This post is part of our Advisor series, featuring some of the most notorious names in Canadian finance. Not only have these individuals made exceptional contributions to the finance industry in Canada, but they’ve also taken a seat on Mako Fintech’s Advisory Board, helping to shape our impact with wealth professionals automating their business processes.
Algorithms, it seems, can do almost anything wealth management professionals can. Innovations like algorithmic trading, digital assistants, and robo-advisors are gathering steam faster than the industry can absorb these changes. What does this mean for wealth managers, their digital infrastructure, and the future of employment in this sector? As financial services continue to undergo rapid digital transformation, how professionals should adapt is just one of the questions we’re asking as an industry.
Even in just the past year, the influence of technology changes is accelerating rapidly. Getting the CFA designation used to be enough to get started in financial services, but now “you’re a technologist that is working in finance,” says Glenn Goucher — former President of the Canadian Depository for Securities, former President of the Canadian Derivatives Clearing Corporation, and a key player behind why Canada’s financial system held up relatively well when the 2020 COVID crisis began. His extensive experience yields a unique perspective that very few will have the benefits of sharing, even by the end of their careers. From Glenn’s chair, he’s watched financial system processes evolve from physical exchanges inside a vault to negotiating the development of digital infrastructure with Canada’s central bank; he’s lived through not one but two major financial crises, and he’s been one of the greatest behind-the-scenes influencers our economy will ever know.
In this interview with Mako’s VP of Marketing Chandal Nolasco da Silva, Glenn gave us his insights on technological innovation in the Canadian finance sector, how wealth managers can navigate these changes, and shared some advice for new graduates about starting their careers.
Mako: What attracted you to the financial services industry in the first place?
Goucher: I generally wasn’t attracted to financial services, in the beginning, I’m a geologist from a first career and a couple of other roles in between. I sort of fell into finance. As a first job, I was a portfolio manager and it just fit me. So I went from working outdoors in the tundra and doing underground exploration and ended up doing high finance with no background, no contextual history, no family members in the business, and ended up turning it into a career that worked out fairly well.
Mako: What was the extent of technology use back when you were working as a Portfolio Manager?
Goucher: It used to be if you got your CFA you could be pretty well placed for your finance career. It was your core competence when you were working in the business, and there was nothing…the technology dimension for portfolio managers and people in the business was almost not existent. Now nearly everybody coming out of school or going through the CFA process can all program, they’ve all got coding skills, and they’ve evolved their analytics capabilities beyond. So the tools have allowed them to develop their skills- which is what they were supposed to do, that was the promise of technology. You can be smarter about your work, but it does take an awful lot of intelligence now to leverage all the technology. For me, that’s the biggest change that’s happened on the front end of the business.
Mako: How has the Canadian finance landscape changed since you first started your career?
Goucher: When I started in finance in 1993 I was in New Brunswick, so you have to account for some not-being-the-center-of-the-universe challenges. When I was managing a bond portfolio, we had a spreadsheet, and we were still taking physical certificates when we were buying and selling bonds (and I know that’s a crazy concept). We had a “cage” where people sat all day inside of a vault to receive securities, which they hand-recorded when they received them. I bought and sold securities with a 20-minute delay in pricing information and back then we were really excited about that time frame.
We were one of the first users of an old bond portfolio management system that was Excel-based and used to take overnight to run, just to see what our positions were and what our returns were. And again, we were quite excited because that was a huge advance.
So I’ve come from that world: a world where I hired somebody to go to the top of the building to sweep off the satellite dish so I could get live prices (laughs). I used to ask people if they were afraid of heights in their interview (laughs).
I was able to participate in the entire process globally because Montreal was the first traditional derivative exchange to go electronic worldwide
I was fortunate enough to join the exchange world. That was in 99, and obviously, the world progressed through time, and systems started improving. I joined the floor of the Montreal Exchange when it was still a floor. I had a funny-coloured jacket, I used to yell and scream at people, and I could order a beer with hand signals (for the half a dozen people who can still recognize what those signals are). I was there for that process of what we used to call “electronification” of the marketplace. We were taking something that was paper slips, people yelling and screaming, hand signalling, typing into a system at the end of the day with the paper slips, and trying to reconcile all of those bits and pieces. That was the financial market that I walked into.
Then after working on the floor with one of the banks, I joined the [Montreal] Exchange, which was a truly exciting time for market infrastructure. I was able to participate in the entire process globally because Montreal was the first traditional derivative exchange to go electronic worldwide, so we were early as a country doing it. I was able to be a part of that global transition to much more automated and much more digital. And then post-market, moving over to the clearing side I was around for the operational heaviness of the business when you got to see it because it still hadn’t changed entirely. The last decade of my time was dedicated to the back office side of the business and watching all those changes happen there as well. We’re still watching them.
Mako: In 2009, the CDC and MX launched the SOLA Clearing platform, this was right around the time you joined as President and Chief Clearing Officer. Can you talk me through what it was like working through a period of market transformation? What challenges did the CDC have to overcome to support the adoption of this new platform?
Goucher: That’s a great question, and one of the reasons I’m retired now (laughs).
That change process is so painful, and there are so many frictions in the system regardless of the age or the experience of any particular company. Because of legacy infrastructure, you deal with managing frictions through all those processes.
So the Derivatives Clearing House, actually both the clearing houses, cash and derivatives, have gone through these large projects, which become large because they’re industry-wide. We used to joke that I had to become a Project Manager instead of a President on more than a few occasions.
When you’re solving something, everyone needs to be winning, and the person or institution introducing the change, and the receivers of that change have to be aligned.
The base of that challenge for me was always based on if you have conflicting priorities, whether dealing with the larger institutions, or the smaller ones. If you don’t have shared priorities then you’re going to have a conflict. The conflict could be engineered, it could be a natural conflict, it could be a real conflict…but if there’s not a shared prioritization in the change then for sure you’re going to deal with friction. So when you’re solving something, everyone needs to be winning, and the person or institution introducing the change, and the receivers of that change have to be aligned. They might not be aligned in terms of the actual benefit that they’re individually receiving, but when they’re both receiving benefits that are measurable, and they’re recognized, change happens pretty easily. But sometimes it’s not possible. Sometimes it becomes more of a process (a more political process, a more visible process), and when the infrastructure that you manage is deemed systemically important by the central bank and everyone cares what you’re doing, and you can’t make any mistakes, it really does amp it up.
Mako: How do you think this relates to the challenges wealth professionals face adopting new technology solutions today?
Goucher: I think wealth professionals today are caught between two sides. They have the traditional challenge of asset gathering and having a lot of that wealth now sitting with a non-traditional demographic for wealth management. It’s been interesting over the last decade knowing that the disruption is coming, talking about the disruption that’s coming, and now seeing the disruption. The “millennial challenge” has been very visible for quite a long time. There was early recognition, but slow recognition that the expectations would be truly different.
What the industry has been slow to adapt to is the fact that not only do we have millennials that have money and are inheriting money (we all predicted this because of demographics), but also this predictable technology dimension that is the comfort in having less direct relationships because that is a world that is comfortable. From a money management perspective, the industry has been slow to acknowledge how that’s going.
Wealthsimple is one of my favourite examples. They were able to pull it together, and just said “there is a better way to do this.” They’re targeting the millennial cohort of burgeoning wealth with a technology friendliness. The new challenge for wealth management today is: how do you build a business around that?
Mako: During your fascinating career, you must have led some other exciting projects. Are there any that stand out that you’re able to share with us?
Goucher: On a project level, coming out of the 2009 crisis, the Government of Canada had three mandates. One, fundamentally, that they never wanted the financial sector to be the centre of a crisis again. It should act as a support industry and it should be in support of Canadians — it should never have driven a crisis. The financial services industry should be a service industry. Coming out of that was OTC derivatives now had to be cleared whenever possible, and I ran clearing houses so I had an interest in that. Also, they should be traded in public markets whenever possible, to shine transparency on the marketplace. I had a training and instructing background so I had an interest in that, but where I got much more involved was the funding/repo markets — a mandate to make sure the funding markets never failed again by having central clearing.
The funding/repo market is like the oil that lubricates a well-functioning system. It keeps the markets running, it keeps banks running, it’s everything that is required in a functioning financial system. In simple times that market is dead easy. You’ve got some bonds, you pledge them as collateral, someone gives you cash, ATMs flow with money. It’s really that easy. In a crisis where you don’t know who’s going to be able to pay you back the next day, you stop even lending secured money, overnight. And that’s what happened in the financial crisis.
The funding markets threatened to freeze again. The repo market became the centre of dealing with the crisis. You saw in the States that they had not fixed their repo market and it became a problem. Canada didn’t experience the same problems. We had a system built, and it worked.
So the project that I got involved with was to build a clearing business for the funding markets — repo clearing. That 18-month project took four years. Four years, a lot more money, a lot more involvement from the heads of all the banks in Canada and the central bank, the right hitters, my boards and my staff… but it got built, it got used, it got expanded, participation grew, and when the crisis happened a year ago, it worked very well. The funding markets threatened to freeze again. The repo market became the centre of dealing with the crisis. You saw in the States that they had not fixed their repo market and it became a problem. Canada didn’t experience the same problems. We had a system built, and it worked. I am very proud of how well it worked. And there were stresses and challenges, but you never heard about a problem in Canada with the funding market during the last crisis.
Mako: What a legacy! It’s extremely unfortunate, but fortunate, to be part of that first crisis and see that system work in another crisis.
Goucher: Yeah, it’s when we were building it, that was the big thing. I was trying to explain to people that this is insurance against this happening again. And of course, a lot of people were saying this will never happen again, but that’s why we buy insurance. So I’m happy that it worked in Canada. While there were really ugly days last March when the panic was the worst, it was fine. It’s a nice thing to have seen work. There are other projects, but of all the projects that I got over the finish line, that one worked and I’m proud of it.
Mako: Where do you think the industry is headed from a technological innovation point of view?
Goucher: When I put my future hat on, what’s interesting for me in terms of innovation, is how payments are going to work and how securities are going to be exchanged in the future. When I was working at the Montreal Exchange, I always thought that we would get to an eBay-like world for securities. I didn’t see why we wouldn’t, especially with increased computing power, but the auction system didn’t fly with such entrenched interests and legacy infrastructure.
In some cases, the markets work very well and there is no reason to change them, however, I think we’re going to get to a world where there are a lot more direct issuance opportunities through end investors without intermediation.
Disintermediation is a word I had to be careful about when I was in the exchange world because it applied to us. I used to tell people around me that we want to disintermediate ourselves because inevitably we would be a target for disintermediation. So as we strip out layers of the financial services stack from the business perspective, it’s going to meet with what has traditionally always been the challenge — how do you move cash, and how do you move money to pay for stuff? In a world where you need trust (and I don’t want to talk about blockchain, but it’s one of the reasons why it’s such a powerful tool), how you’re making payments in a digital financial transaction business is fundamental. That’s where it’s going to get really cool in terms of what finance looks like, how that gets managed, and how you run businesses in that. Because once you disintermediate enough (and it’s not going to happen easily and there’s a whole bunch of regulatory challenges in distribution), I think that’s where the real intersection will come, and it will be driven by the payments side more than anything I think. Once you can move cash around, transparently, without worrying about regulatory issues and worrying where the money is coming from and the counterparty’s ability to pay, it will be a much more interesting financial future for all of us.
Mako: What advice would you give to a new graduate about starting a career in finance?
Goucher: I do have some teaching experience. I taught policy and finance at the undergraduate level for a period of time and I liked it too. I would have different advice today than I did in the past when I was sitting at the business school.
Depending on what you want to do with your finance career, for me, the challenge is going to be specialization. We’re going to have individuals specialize within a particular type of investment style (and I’m talking just on the investment side now), or asset management, wealth management or advisory. The generalist I think is less likely to be of value given where we’re going with AI and core portfolio management.
The stuff that I did my CFA for is all coded now. There’s an app for that. No, literally there is an app for that. We were talking about Wealthsimple and a few other apps, and maybe it’s just the first half of the CFA that is now completely in the app, but in five, ten years it will be the whole thing. So you can take that body of knowledge and integrate it into an investment-style app or whatever. If you’re going to be in the business, and you want to manage money, you’re going to have to be extremely specialized.
The education system can fail new graduates because everything that will be in those textbooks is already embedded into an algorithm.
I fell into infrastructure. Nobody graduates saying I want to be involved with financial markets infrastructure. Number one, it’s not taught, and two you just kind of find yourself there. Many people transition through it because they find “oh this is kind of opps and risk” and they find it boring. However, it’s a great world for the introvert engineer who likes solving problems, and that’s not going away — trust in security and building systems. It’s a technology discussion now. If you want to build the infrastructure of the future you’re a technologist first who is in finance.
My old CEO used to say, and I didn’t really agree with him at the time, that we were a technology company that just happen to run markets. I was a bit more proud of the role we had and believed that we supported capital markets using technology, so we came at it a bit differently. But at the end of the day, it is a technology-centred business now.
So for people graduating in investment finance, it’s tough because you’re still taught traditional finance in school. It really is the challenge of our time that is slowly being addressed with new programs being developed recognizing these changes (my alma matter UNB offers a program in quantitative finance that I helped get started). The education system can fail new graduates because everything that will be in those textbooks is already embedded into an algorithm. An algorithm is smarter, faster, more efficient, and now they’re self-learning. So as much as you can teach yourself and train yourself, the algorithms are doing it better and can be tweaked and reapplied and pushed in different ways. It’s a very tough space to compete in from a career perspective unless you’re hyper-specialized — unless you become the person who is the best weather derivative person for the North West, for example. If you gain the degree of expertise, there will be a place for you, but the investment generalist is likely gone within a generation.