By Carl Gilmore, President – Integritas Financial Consulting
That famous line in the movie “Trading Places” sums up the current financial profitability position of the typical futures commission merchant. With increasing compliance, operational and technology costs, a zero tolerance regulatory environment, virtually no interest income, transactional commissions racing to zero, and increased competition, it is no wonder that the FCM community continues to dwindle. And now, if things weren’t bad enough, blockchain technology threatens the final disintermediation. What to do? That is the $64,000 question.
I don’t want to spend too much time pointing out problems, or lamenting them, as that ground has been pretty well traveled. Rather, I think it is more useful to step back, look at the overall picture and suggest a path forward.
First, commission rates are not going back up. If you operate an FCM and are waiting for an environment in which you gain upward pricing power, you are probably going to be waiting quite a long time. Thus, don’t base your business strategy on incrementally higher transactional revenue. It isn’t likely to happen. Also, there are some interesting things going on in the marketplace with respect to subscription models that bear watching.
Second, assume that the current intrusive regulatory environment is probably going to get worse and act accordingly. As a former FCM executive I commiserate with all of you, but taking it seriously and acknowledging that the zero tolerance regulatory environment isn’t going away soon will help with strategic planning. If there was ever a topic in which an ounce of prevention is worth a pound of cure, this is it. Organizing compliance activities and systems to be even more pro-active than they have traditionally been provides greater benefits to your organization than ever.
Third, think about how technology is utilized. Reorganize workflows around a central technology spine or framework in a way that allows all of the functional disciplines in an organization to communicate with each other in an effective way. That means that technology solutions have to be able to talk to each other. Compliance technology needs to integrate with risk management that needs to communicate with finance and the front, middle and back offices. Data analytics and workflow management are key.
Fourth, think about your business in different ways. I believe it is likely that the FCM of the future will look more like a technology company than a traditional financial services intermediary. Place a premium on creativity and figuring out how to solve business challenges in new ways.
The FCMs that have survived so far have done a great job of organizing their businesses so that they run more efficiently. To survive the next wave and to thrive, FCMs will need to reinvent themselves yet again. That is the future and that is progress.
Also, for all of you going to the FIA conference in Boca Raton next week, make sure you check your email. The Futures Industry Association has sent an email asking attendees to participate in a survey about where the futures industry is headed.
Originally published in the John Lothian Newsletter