The financial sector may be slower to adopt tech-driven changes than scrappier counterparts, but they’re catching up. With their eyes set on the rise and success of computing giants like AWS, major financial institutions see a similar future for themselves, their clients, and partners. 

In an interview with The Financial Revolutionist, Gary Paulin, Head of Global Strategic Solutions at Northern Trust, argues that the future of the front office rhymes with the cloud-computing landscape. He envisions an ecosystem of partnerships built around a client’s value chains, which, he asserts, would offer all firms the opportunity to compete with the fund manager giants. 

Through outsourcing, and with fixed costs minimized, would the marketplace hinge upon alpha alone? Paulin says yes: The front office may be more consolidated, but he thinks allowing smaller firms to compete with larger ones on alpha rather than cost can deliver more investor choice and better industry outcomes.

This interview has been edited for length and clarity.

The Financial Revolutionist: What do you do at Northern Trust, and how did you end up in that role? 

Gary Paulin: I came to Northern Trust through an acquisition of a research brokerage that Northern bought six years ago; I was the co-founder of that brokerage. And in a previous life, my job was to come up with thematic ideas, and I would sell those ideas to institutions and hedge funds.

Northern bought us because Northern Trust is a solutions-focused firm. And back in 2015, 2016, they had taken costs out of the back and the middle office for asset managers and institutional clients, and the front office was the next logical area of focus. So they bought expertise in that space, which is the natural evolution of this solutions-focused mindset.  

Very quickly after, I went about setting up our outsource dealing business, which we call Integrated Trading Solutions (ITS). And it really exploded: It went from one client and half a billion dollars of funds under execution to about 80 clients and just shy of half a trillion dollars of funds under execution. 

I now run our Strategic Solutions business, which is a newly formed team I set up at the beginning of this year. And as part of that, I'm responsible for our Whole Office strategy, which recognizes that our clients’ problems no longer stop with cost and complexity but extend to alpha; decision-making and distribution, as well. We need solutions that cover both. As it relates to the front office, we have set up Investment Data Science which combines all the tools and technologies we use to help improve the investment decision making process. 

Why was outsourced dealing so promising?

I'm pretty convinced that outsourced dealing will become the norm, not the niche. If what I’m about to say sounds a little bit like the technology sector, then trust your instincts, because it’s exactly that. Starting from first principles, the widget that fund management makes is a decision and knowledge is the software. 

The two big drivers—where you’re going to see a lot more outsourcing not just of trading, but of everything—is that we’ve seen in the past two or three years a reappraisal of the needs for firms to become more capital-light. While I think we've been seeing in the last couple of years the front-office outsourcing wave, particularly around dealing, I think these trends will accelerate further. The value case for outsourcing service increases if it delivers not just cost savings, but also things like improved resiliency, BCP expertise, and liquidity. 

Now, I can’t talk about trends without talking about what Covid has done, because Covid accelerated things dramatically. You’ve heard Lenin’s “decades in weeks?” That’s what Covid has done, and it’s leapfrogged us years ahead in terms of thinking, because no fund manager or CEO wants to go through a scenario like they went through in March of 2020, where they saw assets fall 20% and they had no way to manipulate their cost base. The only solution for that is by renting fixed cost infrastructure off a scale provider, and having those activities delivered back as a service on a variable cost. Not only does that enable you to create more margin resiliency in the face of asset volatility, it gives you agility in the face of changes all around us now. And of course, it provides for infinite scalability.

What makes that more resilient? It sounds like a gig economy-type restructuring. Doesn’t that just lead to massive layoffs on the outsourcing side in the face of a downturn? 

There will be a net negative, obviously, but we have taken on trading teams particularly in areas we had gaps. We took on an emerging market team that we didn’t have—they came across from a client that we’re outsourcing to, almost like a sale and leaseback. The client sees no change in connectivity and that institutional knowledge is maintained; the only thing they see changing is who's paying the bills.

As far as downturns go, this is where scale comes in, and that’s why if you’re going to choose a vendor, make sure the outsourcer is a safe counterparty. And by safe I mean large and has scale economics. It means we can withstand the vagaries of the market—we're actually growing and investing in the market even though the market’s falling at the moment. It’s the best time to invest counter cyclically, but also outsourcing teams tend to do quite well in periods of stress.

So we've quoted both Lenin and Rothschild during this interview! Speaking of downturns, what do you think is in store for next year? Do you anticipate a wave of fintech acquisitions, whether for Northern Trust or other large banks and financial institutions in the coming year?

Things have become far more rational. One of the big themes and trends I see is the emergence of orchestrated ecosystems—firms like Northern sitting down with clients, identifying their future optimal state, and reverse-engineering a value chain and, where there are gaps in the value chain, bringing who’s best of breed into our ecosystem, and delivering that solution to the client. 

You might see partnership by actual equity stakes, like we've done with Equity Data Science (a fintech), and with licensure. But I think you'll also see a lot more more open relationships. The currency need not necessarily be hard dollars: Our currency comes as much in our access to an enormous install base than it does in real money. I think you'll see a lot more consolidation, but you'll also see the emergence of these orchestrated ecosystems. I believe they'll capture a lot of value in the market going forward. 

Therefore, firms like us need to consider how we either influence or are involved in these ecosystems. These ecosystems provide a critical alternative for firms desperately trying to scale that don't want to have to go to one of the large monoliths. That produces good industry outcomes. Supporting a small boutique struggling with costs, helping them bend the scale curve and compete on alpha, not on cost—that creates more choice and competition. Everyone wins.

Any final advice for fintechs and people working in finance?

Now's the time to pivot and start focusing more on active fundamental investment. We seem to be going through a regime change in terms of market structure. With rates doing what they’re doing, we're moving from narratives back to numbers, from promise back to performance, growth back to profits. Focusing on real, deep, fundamental investing is going to be core. 

You can no longer just buy a growth company and expect it to go up. Recognizing change, understanding drivers, the dynamics of how things are working, those sorts of things, doing research, are going to pay value. To quote Keynes, the difficulty lies not in the new ideas, but in escaping the old ones.