FactSet Research Systems Inc. (FDS) Earnings Call Transcript & Summary

Welcome, and thank you for joining us today for our second edition of FINSIGHTS, our brand-new webcast series with a focus on the Canadian market. Series started last week with a session on the highs and lows of fixed income. In case you missed it, feel free to check out the recording through the link we've sent you. Today, we want to talk about some of the challenges and solutions for the Wealth Adviser, and how what we call the 5 Cs of Wealth will help you enter the decade [indiscernible] Digital Wealth Management. We'll take a look at the status quo of technology and solutions available and make a fact and check -- reality check of what was predicted for 2020 and what became true. And how forecasts have changed and what happened when something unexpected like a pandemic comes along? And how do wealth professionals in Canada and globally succeed with cutting-edge technology? Is the traditional market data platform already irrelevant? My name is Michael Medvinsky, I'm Director of Sales for FactSet's Strategic Wealth Business in Americas. And today, I'm joined by Seb Dovey. And for those of you who don't know Seb, he was the co-founder of Scorpio Partnership, an award-winning global management consultancy and strategic research firm. Seb has over 25 years of experience working with global banks, asset managers, family offices, technology firms, service providers, aggregators and start-up initiatives and has won various awards for his exemplary work. At post the sale of his company to a Fortune 500 firm a few years ago, Seb is now on the Board of various companies involved in tech, marketing, M&A, and investments in Los Angeles, San Francisco, New York and the United Kingdom. So we asked him to join us as he's an entrepreneur, a thought leader and adviser, we're extremely excited to have him with us today. Hi Seb.

Hey, Mike. Thank you so much for inviting me to be with you on this show, and I'm really looking forward to sharing some thoughts.

Awesome. Well, before we dive in, I'd like to just quickly cover just one housekeeping item. Each of you should see a panel in your webinar controls called Questions. We should have a few minutes at the end. So please ask your questions early and often. And if we can't get to your question today, no worries, we'll circle back after the session. So let's get started. Over the last 10 years or more, there's been a lot of research and thought leadership out there that has spoken around the topic of wealth management 2020. Now that we're here, albeit with a bumpy start, what are the trends advisers should pay attention to as we embark on a new decade of wealth with a new generation of tech-savvy, info demanding clientele?

Well, I mean, to some extent, Wealth 2020 was sort of the gift for management consultants for probably the last decade. I think I remember I did my first 2020 position paper probably in about 2008, actually, just at the global financial crisis. But I think it's interesting to sort of look forward for a decade and just have a quick reflection on where we are right now, what we've got to. The last decade of wealth management, digital innovation was really a decade in my view where industry was kind of experimenting. It was bringing things out to market. There was a little kind of reluctance about what we were bringing to market. There was some resistance, but near the end of the decades are the '18, '19 and now even in this decade, there was a much more rapid acceleration of adoption, which says to me that the market was getting ready. And what we've moved into, it is the 2020s with a decade that's going to be really all about scaling, transforming the operating model of the marketplace and making sure that digital and all that comes with it is going to make a better engagement with clients. And looking to the future now to come to your point of the question, this decade is all about how we're connecting to our clients. Which channels we're engaging with them on? How we're going to build the relationship and how we're going to make it commercially valuable? And that commercially valuable piece is crucial. To some extent, that's probably why there was resistance around digital in the last decade. There was an open question for every operator, which was, how do we make this commercial? How does it work? So I think that's something that's also going to happen in the '20s. It's going to make it even more important with the rising of digital. Firstly, in my view, the emphasis of our industry is going to shift. As a proposition, the value of our business is around the information that we manage. So we've got to think a little bit like an information management business more than just a money management business, which is really where a lot of the operators still have their heads. It's a big shift. It's a subtle, but important one to take onboard, and digital is driving that process. I think the second thing for us to think about is really more about what's digital doing to the consumer. It's changing their behavior. It's changing the behavior of how they connect and engage with the financial services provider. There's a sense of empowerment. There's a sense of expectation and to some extent, there's also a question around value. And those are things that are all there before. But what digital does is accentuate the focus on wealth management and how we respond. Then lastly for me, with this commercial effectiveness, there's pressure that digital brings to the operating model, good pressure, but pressure nonetheless. Which is how do you build this business to be a viable one with a good margin, that's sustainable over time. There is pressure on price and the question mark is, what part of wealth management do you keep as your core? Where do you derive most value? And what parts do you outsource? What parts do you partner intelligently with other operators? And in some ways, I think the industry has got to the point by just at the dawn of 2020, which is it's all about thinking very closely about the final mile, the engagement point. You own that as a wealth manager. But every other component that comes behind it you can collaborate, you can co-develop. So looking into the future, just quickly to take on board, what else are we going to see? I think in the 2020 is we're going to see things around how we invest. I'm going to come on to it maybe a little bit later about what happens with COVID-19, but CSR and impact investment going up. The debate around passive and active continuing, but going up. And the pricing model definitely in debate now, and I'll come on to that sometime into the conversation. Next thing, how do we inform our clients. Crucial. What's the analysis that we give to clients? How do we report to them? And how do we connect clients through the digital experience? And then lastly, for me, it's how as a business, the operating model of wealth management. How does it integrate? How does it integrate with new partners? Whether it's the retail world, like an Amazon or an Apple or a Google or a [ eBay ]. All of those pieces, what are the roles that we're going to have as job specifications in our business model, that's changing, definitely changing. And then finally, what's the price of our business? What's the value that we deliver to our clients? Are we charging the right amount? Are we overcharging and digital, puts an absolute scrutiny on them. So that's my quick race through to where I see the trends of the 2020 industry -- for the industry of wealth management looking ahead. Back over to you, Mike.

That's fascinating, thank you, Seb. Certainly from a solutions provider standpoint, we at FactSet, have also seen some really meaningful developments, both on the wealth management firm side as far as their expectations and requirements are concerned as well as on the role that solutions providers are playing in these wealth firms technology ecosystems. If I may, I would sum these up as currently the 5 Cs of wealth management, starting with consolidation, collaboration, communication, consistency and connectivity. So let's dive into what I'm talking about here. What I've experienced as wealth management firms are certainly looking for fewer and deeper relationships with their technology providers. They're searching for more strategic vendors that they can consolidate with. So that these firms can efficiently fit in and connect with the rest of the firm's technology stack and ultimately to lower their burden and lower their total cost of ownership. We're also noticing a rapidly growing desire amongst these wealth management firms to create greater capacity and increase productivity for their advisers. Really to do that by facilitating the much needed collaboration between the research and due diligence teams in the firms, home office and advisers in the field. The main idea here is to make sure that all these internally developed and managed model portfolios approved and recommended lists are front and center for the adviser directly within their market data and research platform. But forcing them to hunt for this information through their intranet or their overcrowded Inbox or worse, recreating the wheel and having these advisers building their own models from scratch really the emphasis that we're noticing every single day is on helping advisers spend less time researching securities, building portfolios and more time working with their existing clients and onboarding new relationships. And as far as these relationships go, they certainly require an excellent and efficient channel of communication. One way that we found to be very effective at achieving this is making sure all the robust portfolio insights and unique content around markets, investments that adviser is benefiting from and also be viewed by their clients. And this means exposing the appropriate subset, the appropriate level of detail on the wealth management institutions online client portals and creating an engaging and personalized digital experience for their client. Most importantly, being powered by the same solutions provider, the adviser and client experience, and once and for all, allowing the client and adviser to be on the same page. To sum it up, from our point of view, these wealth firms are anxiously in search for consistency, [ consistency ] of content, consistency in analytics that are consumed across our enterprise to really put an end to the disconnect and conflicting results that are often produced by having multiple systems and providers in the ecosystem. And making sure that the systems, such as the CRM, the trading, rebalancing, reporting, the digital experience as well as the teams and audiences consuming those systems are all very efficiently [indiscernible]. So, Seb, I think it's safe to say we all acknowledge that there's really no one size fits all approach. Would you say that following the 5 Cs is a good approach for all advisers. And in light of COVID-19, is there any more of a priority now than before?

Well, I mean, Mike, you've come to the right person when you come and use something like the 5 Cs. I just love alliterations. I think they're an easy way to encapsulate a message and to also bring across some key points. Yes, I agree. I think the 5 factors are very, very important. It will depend on the business, what will be emphasized more for them to be successful. Some might be more committed to emphasizing collaboration and communication in order to get their operating model to work at its most effective. I think also what you're trying to get across here is very much -- it's not just about inside the silo of the wealth management operating models, it's how that operating model works within the ecosystem of the market with everyone else, including, obviously, with FactSet. But you also asked this interesting point, which is the 5 Cs, how are they going to be addressed in COVID and with the pandemic that we're in right now? And what are the more important ones? To me, looking through those 5 Cs, I think the ones that are going to stand out and be significant are communication and consistency. And I'm answering that from the lens of the client. As much as I'm also answering that from the lens of the adviser or the staff member. There's nothing more worrying in this situation in any market recession situation like we've been in before, and I and you, we've both been in a few, is if you don't get a good communication message from your operator, that you don't get a consistent one in terms of how the information is passed to you, how your financial data is reported to you, how your business continues with the strategy that it has. With those 2 not working, you get a dissonance in the business model, which creates distrust, fear, and actually, at some point, a decision to move elsewhere. So to me, those 2 are the highest. But if I think about it again, there's another piece, which it'll be your 5, and I just want to add to the Cs, really. They all sum up to another one, which is credibility. If you do well in consolidation, collaboration, communication, consistency and connectivity, as an operating model in wealth management, you are credible. And if you're credible, that's the multiplier to your business. When you've got credibility, one client will tell another client to do business with you, and that's crucial. And that brings me on to a point that I wanted to get across in this talk that we're having today, which is right now in COVID-19 situation, the pandemic, most wealth managers are in a defend mode. Talk to the clients that they have right now, tell them it's okay, make sure that they're reassured. And that's crucial. And we're in this digital environment where you can do this through the screen, by the phone, by the e-mail, you can stay connected. But pretty soon as businesses, we're also going to have to shift from not just defending assets to growing again. The market will return. How do we use the digital environment to go into a more front footed opportunity? How will the wealth managers and wealth advisers leverage this situation of engaging with clients through different mechanisms to be proactive and win new business. And that, to me, is not something I've been seeing much covered. I can understand that. But I think that's what's going to happen pretty quickly that people are going to start to explore that. That's a view I hold. I don't know. What do you think, Mike?

I completed agree, Seb. And truthfully, I cannot have said it better myself. I especially appreciate your point about credibility, and we'll strongly consider adding that to the mix. But I think in these really unique and unprecedented times, having a personalized and proactive client communication, I believe, will have a lasting effect on both client engagement and on retention, which I think will have an effect well beyond the pandemic.

I'm going to take control of the question-and-answers I've been desperate to do this for a while in this conversation that we've had, Mike. Listen, I know that the audience are going to want to hear some examples of how FactSet engage with the marketplace to help them. And you've had 40 years of experience catering to the financial industry. Maybe you can share with me and the rest of the listeners, some cases, specifically within the wealth sector, that come to mind to you about how firms are overcoming the challenges and pivoting their strategy successfully with digital technology?

Sure thing, Seb. Thanks for the question. Certainly, in my personal 17 years at FactSet, I've seen many examples over the time. But as you can imagine, there's many that stand out as being more meaningful. One that comes to mind, brings me back to my previous point about increasing adviser capacity and facilitating that much needed collaboration between the research teams and the home office of a wealth management organization and advisers in the field. This was a very large wealth management firm that I was working closely with. They had over 100 offices across the country and they decided it was essential and strategic to their future to improve their advisers’ accessibility and adoption of their firm's internal model portfolios, recommended lists and internal research notes. They made a decision to load all of this proprietary content directly into FactSet, so that it became front and center for all their advisers. So when it came to work and launched FactSet, it was staring them in the face. And this allowed the firm to put an end to the countless clicks and all this valuable time that was being lost as advisers would no longer have to search for this invaluable content within their very complex and intricate Internet overcrowded Inbox. Now the impact that FactSet had in helping this firm overcome their communication and collaboration challenge was made crystal clear to me during one of the training sessions, that we had in one -- with one of their office branches. One of the senior advisers approached the FactSet trainer at the end of the session to thank him for the overview and to express his sincere appreciation for whoever in our Norwalk, Connecticut headquarters was producing this research, coming up with these model portfolios and these recommended lists, he noted in his words, this was invaluable to his portfolio construction and client communication efforts. Now this adviser who's been with this firm for many years, thought that this internal content that we simply integrated and we're displaying within FactSet was being created by us. While in reality, this was internal to his firm and has existed for many, many years, clearly, was just buried deep in their intranet. So the awareness and adoption was very much lacking. It was right there when I heard this story that I really fully appreciated the role that FactSet is playing in solving our clients' challenge of content that is essential to their workflow being out of sight and out of mind and solving these problems with the power of collaboration and technology. Now, since we're speaking about Canadian audience right now, would you say there are any nuances to a digital wealth strategy for Canada versus their neighbor in the States? Or in fact, are there any general nuances that you're seeing coming out of the world's wealth hubs that could be applicable to Canada?

That's an interesting one. I mean Canada has always been an intriguing market to me from a digital perspective. Because in many ways, it's a highly innovative territory, and there have been some initiatives, very disruptive initiatives that entered the banking market in Canada long before they came into the U.S. or anywhere else in the world. And for a while, people looked at it kind of a sort of a driving force. So I think from a wealth perspective, one should celebrate Canada's innovation and willingness to experiment. But in the past few years, I think Canada has perhaps been overshadowed by what's going on in the U.S. That's not a negative. It's just the reality. And certainly, Canadian strategists and creative technologists, those that might be on the call today, well, no doubt, you're always looking across the border to see what's going on in the U.S. and also should be looking across many other borders into Europe as well, particularly in the fintech space. I think some interesting wealth hub trends. If I just focus quickly on the U.S., to my mind, the 2020 in the U.S., we're going to see a real strong attack, positive attack, by that way, on the concept of virtual wealth management. So how we deliver a relationship to clients and to prospects through a digital channel. And advice, not just information transfer, not just transactional, which has really been the last decade. I think another thing that the U.S. is going to be at the forefront, and it already is in flight, that is the pricing model. I'm a big believer about the subscription pricing model. And I know that, that creates a tension in the market, and I suppose as an entrepreneur, I have always kind of looked at where those tensions are because that's where the opportunity lies. But it's very clear to me that as the business model bifurcates in terms of what digital can do for clients, the question about price is going to be important [ and how you pay ]. Asset-based pricing isn't necessarily a price model that's going to be here for good, and it's being challenged every day. The final thing that I think about the U.S. that I know that we're all interested in is how it uses its data. And Canada is also doing some really interesting stuff. There's a very, very large financial institution that's at the forefront of AI. But curated data to me means data that you can charge for your -- with your clients and also potentially aggregate and use elsewhere. It's the information management piece that I talked about earlier in our session today. That's transformational to me. And I know that these 3 areas, people will look at -- when they listen to what I say that sort of thing, it flies over their heads and they're just like, I don't know what he's talking about. But trust me, it will come in the same way that maybe 10 years ago, I was just saying, we are going to have financial advice in a robotic fashion that's coming to the market. Well, here it is. Probably a couple of final points that may be useful for us all to think about on the global stage. Firstly, it isn't a global stage with different countries, digitization makes it. There could be a fantastic new business coming out of Germany that could be applied in the U.S. Well, that sounds familiar. There already is one, or in the U.K. with some of the fintech disruptors. My point is, is that the innovation now in digitalization is going to come from all over the world. If the question is how to break into a domestic market, and if, in this case, the U.S., how do you do that? How do you get the distribution that will be key? But trends going into the 2020s are, how do you visualize your data? That's crucial. How do we utilize input of data with AI and natural language processing? How do we do the pricing, the rebalancing of cost to service and value? And then lastly, for me, it's new wealth strategies, the idea that you can store data for a client, maybe even charge for that storage. How you can nudge clients into doing different things based on how they handle their money? And how you integrate their money into their lives? What COVID is bringing in clearer focus to us is this correlation between health and wealth? Will that also transfer into the wealth management territory? I think so. Hey, Mike, picking up on all the things that we've talked about in the last few minutes, I've got a bit of a challenging question for you now. I've been dying to ask this all through our session. Given where you are, I mean, is the traditional market data platform irrelevant?

That's quite the question, Seb. I'll [ put it ] this way. I would say that inflexible and un-integratable closed up market data platforms that refuse to evolve will become obsolete if they haven't already. I think it's clear that our clients are looking for more open and more flexible platforms that can allow them to deliver on their key objectives and to truly address their end users' most pressing content and functionality needs without oversubscribing and without overdeploying. At FactSet we actually just completed a very interesting project with a very large global private bank. There's approximately 2,000 investment professionals that required FactSet's web workstation as they were migrating from another workstation provider. But there were another 15,000 employees at this firm, who required only a subset of our workstations' capabilities, and they were entitled to specific FactSet web widgets, like company tear sheets, charts, news summaries, and those web widgets were very easily integrated into that firm's intranet. At that firm, at that private bank, their technology and marketing teams really, really appreciated their ability to kind of break apart and de-compartmentalize FactSet's web platform and really just subscribed to the web components that they needed. And doing so allowed them to really address their needs across the enterprise in a very cost-effective way. But curious to hear your thoughts on the subject.

I mean given that example that you've just given, it makes me reflect more broadly on where I think we're going as an industry. I'm sorry, it was a slightly pointed question, but I think it's important for the audience. Meaning, in my view, what's happening right now, with the way we work is we're all adapting. And it's always we're all adapting but the pace of adaptation, the pace of change that I feel was going on right now and across not just financial services across our entire society is the fastest we've ever experienced. And that brings to mind that the playbook has actually changed. And if the playbook has changed in wealth management, we need to be open-minded about how we work, who we work with. And we need to be fast, and we need to work with experts in the market that will make us even better at what we do. And wealth management that's an industry that's both at one level fast to change, but on a level just frightened to change. And so maybe right now, we need to be brave. And innovation comes in situations like right now. I'm drawn to thinking about what happened after 2008 with the global financial crisis. After that period, we then experienced a decade of the biggest fintech innovation that ever existed. I think we're about to go through another of those phase again. So that's what I think.

All right. Well, let's move on to addressing some of the questions we're receiving from the audience. First one I see. You guys mentioned creating a personalized, engaging digital experience. Can you elaborate on how you've helped your clients accomplish this? Seb, if it's okay with you, I'll take this one.

Yes, of course.

I would say the personalization and relevance essentially centers around delivering meaningful insights around portfolios and markets that our clients care most about. At FactSet we seamlessly and securely integrate over 5 million client portfolios on a nightly basis. We do this with a partnership with over 100 different custodians and accounting systems. And we take these robust portfolio analytics that we produce, and we marry them with unique content sets and our digital design expertise to deliver really powerful insights to both advisers and their clients through internal and external web portals as well as our extensive library of APIs. That's how we accomplish this personalization and relevance factor for our clients. The second question we're getting. So given the changes in technology that we touched on, we see any impact on advisers skill set?

Can I take that one, Mike? Or you want to start with it? I mean, I think -- listen, I think obviously, the pandemic has completely changed the way in which the world is connected, it is contacted and is communicating. And that has a direct ramification on the wealth management model. I mean the heartbeat of wealth management is person-to-person engagement, and it's like -- it's had a heart transplant. It's all in the virtual relationship management model. So it's clear to me that many, many wealth managers, advisers are going to have to work on their visual engagement techniques, their capacity to emphasize their commitment and professionalism through the screen. And also crucially, and this is I think where FactSet come in. It's how they integrate that visual relationship, virtual relationship into the data sphere, the digital sphere of all of the information management, the rest of the platform of the wealth management model. So there's a huge array of skills. It's not necessarily new. I mean there were already developments in this space over the last decade, as I was saying earlier, but now it's not as if it's an option. It's the only way. At least for the short term. And more importantly, when we return to some form of direct contact, I suspect that the ratio of direct to digital contact is going to change radically to not 20% or less digital, it's likely to be 50% and more. And that's not really a bad thing. It's a good thing. So those are my thoughts, the skills of [ data [indiscernible] ] are right in the focal lens right now in terms of what people need to be good at. That's my thought, what do you think, Mike?

Completely agree. Oh, that's all the time we have for today. We didn't get to your question. No worries. We'll circle back after the session. I just want to say thanks so much for joining us, Seb. It's really been great to have you here. If you have any further questions, please don't hesitate to reach out to me. Thanks, and have a wonderful day.