Onboarding
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The process of getting a client in the door and set up. Depending on what your client wants to do once she has made it aboard, this generally has a number of stages — in the argot, milestones, such as:
- KYC: all customers have to experience the rubber glove of AML procedures
- Client categorisation: A team will have to decide you are professional clients and send out the relevant terms of business and disclosures;
- Credit - those who are trading swaps, stock loans, PB — these days pretty much anything, other than spot and cash products — will need to be reviewed by credit, who will demand the imposition of absurd and intrusive credit terms which must be crowbarred into the master trading agreement by those sainted fellows in the ...
- Negotiation team: also known as the Sysypheans, they are doomed to labour until eternity making the fantastical aspirations of the credit officer legal flesh and blood.
Design thinking
For all the millions that firms spend on rearchitecting their onboarding systems — the philosopher-kings of operations who have transcended the service line will wheel out a strategic remediation initiative, every 18 months or so, but somehow nothing ever changes — a few foundational questions seem resistant to even being asked. Such as:
What is the point of onboarding?
It not only resembles a production line but is one. You are manufacturing a product for delivery to your client. But your revenue profile is different: you don’t make your money upfront, but only once the client has its product. You are selling a relationship, not a chattel. This means:
- Cut out the waste: You want the onboarding process to be as quick, efficient, pleasant and commoditised as possible. Here the Toyota Production System that spawned lean manufacturing techniques is a hearty analogue, and we commend our seven wastes of negotiation article. But note efficiency — in Ohno-sensei’s lexicon, muda (waste), not cost, is the watchword. If you save cost but introduce inefficiency — ~cough~ outsourcing — then you are getting it wrong. Most people are getting it wrong.
- Build for the Future: Your optimal outcome and your client’s is the same: years of trouble-free motoring. Over the years your relationship will grow and the environment in which you do business will change in utterly unfathomable ways. You cannot anticipate these developments, but you can plan for them: design your relationship documents to be standard as possible, as simple as possible, as uncomplicated as possible, and as flexible as possible.
- Design in interoperability: Design for the positive development of your relationship in directions you didn’t expect. Make your documents as adaptable as possible. Your client may open its business in New York and then wish to move to Europe. It may start trading FX and move to equities. Have a platform that allows a client to quickly add services, or switch.
- Make structural change easy: Design in a facility to bulk-amend to cope for inevitable regulatory changes. MiFID 3, ahoy!
- Don’t obsess over the disaster scenarios. Build basic protections against the failure of the relationship or your counterparty — failure to pay, insolvency — but beyond that, remember this is a relationship. as to which...
Relationship contracts
But, but, but — why must it be that our onboarding process does nothing but obsess about disaster scenarios? We know of cases where even affiliated broker-dealers — entities under common control in the same financial services group — have laboured for years to conclude a simple stock lending agreement, horns locked over the indemnities each required of the other, neither side advertent to the fact that the risks between them would be reported at a consolidated group level anyway.
And when it comes to actual clients, every element of the onboarding process is arrayed against the client as if, until proven otherwise, each should be taken as a dissolute money-laundering gambler and fraud who will stop at nothing to subvert your legitimate interests in making a fair return out of your relationship. Now, look: the JC is not naïve enough to believe there are no institutions like that in the ecosystem. There certainly are. Most of them, in fact: we assume a broadly Hobbesian view of human nature in the wild, and wish others would too.
And are salespeople wilfully blind to the risks of intercourse? As a randy goat. A whiff of a sales credit can suspend the most foundational disbeliefs in a heartbeat. But that is not the point. The point is that, even against such bounders and cads, a mute legal document — especially one you hammered out nineteen years ago and haven’t looked at since — is no kind of protection. Don’t take a piece of paper to a knife-fight, that is to say. Take a knife. Your practical risk is best managed by, well, actual risk management.
This is what half of your employees — the control function — are engaged to do, after all. Let them. Intraday risk is best managed by relationship management: margin, credit lines, client communication — to avoid cataclysmic meltdown, rather than by sleep-walking into it and then looking to an arsenal of weapons you prepared a decade ago to wax your client. Think Chernobyl: by the time the core explodes, it’s too late.
History tells us that a miniscule minority of our contracts will ever come to disagreement, let alone court-inflicted blows.