Suresh Kumar of Pershing: Providing a fuller picture

In the battle for boomer assets, Pershing arms brokers and advisers at smaller firms with many of the big firms’ tools.

Over the past several years, big U.S. securities firms have been shifting their retail businesses to a fee-based asset-management model from one centered on transactions and commissions. Economics and customer demand are driving the change; instead of needing assistance with transactions, which have become a low-priced commodity, Americans want help managing a growing pool of wealth -- $17 trillion of investable assets that should grow to more than $30 trillion by 2010, estimates Tiburon Strategic Advisors, a San Francisco Bay Areabased financial consulting firm.

To attract these assets, the industry’s largest firms, including Merrill Lynch & Co., Fidelity Investments and Charles Schwab & Co. -- which each manage more than $1 trillion in client wealth -- have invested hundreds of millions of dollars in technology to provide advisers and their clients with more-complete statements, detailed performance reports and access to a wide array of investments. Smaller brokerages, unable to afford the investment necessary for such tools, have come to rely on the technology of clearing firms in order to remain competitive.

“Technology is one of the key drivers in the decision about which clearing firm a broker-dealer will use,” says Mark Healy, chief operating officer of National Financial Services, Fidelity Investments’ clearing arm.

The nation’s largest clearing organization is Pershing, part of the Bank of New York Co.'s BNY Securities Group since 2003. Its 1,100 correspondent broker-dealers represent 70,000 financial advisers, 5 million customer accounts and $700 billion in assets. Last year, in a move to compete with Schwab Institutional and Fidelity Investments in serving registered investment advisers, Pershing created an Advisor Solutions unit that offers the parent bank’s custody and trust services in addition to the products and tools on the Pershing platform.

Chief information officer Suresh Kumar is responsible for technology at Pershing. Formerly CIO at discount brokerages DLJdirect and CSFBdirect -- units of the company’s previous owners -- Kumar has been in his current post for four years and serves on several securities industry technology advisory committees.

Kumar received a Bachelor of Technology degree from the Indian Institute of Technology in Madras, an MBA from the Indian Institute of Management in Ahmadabad and a master’s degree in technology from the New York Institute of Technology. He discussed how Pershing is working to help its smaller-firm clients in a recent interview with Institutional Investor Assistant Managing Editor Evan Cooper.

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Institutional Investor: How has the Internet changed what broker-dealers seek from Pershing?

Kumar: Our customers look to us for many Internet-related services. They’ve asked us to provide them with a Web presence that they can customize to suit their needs and can integrate into their core business. In doing that, our challenge technologically is to make sure the brokerage components we provide integrate seamlessly with their other offerings. We also can provide individual investors with a log-on that gives them access to information about their investments as well as one consolidated statement, all under the brand of their broker-dealer. Financial advisers can integrate this data into their workstation or access it remotely.

What kind of products and services do you support?

Our array is competitive with that of any major wirehouse. We have a central asset account with checking and debit cards; we offer separately managed accounts and unified managed accounts through our Lockwood unit; directed trusts, nonpurpose lending and mortgages; and a full complement of mutual funds, as well as insurance and annuities and the basic equity and fixed-income choices, of course.

In equities, how are you preparing for the arrival of the Regulation NMS trading rules?

We’ll probably need additional network bandwidth and central processing unit capacity to handle the expected increase in trading volume, but adding it shouldn’t be a problem. We’re working with our businesspeople and the trading group to model what’s coming, and IBM is helping us. Fortunately, the systems we have are scalable. We may make some changes to our platform, but we have plenty of room to grow without having to “rearchitect.”

Is data storage a problem?

Not really. Instead of storing data digitally and then delivering it on paper or microfiche, we’ve created digital forms so customers can see what they want in real time -- there’s very little going from digital to analog anymore; it stays digital, which is relatively inexpensive. We make digital products available to the introducing broker-dealers, investment professionals and investors, so that if a client wants to download information into Quicken or TurboTax, for example, it’s easier and faster to get what they need.

What steps are you taking to control your costs?

Cost containment and reduction are outgrowths of a program that we have undertaken to standardize and continuously improve our technology methodology. As a large-idea organization, it’s important that we have a technology-quality framework in which to operate, and to do that we use the Carnegie Mellon University Capability Maturity Model Integration, which comes from the school’s Software Engineering Institute. The model assesses an organization on process maturity on a five-level scale. The scale rises from 1, which means that an organization is chaotic, to 5, which signifies that it is well organized and focused on continuous process improvement. We’ve been working on this for five years, and in 2002, after only a year of program implementation, we were assessed by an independent auditor and certified at level 2. We rose to level 3, and last year we were at level 5. I don’t know of other Wall Street firms that have made a commitment like this, but we believe that rigorous process improvement is necessary to deliver our projects on time and on budget. We also created an information technology infrastructure library that focuses on using best practices to improve the way we deliver services.

How has the process approach changed what you do?

We now have a fourfold focus. First, we continue to reengineer transactions so that we achieve as much straight-through processing as possible. Second is improving information delivery. We used to do it 13 ways; we’re trying to streamline the process, so someone can query a database and access information in whatever way they like. Third is what we call service delivery strategy, which means that we hold ourselves accountable for every request for action that comes in, and we create an audit trail that shows how long it took to complete the task. Finally, we emphasize speed, because the marketplace is evolving constantly and we must react quickly.

How do you stay on top of changes?

Because we’re responsible for the timely delivery of the technological tools and processes our customers need, we have to stay current with issues such as money laundering, mutual fund breakpoints and all kinds of books and records requirements. To do that, more than 200 of our associates participate in various industry committees. We also develop our own software at our center in India, which we started during the dot-com boom, because we couldn’t hire the people we needed fast enough. It enables us to work 24/7.

How has the changing online world shaped your role at Pershing?

Coming from the discount online brokerage world, I had one perspective of the technology that a modern brokerage firm requires. But the online experience has become more than the ability to trade. The trend toward fee-based brokerage changes what we have to do technologically, encouraging us to deliver products that focus on performance of accounts and relationships.

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