Investor Services’ Infomediary® platform, which facilitates data transmission and integration between buy- and sell-side systems, will further support our goal to become a single platform serving the diverse needs of capital markets participants.
Thank you for your time and insights—we appreciate the look behind the curtain and will certainly be watching the evolution of State Street Alpha.
For more information on what other solutions providers are doing in this space, read our Solutions Market Perspective Series.