Thanks, everyone, for joining. Brennan Hawken, UBS's Capital Markets Analyst. Pleased to say joined by Jim Crowley.
Good to be here.
Thanks for being here, Jim. So Jim is an SVP and the global head of Pershing. Pershing, of course, provides business-to-business solutions to 1,300 of the world's most sophisticated financial services firms. Jim is also the chair of Pershing's EC and a member of BNY's executive committee. So really appreciate your time today, Jim.
Great. Well, thank you for having us.
Yeah, absolutely. So, Jim, I'd love to start broadly. So, Pershing is Bank of New York's second largest business. It sits in the segment that has highest growth trajectory, best pre-tax margins. So, really interested to dig more into understanding the story better. Can you start maybe with just an overview of the business?
Sure. Well, thanks again, Brennan, for having us. It's great to be here. It's great to be in Key Biscayne in February when you're from New Jersey. It is the second largest business inside of BNY Mellon. Many people in the audience may not be familiar with what a clearing firm does or a custodian does. Why don't I just sort of take a second and ground us? At the very, very core of what Pershing is as a business is that we provide execution, settlement, and custody services to, as you mentioned, 1,300 different intermediaries across the globe. And in particular, we're focused on the wealth segment. That's what we do at our very, very core. And then around the fringes of what we do around the core is we add a variety of value-added services, which we can get into today.
It will be product. It will be technology. It will be many of the things that BNY Mellon brings to the forefront as a globally systemically important financial institution to an intermediary that we serve. So to give you another sort of factoid or two, 1,300 clients, as I mentioned, there are 8 million investors that those 1,300 firms support, the advisors affiliated with those firms. We custody about $2.5 trillion worth of assets. And we process on any given day about 2 million trades. So it's a big business. It's one that we're seeing a lot of change in the marketplace given what's happening in the wealth segment. And so we're super excited about our business and where we're headed.
Yeah. No, that's helpful. When you think about the competitive landscape of the market, what differentiates Pershing versus its primary competitors?
OK, great. So let me start with the first one and the most obvious one. As a custodian, I don't think that there is another custodian that is aligned with a franchise like BNY Mellon. And that is a super powerful sort of superpower that we have because it gives us a broad set of capabilities that we otherwise would not have. So I mentioned execution capabilities. We can execute globally in over 60 different markets. We can custody in over 100 different global markets. We can provide treasury payment services. We can provide investment management solutions. We can provide an investment management product. So there's a whole list of things that go on at BNY Mellon that add to the value proposition that Pershing brings to the marketplace.
When we think about how we differentiate, when our clients come to us, they come to us with a couple of major sort of problem statements. The first one is that operating a financial institution in the wealth space is a very, very complicated thing. The first thing that they are sort of seeking out from us is, how can we help simplify the operating system of their business because of technology, because of the regulatory environment, all of those things? That's the sort of first problem statement that they come to us with. That's what we first go to solution for. The second thing is, how can we scale our business? Because it's really hard to scale a business in this environment when you have an operating system that is as complex as many of them are. The third thing is world-class service.
How can you deliver world-class service? It comes back to the talent. It comes back to our B2B focus. We're not thinking about how to compete for advisors or how to compete in the retail space. The only thing that we're interested in is, how can we serve our clients better so they can obviously support their advisors and bring to their clients the solutions that they're looking for?
Right. OK. And when you think about when you're pitching Pershing to a potential customer, who are the typical firms that they would consider if they didn't go or when they're considering choosing Pershing?
Yeah. So this is kind of like the press no-no, right, to talk about your competition. But I'll do it. So if you think about who our clients might consider, it varies based upon their business model. So the two primary markets or the two primary client types that we serve are Registered Investment Advisors. And we tend to serve the larger, more complex, professionally managed firms. And so these are not sort of your one-off Registered Investment Advisors.
RIAs in an office.
Yeah. These are multi-billion-dollar RIA organizations. So that's the first client type. Then the second client type is the broker-dealer client type. Now, historically, Schwab and Fidelity have been sort of standouts in the RIA marketplace. And of course, TD, which now with Schwab with TD together, that's one. So when we think about our market share in the RIA marketplace and who we compete against, those would be the primary competitors to us. But we think about who our ideal client is and who we're pursuing. And so we think of them a little bit differently. We think of them as serving a broader type of client type than what we're trying to pursue. And in the broker-dealer marketplace, it's largely Fidelity as well. They've been our primary competitor.
Of course, the firm that is sort of making the sort of most waves out there these days is LPL in the broker-dealer market segment. Again, I think our value proposition is so different than those firms that we feel as if there's plenty of room for us to stand out and differentiate.
Yeah. Got it. One thing that I'm really interested in hearing because you're a multi-decade veteran of Bank of New York Mellon.
Thank you.
I didn't say how many. But yeah. So keen on hearing your perspectives about the new leadership because Robin and Dermot have really driven a lot of excitement in the investor community. And so from your perspective, how has their approach differed from prior management teams? And curious to hear your views on why you think their approach may be more effective.
Yeah. So I've been with the firm for more than four decades. Thank you for not mentioning that. So I probably have one of the most boring resumes when it comes to resumes. But I think a very interesting career because over those four decades, Pershing has been owned by six different entities. And just during the last 20 years of my experience as part of BNY Mellon, six different CEOs. So the question really is about Dermot and Robin and how are they sort of changing the company. I'd say a couple of things. First is Robin has set out these principles of how we're going to think about the business, these three strategic pillars: be more for our clients, run the company better, empower the culture.
And when you sort of think about the complexity of the business that I was just talking about and you think about being more for our clients and how we have operated historically versus how Robin is sort of making us think about the business now, it's night and day. And I think that's probably proven in the financial outcomes as well. And I think you're starting to see proof points now how it's starting to change where this idea of being more for our clients and bringing all these sort of adjacent businesses that by themselves are really great businesses and they have great client franchises but never really worked with one another.
So as a simple example, if I were talking to Jennifer Barker, who runs the global head of our Treasury Services group, about how we can change the client experience for our clients with real-time payment services, it's night and day. So all the processing of checks, whether they're inbound or outbound, that is a great sort of way that we can think about collaborating differently and working across the firm and connecting the dots to be more for our clients. And so that's just one sort of simple example of how we're thinking about or how Robin is asking us to think differently about our business. And I'll give you another great one too because it's so practical in all of the advisory businesses that we work with. Portfolio management, this idea of outsource CIO, outsource the investment process.
Well, 55% of advisors now run their businesses on a fee-only model, away from transactional business.
It's probably even higher in the RIA space too.
Well, technically, by definition, it's 100% in the RIA.
You can have the dual-registered. They might have a different.
Then you get into the dual-registration model where it's a little bit of a blend. So that's a super exciting thing for us when we can go into a client relationship and start talking about the idea that we can bring this outsourced institutional investment management styles to our clients. And I don't know. We're $2 trillion. That's what we manage at BNY Mellon on behalf of all the clients that we serve at BNY Mellon. So it's a great way for us to be more for our clients by bringing expertise that exists in the company into the client relationships. And we've got several now that are taking us up on that opportunity.
It's a very interesting point. Actually, I'd love to drill down on that if I may. Direct indexing is something we hear a lot about. Where are you in that journey? And how can you bring some of Bank of New York Mellon's capabilities to help with that?
Yeah. So by the way, Mellon is one of the largest indexers that's been around for many, many decades as well. So just let me put it in the context of Pershing. We sit in this really cool seat where we get to see asset flows across the platform and how firms are thinking about creating model portfolios. And everyone sort of is out there sort of talking about the death of mutual funds. I've got news for you. Mutual funds are not dying. There's still a lot of life left in mutual funds that we see across our platforms. And then it became ETFs. And then it became direct indexing was going to be the most tax-efficient way for people to manage portfolios and SMAs. So it's become super popular. We actually went out and bought a piece of technology.
It was a company called Optimal Asset Management about 18 months ago. We embedded that direct indexing technology into our new advisory workstation, Wove, which I know we're going to talk about in a little bit. I can talk more about that later. The idea of indexing is something that is very much coming to the forefront with many of our clients because obviously, being tax-efficient is a really important metric when it comes to performance management.
For sure. It's part of the value add, without a doubt. So thanks for that. Curious about some of the revenue drivers within Pershing specifically. So can you touch on exactly what the fee revenue drivers are or not exactly, but what portion of fee revenues are tied to asset levels versus transactional volumes and maybe a sense of how much of the revenue is recurring?
Yeah. So this is that you asked about differentiation before. This is something where and you asked about competitors, something that if you were to sort of line up our income statement or if you were to take the market and wealth segment and try to sort of line it up because you can't sort of see Pershing that clearly. But you would see a dramatic difference in the way that our economic the way our income statement works versus some of our competitors. So 20% fee income, I'm sorry, 80% fee income, 20% NIR. So that's like the first stark difference. And on that 80% fee income, there are three big components to it. First is transactional business. That's the trading and settlement of trades. The second are account-based fees. And then, I'm sorry, balance-based fees and asset-based fees.
Got it. And then so of the fee revenue, basically transactional is going to be volume dependent.
Volume dependent. We track to any of the sort of U.S. exchange index volumes; we track pretty close to it. Our asset-based fees track mostly to the U.S. equity index. Our balance-based fees are a function of cash and what we do with cash management. It's just another opportunity for me to sort of point out how we're a little bit different than some of our competitors because most of the cash that we have on behalf of our clients is held off balance sheet. It's not on balance sheet. The other thing that is unique about Pershing's business versus some of our competitors is that we offer over 100 different choices of money market funds for our clients to choose from. It does create some variability in terms of which funds they choose in terms of what might drive our balance fees.
But we believe that being open architecture and giving clients choice is a better model than pointing them to a deposit product that they're sort of forced to use. And of course, we also offer, because it is a very popular product, we offer on-balance sheet product. We do have several FDIC bank deposit products that our clients can choose from.
Got it. And so yeah. So the cash fee balance fee, as you call it, really is more like distribution basically on a lot of those money market funds.
The money market funds.
Yeah. Got it. Perfect. That's great. So when you think about the proportion of that that's recurring of the fee revenue of that 80, what rough?
It's really high. It's really high.
Like three-quarters?
We don't sort of get that precise with it. It's super high. And I think the real stark difference is the value of those recurring fee revenues versus NIR being the determinant of what this is going to look like. And frankly, you brought up the word sustainability and the recurring revenues. That's one of the things that we really work hard on and has been a lot of the conversation about the overall bank's performance about fee income. We are very, very focused on driving more fee income into the business model. And we have enough flexibility to work with our clients and become aligned with our clients. And so as they bring in more balances, bring in more accounts, bring in more assets, we are super aligned with them on the economic model to drive higher fee income across BNY Mellon.
Got it. Makes sense. So thinking about investing, it's a very competitive space. You spoke to some of the competitors before, all very, very formidable. But yet, Pershing's a very high-margin business. So can you talk about how you balance investing to stay competitive in the marketplace while at the same time keeping the expense growth at a controllable level so you can keep that great profitability?
Yeah. So it's a great question. It comes with a lot of discipline around how and when we're going to invest. We are going to speak about Wove, which is this new advisory platform that we're creating.
The second tease.
Second tease. But I gave you the second tease because it's the single largest investment across the franchise, across BNY Mellon, multi-year investment. Robin talks about it during almost every call about what we're trying to do, which is to really solve for this super big problem that exists in the investment space. So if you ask an advisor, I'm going to give you a little more of a tease. If you ask an advisor, what's their number one pain point? They will tell you that the number one pain point that they have is getting the technology to work because it doesn't.
Interoperably?
It's not interoperable. Yeah. And then the second thing that they would say is that they spend way too much time, I think it's a Cerulli report that quotes 70% of their time is spent doing administrative things, not talking to advisors, not talking to clients, or not talking to prospects and clients. So we want to solve for that problem. And so that is going to be and continue to be one of the biggest investments that we have. As it concerns the other investments, look, we have got, as I've talked about already, a great franchise and core business. We've got a great portfolio of clients. They're always raising the bar in terms of what they want us to do in terms of new capabilities. I've talked about simplifying very complex operating systems.
So we need to continue to invest in those things that sort of feed the core business because that is super important to us. We cannot sort of slack or fall behind because catch-up is a really tough game. So it's a real rigorous process that we go through for any investment that we choose to take on because Dermot's not writing checks very easily.
He's told me that directly.
I know it has. He's told it to me more than once. So we've got to be really thoughtful. We took on a big project about a year ago to change the client onboarding process that we have. And again, if you were to ask an advisor, what's one of their big pain points, they would tell you it's the whole client onboarding, getting the documentation, getting it through workflow, getting signatures back. It has been very paper-intensive and manual. We want to eliminate those things.
Yep. Eliminating the paperwork would be a huge plus. OK. Appreciate that. One more, and then we're going to dive deeper into Wove. We've queued it up really well. But really, I got to touch before we do that, I got to touch on that new assets. When we think about the wealth management business, it is probably the most important metric. So it bounced around a little last year. There was some, I know, there was a client offboarding that's kind of been ongoing. And we've had that out in the public. But how should we think about the core business, the impact of a potential offboarding? And do you think that the mid-single-digit NNA growth rate is a reasonable pace to assume going forward?
Yeah. Let me start with that. Yes, we have high confidence level on that mid-single-digit net new asset growth rate. Now let me sort of put some color around that. It is the metric. It is the key metric of all wealth firms. What are their net new assets? It kind of defines success in many cases. If I look back to 2021, we did $160 billion. In 2022, we did $120 billion in net new assets. 2023, it was I think we ended up with a print about $35 billion. You mentioned the banking situation in 2023, which by the way, if you think about the environment and you come back to sort of the whole BNY Mellon story about resiliency, safety, security, that story really does play well during periods we had in 2023. It plays well even within the Pershing business.
Some people don't necessarily recognize that. But when I get phone calls from advisors wanting to know where their clients' assets are, and I can sort of share with them kind of the truth about that, truth may not be the right word, but transparency on that, it gives them a lot of safe, it gives them a great feeling of comfort to do business with BNY Mellon. So net new assets, we're very comfortable with the mid-single digit growth rate. It is going to be lumpy in 2024. We still have some bank offboarding that we're going to be doing. But look, we have a great franchise of clients. And I won't go through them by name. But these large firms really are growing at a rate much higher than even the mid-tier.
There are now 1,200 firms that control 75% of the wealth assets in the United States. When you ask me about who we serve and how we serve them, I'm not thinking about serving 18,000 registered investment advisors. I'm focused on 1,200 firms that really have the lion's share of the assets and who have got higher net new asset growth than those 18,000 or the residual of that 18,000. It's going to be a lumpy year, very focused on making certain that we've got all the investments in place to help that organic growth.
Is it possible to quantify or discuss the potential size or headwind that's left from the offboarding or maybe what inning we're in in that?
Well, it would be sheer speculation because there are.
Let's dock and trade.
It would be sheer speculation because there's think about all the sort of interested parties. You have an investor who is the interested party. You have an advisor who is an interested party. You have another intermediary that's an interested party. You've got infrastructure capabilities that may be binding constraints. So there's a lot of variables that go into that formula. So Dermot asks me the same question as well every week. I try to just keep him current with what I know with the facts. And so look, I think it's going to the tail probably will be a little bit longer than we thought. But it's anyone's speculation. We're planning for it to be sort of off of our books by the third quarter.
Got it. That's helpful. Yeah, OK. We've teased it up. Let's get into Wove. Yeah, so you guys have launched it. I'd love to hear specifically you touched on it a little bit, the addressable market. But it sounds like it transcends what you focus on at Pershing. So I want to confirm if that's right. And then how do you plan on what is the go-to-market strategy? How do you plan on driving the organic growth there?
Yeah. OK. So there's a lot in there. So let me just sort of back up a little bit.
I do that.
That's OK. It allows me to tell the story. So if you go back two years, we didn't have anything. We just hired Ainslie Simmonds, who was the head of digital at another firm, had a big asset manager to come in and help us make this strategy, this vision that we had to transform the advisor workstation come to life. And we're so proud of how we did that because when you're in a 240-year-old bank and you sort of suggest that you're going to do something with speed in an agile way, you get a lot of.
Sideways stairs.
A lot of sideways stairs. But we did it. In June of last year, we launched Wove at our big advisor event. Now, the Wove platform is—it's an ecosystem of applications that almost every advisor needs access to. And so the average advisor out there in a firm accesses 8-15 different apps to do their work. And it all begins with CRM. And it goes through all the other things in terms around financial planning, proposal creation, trade execution, reporting, billing, and half a dozen other things in between. So we've built this ecosystem of apps. And as I said at the top, or you actually used the word first, I think, but the idea that all these apps are going to be highly interoperable. And we're not going to compromise on that. So interoperable means a couple different things.
It means data's got to pass from one thing to the next. And it has to work. And they all have to be scalable. And they all have to be resilient. And they all have to be modern technology. They all have to be cloud-based. It all has to be and it's all being designed with the client, the advisor that is, with their design work embedded in it. And that's the order of operation that we've used. And so we did it, Brennan, with this idea that if we were going to take this idea and put it inside of a 240-year-old bank, it wouldn't sort of come along real fast. It would take a long time. So we created this sort of startup franchise. We called it Pershing X. We gave them autonomy. We gave them their own budget. Back to the investment question.
We gave them their own budget. We said, go. Oh. We gave them a little bit of a push by putting a whole bunch of engineers that we had in an adjacent business into the Wove business. They could start to work in this new framework. They stood up, I think, 42, maybe off by a couple, Agile teams. They've run it in the whole Agile format with sprints. Small teams, little pieces of work, iterate, iterate, iterate. It's been super exciting to watch it come to life. Yeah. It's launched.
OK. Yeah, it's launched. And it's off to a pretty good start with $30 million-$40 million of revenue expected this year. Yeah. So what progress can you share about the pipeline? And how should we think about the growth off of that base?
So the pipeline, basically, if you think about where we launched in June of 2023 being 0, we now have over 250 names in our pipeline and adding about 25-30 names a month to the pipeline. So your next question might be like, holy cow, Jim, that's really big. How are you managing that? And so I think it's important, too, to sort of share with everyone because the way I described this platform, I described it in such a way almost that anyone would believe that you had to take the whole platform. That's not the case. So you might walk through the door as an advisor or a team of you may be leading a team breaking away from a major wire firm. And you might say, hey, look, we've got our own technology guy. And he's got our own CRM.
We're going to do our own investment management because we're really smart people. But what we really need is a tax transition tool because when we bring models over from our old firm to this firm, we're going to have to, with some kind of tax sensitivity that the client is going to share with us, gradually work out of this old model into this new model. And I can't do that. I can't take the time to do that. Do you guys have a solution for that? And we would say, yes. That may be the app that you might want out of the Wove platform to do tax transition work for all of these advisors shifting portfolios to a new investment management style. And there are several apps within the Wove application that advisors or firms can lift out and use themselves.
And so we're not asking our clients to sort of throw away their old technology or old is the wrong word throw away their current technology, stack, and start over. We are, in some cases, augmenting their technology. And in other cases, we're going to be a whole solution platform for firms.
Right. So it has a lot. The interoperability is with other capabilities as well.
That's right. Yeah. And you asked me about addressable market, too. I didn't want to, I wanted to come back to that. If you think about one of the cool things about Wove versus some of its competitors, and there are a couple, three pretty well-entrenched platforms out there who work with advisors, who work with other franchises, what's different about Wove is not just that it's current technology, cloud-based, designed by advisors. But it's also adjacent to this custody platform. So you asked about the pipeline. I told you some of the numbers about. I'll give you a swag. Maybe half of those clients in that pipeline are custody clients. And the other half are either non-custody clients or potential custody clients. So for us, it's been a way to sort of create a multiplier opportunity product for our custody business.
It's been a way for us to expand our total addressable market by working in a multi-custodial or non-custodial way. It's put us in a business from we were talking before about recurring revenues to have a subscription-based economic model because you want to buy the tax transition tool. Well, I might sell that to you on a subscription basis. And then it also, obviously, will add to the other things that we talked about in our recurring revenue stack. It'll bring new accounts. It'll bring new balances. And it'll bring new assets to the platform. So it puts us into this subscription business model, which we think is pretty exciting, too, from recurring revenue.
Yeah. So it's like a lead generator, basically.
It's a lead generator. Exactly. Exactly.
Is the only monetization model the subscription model?
No. So it could be a subscription model. It could be a blend of subscription and custody. Or it could be although I don't know of one at the moment, there could be some other sort of flat fee one-time event. But no one has walked through the door yet ready to write a check that big. So it's going to be primarily based upon custody and subscription.
Yeah. So in other words, give us our business. We'll give you a better deal on the subscription or whatever, depending on the size.
Yeah. Look, if you want to come in and buy one app inside the Wove ecosystem, that's going to be a rate. If you want to come in and buy multiple apps and also custody business, that's going to be a different rate. So the more people lean in to sort of what we are thinking about this vertical integration, the better the economics will be. And that's why sort of the scale that we bring to the formula with clients of being able to offer investment management, being able to offer custody, being able to offer technology stacks, we also do investor portals. And so there's a wide variety of things that we can sort of put in that bundle to go to market. And we'll actually allow clients to define what that bundle might be.
Right. Are you seeing that? Well, it's probably too early to see an impact on the overall business yet. But, or is it? Have you seen the early traction in Wove actually lead to better take-up rates in the core Pershing business, certain parts of the market that you didn't see before?
Yes. So I'll give you two examples that we've gone public with. We had a client, Lincoln Investment, who's been a client of ours for 25 years. They've been in business for 50 years. They had split their custody business. They were custody with us. And they had a self-clearing platform for their 403(b) business, specifically 403(b) business. And I think they have $20 billion on that platform. And the CEO came to me and said, look, I want to create something that's going to be relevant. And it's going to take us through the next 25 years of this relationship. I don't think us having sort of a split operating model is the best thing. How can we do this together? But he said, I need a new advisory platform, too.
Specific for the 403(b)?
Specifically for the 403(b). So we can be the custodian for the 403(b) business. And then the Wove platform becomes the overlay advisory platform for both the businesses, the 403(b) business and the legacy investment business. And in that particular case, the third piece is they want to outsource the investment business as well. So we'll build models and put it into the advisory platform. So that's one example where it was kind of like a win-win-win. And there are other examples. Integrity Marketing Group is another one I can think of. This is a Dallas-based insurance agency business, not in the investment business. They have hundreds of thousands of independent insurance agents that want to be in the investment vertical, need a platform, need investment management, need custodian.
They don't want to make three or four phone calls to sort of put those pieces together and operate it. You make one phone call to BNY Mellon.
Got it. That's great. That's very helpful. I had a bunch more questions. But we drilled into a lot of these in far greater detail. So I think that's a great note to end on. Jim, I really appreciate your time today.
Brennan, thank you very much. Appreciate it. Thank you, everyone.
Thank you.