September 15, 2024.  Please note that this is an automated transcript of the above mentioned podcast; errors may exist. If you have any questions, please contact Castine.

Robin Hodgkins: Hello and welcome to this episode of Castine Conversations. My name is Robin Hodgkins and I’m the president of Castine. In these episodes, we meet the business leaders and businesses involved in commission management, compensation, research services, and compliance as they’re used in both the investment manager and broker space worldwide.

Our conversation today is with Aaron Walter, who is the head of research management at Janus Henderson. Aaron has been with the firm for over 30 years and has been working closely with CSAs for a number of years while developing a global team that really understands the issues that firms like Janus Henderson face with different regulatory impacts around the world.

Our conversation covers Aaron’s career, how he views the current global environment for commission management, and whether the latest report from the UK’s Financial Conduct Authority is a plus for global firms. I hope you enjoy the conversation. So, Aaron, thank you very much for joining me today.

Aaron Walter: It’s great to be chatting, Robin.

Robin Hodgkins: I’d like to go back a little bit in time because you’ve been at Janus Henderson for quite a few decades. Before that, you already seemed to have been in economics and this whole finance world. Going back to your college days, was there something—either playing chess or gambling in high school—that led you to economics in college?

Aaron Walter: I’ve always had an interest in the stock market since I was growing up. When I got to college, I was trying to figure out what to focus on, and I bounced around degrees multiple times. Finally, during my junior summer, I had an internship with a stockbroker’s firm, and that’s really when I realized that I wanted to do something with investments.

Robin Hodgkins: Interesting. So this was more just on a personal level, or something where you were making enough money to pay for college and take over the world?

Aaron Walter: I always had an interest. I just didn’t know what I wanted to do, and I didn’t know what the opportunities were in finance, really. I didn’t want to be a broker. Mutual funds were not well known at that point in time. So it was just trying to explore and figure out where there were opportunities and where I could be a good fit.

Robin Hodgkins: That’s great. So speaking of a great fit, it sounds like Janus Henderson has been a great fit for you because you’ve been there for such a long time, very successfully. Was there some vector to get into the firm, or how did that happen? Was that just something that continued from your work previously?

Aaron Walter: When I graduated college, I started applying to a number of mutual fund companies, and one of them was Janus. Janus, at that point in time, had a small office in Kansas City as we were owned by Kansas City Southern Railroad, and my first job was customer service. So I was doing a variety of things, but it was a little bit unique since it was a satellite office, and I was able to get involved with a number of things behind the scenes, which really gave me a great perspective and a solid foundation of how the company worked.

My involvement with customer service was fairly short-lived, and from there I moved out to Denver with Janus, and that’s where I started to get involved with our portfolio management teams.

Robin Hodgkins: Excellent. And from there you’ve grown from the portfolio management side to the research side and now the global side.

Aaron Walter: A wise man once told me that good work leads to more work. I’ve been involved with a number of different initiatives within the company, from analytics to fundamental research, and then getting thrown into the MiFID II party. When I was asked to take over the research management function, I was initially fairly resistant as it was a whole new world of regulations, acronyms, and just very fast-moving changes that were taking place in the industry. But in hindsight, the move to research management has been really exciting and interesting. Best of all, it’s given me a chance to build a whole new set of relationships with individuals and firms that I didn’t have previously.

Robin Hodgkins: Have you gone through different cycles where the research was more internally generated and then externally generated, then back to internally generated? Or has it been more of a constant theme throughout?

Aaron Walter: It’s been a constant theme. We take pride in our internal research, but we supplement it with external research.

Robin Hodgkins: When was the first point when you first became aware of soft dollars, as they were called back in the day? Was that the very first day that you were involved in procuring research, or is it something that kind of snuck up on you?

Aaron Walter: I’ve always been aware of soft dollars, but I really didn’t appreciate the ins and outs of how soft dollars worked or CSAs until I got thrown into the fire. I think that was very eye-opening—from all the acronyms to just how things work with the commission aggregators to the sell side, to internally applying the research that we’re looking for.

Robin Hodgkins: Definitely. It’s something that’s been in such a state of flux for the entire time I’ve been in the field, which is about the same amount of time as you’ve been in the field. Going from soft dollars to CSAs, to CCAs, to MiFID II RPAs, then the most recent changes in the UK, which we’ll get to in a minute or two. Do you think that the way things stand right now in the US is probably going to be stable for a while? Or do you think that there are going to be changes created more from internal changes within the US marketplace?

Aaron Walter: It certainly feels like things are fairly stable in the US. The SEC has been fairly firm on staying pat, if you will. So it doesn’t feel like there’s going to be any regulatory changes. But what’s been interesting is within the US marketplace, you’re starting to see more firms unbundle.

With these MiFID regulations, it’ll be interesting to see how many US firms take a budgeting perspective. If transparency becomes a requirement in the US, that’s going to put some interesting dynamics on US firms to figure out how to budget and then ultimately communicate to clients what their budgets are.

Robin Hodgkins: Absolutely. With all the changes that have happened, I remember where I was when everything went to P&L in England—I remember pretty much the exact desk I was sitting at at that moment. Did that affect you and Janus Henderson as much as it affected vendors like ourselves?

Aaron Walter: It was a big change. I think for Janus Henderson, we’ve taken a global approach, meaning that we try to apply a budget to all of our strategies, whether they’re US-focused or European-focused or elsewhere. Ultimately, we’ve taken the approach to put a budget for each underlying account.

So I think we’re in a very good spot for this, but it was very bumpy to get there initially. I think what we’ve seen over the last six and a half, seven years is that things just keep evolving on our side. Internally, as you’re trying to do the budgeting, there are just little intricacies that you have to figure out how to deal with—things that are not in the regulations. So you have to figure out how to do it in a fair and equitable approach.

Robin Hodgkins: Definitely. I think you’ve obviously navigated those stormy waters quite well because you’re still here and you’re still smiling, so I think that’s a good sign.

Based upon what’s been happening most recently, and I’m not sure if you were really involved in conversations with the FCA, but maybe you could talk a little bit about how you view the current state of things as far as the new reintroduction of CSAs, or CSA-light, or payment optionality as it’s being called in the UK.

Aaron Walter: I think I’ve been very impressed with what the FCA has been doing with the feedback. I think they’re trying to make things work. Rachel has obviously spent a lot of time trying to understand what was needed and what asset managers—what was going to work with them and what was not going to work with them.

So it certainly feels like the FCA is trying to figure out how to be a little bit more business-friendly, if you will. I think when MiFID II came into place, it felt like things got a little bit heavy-handed. Yes, it created transparency, but it also just created a lot of noise with things.

As you fast-forward now, it certainly feels like we’re getting to a better spot regarding how the business can function, but yet also have transparency for investors.

Robin Hodgkins: Yes. I think it has been remarkable how well they have responded to all the conversations. It seems like the way the latest report, the PS 24/7, has come out, there’s a lot of similarity to what we’re doing here in the States with the way we treat commission management. I know they don’t like calling it CSAs over there, but there’s a tremendous amount of overlap between the two regimens, between the SEC and the FCA. Are there areas of difference that concern you between the two views of the world?

Aaron Walter: I’m not sure I would say it concerns me, but I would just say there are differences. The question will be, as we move forward, will these differences persist or will we iron some of these things out? My guess is we’re always going to have some differences. You’ve got differences with corporate access, you’ve got differences with market data and being able to classify that as research or not.

So those are the big things that hit me. You’ve also got differences with the disclosure. I don’t think the disclosure is anything that’s unworkable. I think it just creates some extra steps, but it also, as I said before, creates transparency for the shareholders.

Robin Hodgkins: On the reporting side that you’re doing right now, it sounds like you’ve got a uniform approach around the world with the way you do your reporting. Do you think that is going to be simplified now, or do you think it’s going to stay the way it is right now for Janus Henderson?

Aaron Walter: I think from a reporting perspective, we’ve got some RPAs, we’ve got some CSAs, and then we’ve got a lot of hard accounts as well, and we’re doing what we need to do with the RPAs to report on those. It’s been interesting for the CSAs—there aren’t a lot of questions on those. I think when we get questions from clients, we’re specifically very transparent and give them detail, but it doesn’t seem like clients have a lot of questions regarding that on the US front. So I don’t necessarily see our reporting changing on the US front. I think elsewhere, we’ll continue to do what we need to do from a regulatory perspective, as well as what shareholders want.

Robin Hodgkins: It does seem interesting that the concern that people had around the client conversations on the reintroduction of CSAs was going to be very exhaustive and probably exhausting. But what we’re seeing in the conversations we’re having is that clients do not have a lot of questions about CSAs and the reintroduction of CSAs in England. Is that along the same lines that you’ve been experiencing?

Aaron Walter: I’d say it’s very true from a US perspective. I think from an EMEA perspective, it’s to be determined yet. I think my guess is there’s probably not going to be a lot of questions, but the proof will be in the pudding on what that looks like.

Robin Hodgkins: I think the idea that it does not require client approval—it requires more client notification—will make it a lot easier. I think also the explicit goal of these changes, which is to help the market and to help performance, certainly helps in that direction as well.

So this is something I believe is a win-win for the client, for the asset managers, for the research community. So there should be little discussion, but it is a change going from P&L or hard dollars back to CSAs.

Aaron Walter: It is. I think for global firms such as ourselves, we’ve been running a split model. It’s hard—I think global firms want a single process to run these things on, but also you want to be able to treat clients fairly and do the right thing. When you’ve got these split models, it’s hard to do all these things. We’re also looking at what the local market practices are. You don’t want to be out of line with what the local market’s doing. So there are a variety of factors that go into this. I think at the end of the day, though, it’s really trying to figure out what’s best for the client and treating clients fairly.

Robin Hodgkins: One hundred percent. From the view of a global firm such as yourself, I guess it would be ideal if everything was the same around the world, if there were some global settings for reporting and for treatment of what type of research is eligible, those sorts of things. But do you view it as an issue that there will remain differences in the eligibility and treatment in different regions?

Aaron Walter: No, I think you can get there. Yes, it creates some issues—it created some issues for us early on with trying to figure out how you deal with corporate access. But we’ve cracked that nut, and I think you can do it. It’s just that you’re going to have slightly different processes, but you can have processes that look and feel fairly similar to one another.

Robin Hodgkins: On the same note, do you think that the FCA is going to sit back now and say, “Okay, we’re done. That’s it”? Or do you think that they’re going to be looking at this over the next year or two to either change the reporting requirements or maybe even the eligibility requirements for things like you mentioned, corporate access and market data?

Aaron Walter: Well, we know there are two things they’ve mentioned that they’re going to be tackling. The first is the alignment of COBS 18 and COBS 2.3, which they’ve indicated will happen this autumn, which I think is key to getting things across the line. And then they also called out that they would be taking a look at corporate access at some point. I think it’ll be interesting to see what else is looked at during this cycle. It seemed like they were very open to feedback, so it wouldn’t necessarily surprise me if they look at other things as well. But I think that’s going to be based upon feedback from the market, if you will.

Robin Hodgkins: Yes. The comments that I’ve heard and that have been written about really do indicate a tremendous amount of confidence in what the FCA is doing. Corporate access continues to come to the fore—if that’s something they can address in the future, I think that’s great because that is such a major service that’s being provided and it’s being paid for somehow. So it would be ideal that it can be paid for in the same way as other services.

Similarly in the US, the level of changes to align from the US to what’s happening now in the UK—I don’t think either of us see any likelihood that there’s going to be changes there to take things out, like market data or corporate access.

Aaron Walter: No, I think you’re always going to have differences. The SEC seems like they’ve been fairly firm with where they are. They let the no-action letter expire and, outside of that, they really haven’t had a lot of regulation changes during this whole seven-year window. They’ve let things play out, and 28(e) over time has passed the test, if you will. The markets seem to appreciate it, but it also serves a good purpose and it works fairly efficiently.

Robin Hodgkins: It does. I think the level of confidence certainly in this country is significant. We’re seeing a lot of brokers still adding CSA services to their list of services, and we’re seeing more and more asset managers over here continue to work with or even expand their CSA activity. You mentioned earlier about the diversity of ways that you’re paying, whether it’s hard dollars or CSAs or RPAs. Do you think that maybe RPAs, at least for your own firm, might fade away? Or do you think you’re going to continue with those over the next several years?

Aaron Walter: I think RPAs are going to fade into CSAs. The record reporting requirements are very similar, but the big benefit of fitting the RPAs into a CSA is that now you’ve got everything into a single pool. I think that’s one area we’ve struggled with—when you’ve got multiple pools to pay out from, it just creates more complexities behind the scenes.

Robin Hodgkins: It does, and certainly there is a benefit in spreading one’s risk between multiple pools, but there’s also a lot of work if you have multiple pools. So I think every firm has to decide what is the best way to handle that—whether to consolidate or whether to have multiple pools. But if you have multiple pools on the CSA side and on the RPA side and on the P&L side, it gets very complicated very quickly.

Aaron Walter: Yeah, you’re still going to have the same requirements. You’re still going to budget the same way. You’re still going to have account-level budgets, but it just cleans up things operationally. We’ve been trying to manage two pools—you can do it, but it just becomes really noisy when you’re paying out brokers, especially if you’ve got a small payment coming out of one of the two pools. It’s just noisy.

Robin Hodgkins: Mm-hmm. Yeah, and it distracts you from the real focus, which is research itself. And speaking of research, what are your thoughts about the impact of these changes coming out of the UK on US research providers or UK and European research providers? I would think more on the latter, but I’m curious what your thoughts are.

Aaron Walter: So I think going forward it should open up some opportunity for research providers. Budgets aren’t going to go up overnight, but I think these changes allow more flexibility. I think when you had things moving too hard, it was a challenge where you’re trying to deal with the corporate side of things, but you’re also trying to deal with the shareholders and what research they need on their accounts, and then ultimately portfolio managers and what they want to consume. I think as we move forward, it just gives you more flexibility. This isn’t going to change budgeting overnight, but it just gives you more flexibility in the long run.

Robin Hodgkins: And do you think that it would expand your list of research brokers, or is that also going to be something you’ll kind of wait and see as the needs of the fund managers and all change?

Aaron Walter: I think it gives you the opportunity to expand it. I think when MiFID came into play, there was a lot of cutting out of providers, and I think I could see people or firms or strategies adding some brokers. I don’t think it’s going to be exorbitant, but you’ve got some of these fringe brokers that people think are maybe nice to have or better than nice to have, but they weren’t willing to pay for it. Well, now this opens the door that you can do it. And from a shareholder perspective, I don’t think you want to get things so tight that you’re losing out on opportunities or losing out on potential investment opportunities. So I think this just gives some more flexibility and gives firms the ability to do what they think they need to do.

Robin Hodgkins: I totally agree with that, and I think time will tell. I think the opportunities for brokers in the UK will expand and hopefully that’ll be true as well for the continent as things develop there. But I think the main impact on this will be for global firms such as yourselves to be able to simplify your reporting, simplify your processes, reduce the time you’re spending on all of this so you can actually concentrate on the main core of your business, which is procurement of high-quality research.

Aaron Walter: I completely agree.

Robin Hodgkins: One of the things we’ve been talking about for a long time in the conferences that we both have been at is the lack of research or the reduction of research in the UK has hurt performance. Do you think that the goal of the FCA to help the marketplace will be realized in short order on the performance side, or is that also going to take quite a while to settle in?

Aaron Walter: So, Robin, I think the answer depends on the strategy. Yes, I think some strategies are going to see some short-term impacts. A lot are going to see mid- to long-term impacts—performance wins on this thing. For a firm such as ourselves, we didn’t drastically change where we’re consuming research and how we’re consuming that, but this just gives us more flexibility, as I alluded to before. And from a costing perspective, this really is a minimal amount that’s being passed on to shareholders. So you’re talking about a couple basis points, generally speaking. And so from a performance perspective, that is not a material amount.

Robin Hodgkins: Absolutely. And it’s something that has created a lot of curiosity about the amount of effort that’s been put into this whole process for such a few number of basis points that are involved, versus the increase in performance, the increase in simplicity, the increase or the decrease now in operational costs in managing a more standardized approach on a global basis.

One of the things that we’re asked about a lot is how fast this is going to be adopted. You’re a global firm, and there’s a lot of other global firms that have been looking for standardization, simplification, coming out of the UK, hopefully out of the US, out of the EU as well. But there are a lot of other firms, very small firms that I think will benefit from this change very quickly. But do you think, or do you have any thoughts as to whether it’s going to be led by the large firms such as yourselves and others to get back into CSAs in the UK, whether it’s going to be the small firms that really will benefit from this on an immediate basis, or it’s going to be more of a scattergram that will be unlike what it was in 2017 where very large dominoes fell first?

Aaron Walter: I think that’s the million-dollar question. It seems like there’s an appetite for some smaller firms to move fairly quickly. I think your larger global firms are in a spot where they could move fairly quickly since they already have CSAs and they have soft dollar processes in place. But I think for the larger UK firms, it’s more of a wait-and-see approach.

I always use the reference back to the end of 2017, where things happened over a weekend where literally nobody quite knew what was going on, and then all of a sudden you had a couple firms come out and announce that they were going to go hard, and the bulk of the industry moved very quickly. So it wouldn’t surprise me if we see somewhat of a domino effect again. What’s different between now and 2017 was that in 2017, you had 60 days to decide if you were going to stay with soft, and if so, you had to have your policies and procedures in place by then. Here, it’s more open-ended, so you’re not tied to a specific date. You’ve got more flexibility on when you can implement that.

But what I would also say is that a year ago when this was announced, there was a lot of doubt whether anyone would do it. Six months ago it seemed like there was some optimism, and momentum has really continued to build over this. Now, everyone you talk to seems like they are actively considering it. That’s not to say they’re going to do it, but I think everyone’s actively considering it. And I haven’t heard anybody in the last couple months say they’re not going to do it at all. So I think that’s a big change in tone from our peers and within the industry.

Robin Hodgkins: I definitely think the corner has been turned. And again, to your point, they may not do it tomorrow, but they’re no longer closing the door—mixing metaphors—to the idea of considering it going forward. So looking at other things that you might ask for from the FCA, and we might have already covered this before, but are there other things that you would like to see from changes in regulations, not just the corporate access or the market data side, but other things that you think would really help the large global firms or the smaller firms in this marketplace?

Aaron Walter: You can always find a lot of little things to dot the i’s and cross the t’s on, but I think you’ve got to get the big things taken care of first. And it seems like the ground’s been laid so that firms will have the optionality to do this if they choose to. And then I think, as I said before, as you’re doing this, things evolve and I think firms are going to see, as they go down this path, you can’t just put a playbook in place on day one and believe it’s going to hold for the next two or three years. Things change behind the scenes with how you do your budgeting, just some little ins and outs with things that you hadn’t considered. There are a lot of little things that happen behind the scenes that you have to take into consideration. And the FCA doesn’t want to tell you what to do—doesn’t want to give you a playbook on how to handle every single scenario.

Robin Hodgkins: One of the things that concerns me, and I think also concerns other vendors in this space, concerns the brokers that are out there, is the lead time it’s going to take to get people on board with CSAs. My concern is that everyone’s going to wait until the last minute because they think it’s going to be a lot of work, it’s going to be a lot of cost before they decide, and all of a sudden they’re going to be caught short-handed without having a program. So maybe you could talk a little bit about your thoughts on what firms should be doing or considering to do now, rather than waiting until the very last minute when the dominoes in fact do all fall.

Aaron Walter: You and I have talked about it—for firms that want to do this thing, there’s a three-month lead-in time, both on the sell side and buy side. So you need to get moving sooner rather than later if you’re going to seriously consider doing this. And there’s minimal effort, or I should say there’s minimal costs on the upfront side, it’s just getting the things in place so that you are ready to roll if you choose to go that direction.

I think if firms are considering this, they need to start putting things in place. Start figuring out what your process and your procedures look like. Start figuring out how you’re going to budget, but also figure out how are you going to handle this? Are you going to handle this through a CSA? Start getting that in place or start at least understanding what it’s going to take to get that in place. Because there is lead time for these things, and I think if everybody is waiting till they make a final decision on this thing, there’s probably going to be some firms that get hung out to dry a little bit because there’s just not enough time to get things done.

Traditionally, with this budgeting, everything’s been done on a calendar year basis. So we’re getting close to Q4 now. And so I think if firms are thinking they’re going to do something for 2025, or if they want to at least give themselves the optionality for it, they need to get things rolling sooner rather than later. And then ultimately, if you’re not thinking about something for 2025, but think about something for 2026, don’t wait till the last minute. And just by putting things in place doesn’t require you to do it. I think we all know we’ve got optionality here, so it’s just trying to give yourselves the best optionality.

But also, I think generally speaking, people want to go where the local markets are going. So if things move quickly, you don’t want to get stuck waiting to decide what you want to do.

Robin Hodgkins: Absolutely, yep. I think also if they’re looking to bring in consultants, looking to bring in new people, and they’re all hitting the market at the same time, it’s going to be very hard for the recruiters, very hard for the providers such as ourselves and our competition to respond if there is that last minute dash for entry into this. So yes, I think it’s very wise to be very pragmatic about this, to, as you say, spend a little bit of time and money to get this thing looked into and planned for. At the end of the day, if you decide to do it in ’25 and ’26, whenever, it’s not going to be a lot of time and money wasted. I think it’ll be time very well spent.

So speaking of the wisdom that comes out of the years that you’ve had in this marketplace, are there any suggestions or words of wisdom for other people that want to get into the research management space or the CSA space that you’re willing to share?

Aaron Walter: To me, it’s very interesting how this piece of the business works, but it’s also rewarding from the aspect of working with your investors and getting to see firsthand how some of these investment decisions are made. So I would also say it’s, for me at least, this world has been a very fast-paced and evolving world, which has been exciting.

Robin Hodgkins: I think if you like exciting, if you like the ability to see how things operate behind the scenes—as you said, you started your career with that and really kind of evolved, fast forward to today—other people that want to get into the marketplace, I think could benefit from your experience and from looking at this marketplace as not just the research side itself, but all the other things that go into procuring that and ensuring that it’s the best research possible for your investors and for the asset owners.

Aaron Walter: I completely agree.

Robin Hodgkins: Well, Aaron, thank you very much. This has been a great conversation. I really appreciate your time and I look forward to our next unbundling or rebundling covered conference coming up in November.

Aaron Walter: Thank you very much Robin, and I look forward to seeing you and everyone else in London.

Robin Hodgkins: Excellent. Thanks a lot. I’d like to thank Aaron for spending time with me today. I’m most grateful. For more information on Janus Henderson, where Aaron is the head of research management, please visit their website at janushenderson.com. For more information on Castine, please visit castinellc.com. Thank you very much.