As a percentage of the overall pool of brokers, the public firms make up a very small portion. At ThinkLiquidity, we have several public brokers as customers and we see them making changes rapidly, some for the better, some for the worse, but we are seeing changes. For the private firms we work with, the lack of outside pressure on decision making has in many cases allowed them to stick to their long-term plans. But, as mentioned earlier, a lack of financial reserves can place smaller private firms in the same position as the large ones by forcing them into making decisions based on short-term results alone.
3. Can you describe some of these changes, are they personnel moves, restructuring, etc.?
When revenues are decreasing, firms often look first to cost cutting measures protect net income. This often includes personnel moves as employee compensation is the largest expense item for most firms. But changes are not limited to the expense side. Firms may also adjust risk management practices to try to earn more from the flow they do have. Depending on the firm, this can result in taking on too little or too much risk if not done correctly.
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Another thing we are seeing is that companies are starting to look at IB and partnership numbers and making changes to the commercial structure of the relationships. These changes may not be the best for the long-term relationship, but can help in the short-term by reducing the overall fees paid by the firms. It is also worth mentioning the fact that IBs have had a feeding frenzy in recent years with the explosive growth in the number of brokers. Deals that were written for IBs over the last couple years may not make financial sense anymore.
We are seeing restructuring from firms of all sizes, but because of the limited number of firms that release public data, it can be difficult to identify overall trends in the changes being made if you don’t have our unique vantage point. For the firms we work with, we often focus on identifying the revenue opportunities that exist already, but are not being maximized. Proper risk management strategies can often lead to improved financial results, without needing to make cuts to staff or make drastic changes to the long-term strategy of the firm.
The lack of volatility has been great for our business. Brokers really start to question their risk management practices in environments like this. I have had CEOs from every corner of our industry calling me for meetings and consultations. There is no better time than now to conduct a thorough overhaul of risk management teams and strategies.