The inflationary environment is hitting all corners of the economy. Yes, even financial services companies. Perhaps nowhere is this more evident than in the cost of market data. 

The challenge for financial institutions – and by extension, their wealth management servicing platforms – is that this information is not a discretionary purchase that they can forego when costs become too high. In the back- and middle office, it is necessary for portfolio administration, accounting, reporting and to meet rigorous compliance demands; in the front-office, advisors, portfolio managers, analysts, and client servicers count on this data to inform investment strategies and react instantaneously as new risks surface or opportunities emerge.

But while the data is necessary, these expenditures, have been a sore spot across financial services for years. Parallelled in the asset management and capital markets segments within the global financial services complex, the private banks, trusts, broker-dealers, RIAs, and accompanying wealth servicing platforms have generally only seen costs grow. This inflation has been exacerbated by vendor consolidation, increasing demands for entirely new categories of data such as ESG, timeliness of data such as real-time feeds coupled with aging technology delivery methods.

The caveat, however, is that the costs of market data both raw feeds and digital access have accelerated so quickly that what may have seemed reasonable ten years ago, is becoming harder to rationalize in an era of fee compression and intensifying competition. The good news is that as leadership begins to scrutinize their own balance sheets in anticipation of a potential slower-growth environment, many are discovering that they’re paying an excessive amount for market data and “forced” frills that aren’t being utilized. These unused services represent the low-hanging fruit for cost-cutting.

Again, a new “buyer’s market” for data is forming, particularly as stakeholders become more vocal about the costs and value of legacy solutions. A mutually beneficial commercial environment is being advanced whereby the technology firms enabling comprehensive, reliable, quality market data and the financial institutions consuming such data, will be able to operate in a more healthy, transparent, and sustainable manner.

Contextualizing the Costs

While the cost of data very much depends on the strategies of each firm and the number of professionals utilizing these tools, it’s clear the high costs of data is not easing margin pressures among wealth managers. FINRA, in its 2022 Industry snapshot, documented that the aggregate expenses of member firms had grown by more than 14% when comparing 2017 to 2021 totals. It’s reached a point that the industry trade groups, beyond becoming increasingly vocal about the fees, are now appealing to regulators to rein in the costs.

Consider the rise of ESG, which has amounted to a landgrab in which some vendors have taken advantage of reporting obligations to charge excessive fees. SIFMA, in its consultation with the European Securities and Markets Authority, said this was a “big concern” among its membership as pricing policies have been changing “in a manner that isn’t justified on the basis of different or additional services.” Rather, SIFMA documented, many vendors are merely creating layers of sub-licensing agreements linked to “mandatory ESG reporting and disclosure requirements.”

Of course, regulatory and compliance demands have traditionally represented a tailwind for data vendors, turning a “nice-to-have” data insights into mandatory inputs for reporting purposes.

Finding a Market Solution

It’s against this backdrop that financial institutions and their service providers are left with no other choice but to find a market-based solution. Timely, relaible, high-quality market data represent the table stakes for any vendor who aims to provide a viable alternative; the real value proposition for any would-be disruptor, thus, will likely reside in whether or not they can offer material relief from the excessive costs. The good news is that alternatives are indeed available, but organizations, first, must distinguish between the wants and needs of users and better tailor the capabilities of available platforms to the specific workflows of each function.

It’s important to distinguish between the material value many upstarts can provide their clients versus “cheap” solutions that in the past have only  reinforced brand loyalty for the legacy players. For instance, value extends far beyond simply charging less: it can be found in lower friction in on-boarding new users, which minimizes switching costs; access to more content, crucially on a self-service basis; better usability on the front end through intuitive tools accessible to business users; and fewer restrictions on use with greater transparency. Moreover, users will not be willing to compromise on stability and accuracy – again distinguishing “value” from “cheap” – and market data must be tied to a digital experience, particularly as wealth managers increasingly embrace a hybrid work environment.

It can be assumed that any front office user will have certain tactical needs. These likely include real-time quotes, options screeners and RTD; analytic charting tools; dynamic market monitors; detailed company information, filings and financials; and available research and analyst coverage. This information and these capabilities will fall into the prerequisite bucket for any professional user. But if decision makers think of their data spend in the context of the Pareto principle, these capabilities -- which might account for a fraction or 20% of an all-inclusive offering -- probably solve for 80% of the day-to-day needs of front-office data consumers.

So, what should decision makers look for in crafting bespoke solutions? A few attributes, in particular, will distinguish the best-of-breed vendors as well as the upstarts with staying power: quality and reliability, accessibility, and a business model that allows users to optimize costs to truly get the most out of their data.

Quality & Reliability

It’s very likely that organizations have tried and failed in the past to migrate away from their terminals. Again, cheaper options, alone, won’t cut it. Over the past ten years, however, API technology has been developed that can ingest, normalize and deliver comprehensive security pricing, reference data and analytics across all asset categories with real-time coverage across all the major exchanges – including, but not limited to equities, bonds, futures, options, mutual funds or the indices (S&P Dow Jones, Russell, CME, CBOE, etcetera.)

Ultimately, the back office needs instant access to intelligence and this data and analytics should align with and be connected the same sources of information used the front-office. If that information isn’t available at their fingertips, any “new” solution will create opportunity costs that eclipse the savings business leaders hope to achieve.

Accessibility

More than ever, the user experience matters. This is a point we’ve highlighted in previous commentary outlining how the pandemic altered consumption patterns. The need for accessibility will tilt the playing field in favor of those able to provide data-on-demand through delivery models customized to the very specific workflows of individual users. And real-time data will need to be available to front-office professionals whether they’re in the office or working remotely.

This focus on the user experience is even more critical as data demands grow across the enterprise. If solutions can be custom built for back- and middle-office professionals, financial institutions and their service providers can better leverage their spend to meet the different needs of more users across a greater variety of functions.

Compatibility with the New Paradigm (i.e. Aligned Costs of Ownership)

Excessive costs may be the motivating factor prompting decision makers to see what’s out there. That being said, pricing is the last factor they’ll consider when selecting a vendor. An organization will only move forward with a new alternative when quality and accessibility are either equal to or exceed existing solutions. Still, the rising costs of market data is overshadowing the extent to which value is available to those who know where to look.

Each of these attributes – quality and reliability, accessibility, and a lower cost of ownership – each ladder up to better and more efficient technology that will help wealth managers win the day. Data, itself, has become a commodity and the costs to access market data can be deployed elsewhere to better drive asset growth or performance. 

But even as data and analytics may be the new “oil” fueling financial services, the real value of data can be better appreciated when firms have the operating efficiency and controls in place to more effectively manage their data and only pay for the capabilities they actually use.