Bryce Engel is president and chief operating officer at Penson Worldwide, Inc., a post he took in June 2009. Prior to joining Penson, Engel served as senior vice president with TD Ameritrade, overseeing retail client services and support, institutional and clearing operations. He spoke with Jim Kharouf, editor-in-chief of JLN about his 13 years at TD Ameritrade, Penson’s plan to shed oversees business and concentrate on North America, as well as plans to introduce managed futures.
Q: How did you get started in the financial services industry?
A: I started with TD Ameritrade before there was a TD or an Ameritrade. We were a small non-public company with a series of introducing brokers that we were trying to look for, to find the right niche of trading. We were focused on retail transactions at that point.
I started at the ground level, on new accounts. I worked every job on the retail side, helped build the call centers from the ground up, ran the call centers for about five years, then I was asked to run the clearing organization. As soon as I got over there we decided to do transaction. So in the late 1990s, there was a bunch of consolidation in the brokerage space, such as National Discount Brokers, then Datek and then we did a series of about eight acquisitions leading up to TD Waterhouse.
I had a bunch of different roles there, running the front-, middle- and back-office for the institutional business and retail business. I really enjoyed it. We were a small firm that kind of took on the world from little Omaha, Nebraska.
So working for a big company is not something that really makes me tick. I really wanted to build something again. My wife said, “Sure, as long as its south of Omaha, where the weather is better.” I had been going to the Dallas/Ft. Worth center for work every six weeks and ran into some people from Penson. Interestingly enough, I was on the Options Clearing Corporation board of the directors and Phil Pendergraft (Penson co-founder) had nominated me for that board.
They invited me to come down. And the thing I liked so much about Penson was that they are independent. Here’s a small firm with the right market position. They are an independent provider of clearing technology. They don’t compete against their customers. From a brand and market position, I thought Penson had a lot of opportunities to grow. So I talked to Phil and joined the firm four weeks later, bought a house in Dallas and moved down there.
Q: How did you find Penson when you arrived?
A: When I started Phil told me he had 13 direct reports and flew about 200,000 miles per year. They said “You get all the international and long trips” and he kept the U.S. broker-dealer and futures company. I took on responsibility for all the international companies. And I think I flew 250,000 miles that first year.
We were really doing some interesting things with the London company and completely overhauled it. We brought in a whole new management team from a CEO, to CFO, head of sales, head of compliance. We completely re-engineered that and worked on improving our relationship with The Street and regulators. And we were growing quite well. But it was a loss-making business.
We launched a business in Australia in December 2009 and grew into a strong position in third-party clearing there. That business has grown very well into a very nice profitable business. Given where we are in the US marketplace, which is our largest part, the London business was running out of runway. It’s still a loss-making business but the trend is going the right way.
But with interest rates definitely not going up before 2013, and still that doesn’t mean they are going up in 2013, it’s critical we go in and look at how we streamline our company. We’re going to sell those franchises in London and Australia. And we’re going look at how to reduce our costs, de-lever the business. We have a pretty expensive debt structure on a high-yield offering we did several years ago. We have to look at how we can get back to where we’re in a profitable position to weather this challenging time.
Q: This is the question for most brokers today. We’re in a low interest rate environment. So how do you deal with that and manage it, given that Ben Bernanke says the Fed will hold interest rate steady until 2012?
A: We’re going to sell off the London and Australia businesses. That’s going to generate capital for us to reduce debt, either buying back debt or financing debt in the marketplace. We’re going to pay down some of our revolvers. But also, we announced that we merged our broker-dealer with our FCM. That creates much better capital efficiencies for us. And the requirements, from a regulatory capital point of view, are the greater of the two between the U.S. broker-dealer and the FCM. Because we had $160 million in regulatory capital in our broker-dealer and we’re adding $30 million from our FCM, we can basically double our futures business without any more regulatory capital. So we’re looking at ways like that to further streamline our business and make us more efficient.
The third way is to streamline our organization. We’ve done that a couple different ways. One, through being more effective with the staff we have. We entered into a deal about one-and-a-half years ago with Broadridge. We had several different technology firms we were using in our company that were separate systems running in a siloed business.
We bought Broadridge’s correspondent clearing business and outsource our current technology platforms and do some business process outsourcing. By doing that, we’re going to save in excess of 20 percent of our operating costs. For us, those are significant cost savings to take out for the long run. And we think it’s going to give us some better product capabilities as well.
Q: As you look forward, melding the broker-dealer and FCM, what are the prospects for the futures business?
A: Between the futures, equities and options business, you’re seeing the institutional and professional trading groups starting to cross the lines. So you’re starting to see the futures trading group getting into equities and vice-versa. You’re seeing more companies looking to tie in equities, options and futures together. There are going to be more opportunities to cross-sell our organizations and we’re starting to do that.
Q: Going forward, how do you execute that strategy?
A: It’s about having a very simple message and the right way to make it happen is to open one account and then another account. You take on the work of getting them up and running. All of our platforms are FIX enabled. The easier they are, the more likely it is they will try that.
The other product we are very interested in on the futures side, is managed futures, packaging the futures product together and then maybe you can cross-sell that to your online firms, white label it so they can sell it to their futures base. The customers, back to my days at TD Ameritrade, always talk about futures and want exposure. They may not have an idea of how to trade those markets, so managed futures is a much easier way, and they can get all the information on the manager’s style, how they run their portfolio and their fees.
We’re starting a small roll-out in November and then rolling it out to the rest of our account base.
Q: There may be a good opportunity on the managed futures side of things.
A: From all my years of experience in the retail business, even the sophisticated retail customers, they want you to make it easy. They want you to make it simple. You may have a great, customized platform to let them do all kinds of really cool things, but they want it to work when they log in the first time. They want it to be intuitive and simple and easy, and have it work, so when they have an idea, they can execute on it. That really goes into the managed futures side, to the extent we can make it simple and easy, you’re going to get more people that take advantage of it.
Q: When I think of Penson, the company’s bread and butter early on was clearing. I’m wondering from your perspective what can you do with clearing and what is the strategy for that?
A: Well, I think it’s both clearing and execution. We’re looking at ways that we can do both. Some people want execution and clearing, some people just want clearing. But we don’t have a preference. On clearing, the best thing we can do is be invisible to the end-customer. They want a seamless experience. They just want it to work. So, to the extent we can take whatever might be complicated and make it simple and easy, I think that’s how we’re going to continue to make our correspondents successful, which will make us successful.
Q: It’s challenging days for all the brokers out there. What are your prospects going forward?
A: It certainly has been challenging as we are exiting the business in some places, London and Australia, even though we hate to do that because those are two organizations where we think we’re on the right path. Yet we have to figure out where we want to spread our footprint while the markets are in their tough time. So while the markets are struggling right now, what we’re looking at and focusing on is spreading our footprint within the U.S. clearing business, Canadian business and the futures business. So, with the U.S. business, we bought the Broadridge accounts. We bought about 100 correspondent contracts with about $50 million in revenue, and that’s with a low interest rate requirement.
In the futures business, we continue to grow our footprint there in adding more customers, with the idea that when the markets are tough, if you can be a low-cost operating firm and you can grow your customer base, you expand your footprint so that when things do get better, you’ll actually be able to rise more quickly. And so… we’re doing a good job at keeping our costs down, streamlining our operations, cross-selling within the existing customers we had – I don’t think we’ve really exploited that as much as we really could have in the past, and I think it’s an opportunity for us. That’s really where our focus is.
Q: One final question, what your thoughts are on the current regulatory environment? It’s still uncertain, we don’t have all the rules yet, but what does that mean to you from the broker/FCM side?
A: Well look, as a clearing firm, the regulatory environment has been going on for some time. We want to make sure that the type of regulation that comes in isn’t cost-prohibitive, because if it’s a challenge to the firms to have to implement, ultimately the end-customer is going to end up footing that bill. We hope that it’s rational, and that with all the challenges that have gone on recently, we do things in a smart way.