[The Institute for Innovation Development interview series invites innovation experts, innovative business leaders and emerging FinTech companies to talk to our readers about their latest innovation activities. The series seeks to learn from innovative business creators, uncover innovation best practices, and apply these insights into a financial services business model.
We recently talked with Jordan Fishfeld, Managing Director and CEO of CFX Markets, an online trading platform for non-public investments - currently focusing on non-traded REITS - that is transforming how people view and hold alternative asset positions.]
Hortz: What was involved in creating a first time trading platform, in this case, for illiquid REIT and BDC positions? What were your first steps?
Fishfeld: Our first step was learning the process of how these assets transferred historically. As exchange technologists, we could build the infrastructure to actually make these trades possible. We then built a very robust, fully automated system, and quickly realized we needed to simplify things.
I think the sentiment of everyone these days is digital - online is better. All of the users were very quick to adopt our technology, but they had no incentive to build it. We realized this early and so rather than going against the large players, we worked with them and created the tech layer for all parties to transact.
Hortz: What do you mean when you characterize your innovation as an “end-to-end” financial trading platform?
Fishfeld: We brought the entire transfer process online. A seller can now list his or her asset, match a buyer, and receive distributions all within the platform. Through our integrations, we are able to cut the settlement time down significantly, creating a more efficient liquidity solution.
Hortz: What new processes have you created that were not deployed previously in the alternative asset trading or exchange markets? What additional benefits do they bring?
Fishfeld: As an alternative asset trading platform, our application of blockchain (distributed ledger technology) is largely focused on the reporting, recordkeeping, and clearing & settlement process. We are not a blockchain company. We are a blockchain enabled company that leverages distributed ledger applications in a way that allows us to standardize alternative assets and the process for transferring ownership from one party to another.
The first phase involves using Ethereum to store transaction data to provide an immutable record of our trades. We are required to report all trades to FINRA and are regularly audited on our broker-dealer activities. By leveraging Ethereum we can provide secure authenticated reports to FINRA in real-time which will replace the time-consuming audit process, as well as resolve any dispute issues that may come up downstream. Databases can be altered, and documents can be backdated, but the blockchain serves as a permanent paper trail.
Next, we will leverage blockchain to address the biggest bottleneck in our asset trading life cycle: the clearing & settlement process. A majority of the assets currently trading on our platform clear through DTCC, one of the largest securities depositories in the world. Currently to get to DTCC, we have to go through intermediaries (transfer agents) who are very much paper-based in their bookkeeping process. This becomes a roadblock for us to achieve true T+3 efficiency in the market. We can become DTCC transfer agents ourselves, but we will still have to sync up with the main TA of record to prevent double-selling. However, DTCC has rolled out blockchain initiatives within various asset classes and we will be able to plug into their framework to go direct and bypass the intermediaries (transfer agents), allowing us to achieve faster settlement times than anyone else in the industry.
Lastly, for non DTCC eligible assets, we can use the distributed ledger to maintain secure recordkeeping for transfers between shareholders. Many private securities do not use a centralized security depository, but by connecting with our technology we can provide them with a decentralized depository where all of their transactions can be recorded and ownership can be tracked in an authenticated fashion. This opens up opportunities to on-board private companies and private funds that are not publicly registered today.
Hortz: Can you explain how besides providing transparent pricing, your platform also provides banking, compliance and document management?
Fishfeld: These tools are all necessary to speed up the transaction process. For some, we decided to build our own, and for others, we decided to build into others. To begin, because we own a broker dealer, we knew we needed to get information to our compliance officer, and get his responses as quickly as possible. We therefore built a compliance dashboard that acts much like an auditable dropbox. Files are uploaded or transmitted, depending on the method of receipt, and our compliance officer can review each trade and approve when complete. Once approved, the listing can go up automatically without an additional step. These time saving mechanisms are what get us closer and closer to real time trading.
As for our banking system, we decided to build a dedicated integration with a banking software company, allowing us to move money within our system for a fraction of the cost and time traditionally required. This banking system also provides us with an additional layer of review as each buyer and seller is required to complete OFAC, KYC and AML checks just to trade, ensuring a level of compliance we think unmatched. We do KYC, AML, OFAC, accreditation, and suitability reviews for every investor. What we have been able to do is streamline the review and approval process through our cloud-based interface.
Hortz: You provide secondary market services to a number of online crowdfunding private real estate platforms, like AHP, PeerRealty, and StartEngine. What is the scope and nature of the relationship?
Fishfeld: Our initial thesis when entering the industry was to support the proliferation of online capital raising platforms by providing liquidity. We created great relationship with portals to do just that but quickly realized that the size of this market was not yet where it needed to be, although we expect it will get there. Recognizing that the need for liquidity is not new, we started focusing on other real estate structures that required access to liquidity and zeroed in on the non-traded REIT market. With over
$90B in assets held by over 1.2M people, we knew we could make a huge difference quickly if we provided the tools we had built for this archaic market. That is where we are focused today.
Hortz: By bringing in new technology and more efficiency to the process, what level of pricing/cost benefits can you bring to advisors and their clients?
Fishfeld: Right now, we are seeing 30-40% discounts to published NAV as the average discount in pricing secondary market securities. This is a large discount given the available information and performance of these assets. We believe that with a centralized location and increased awareness, we can bring these discounts much lower. Our goal is to trade within a single digit discount of NAV this year.
Hortz: You mention in your executive summary handout that your team is looking for strategic partners to join in your efforts to create efficiency and transparency in this archaic space. Who are you looking for as strategic partners and how would that partnership look like?
Fishfeld: We are looking for investors with a specific knowledge in capital markets to join our board of advisers, but mostly, we are looking for market making customers. These partners can buy and sell product through our platform. They have the capability to buy large blocks and allow retail investors to purchase from them in amounts they choose, rather than the blocks available.
Hortz: Based on your experience in creating a new solution to an industry problem, what advice would you give advisors on handling their business challenges?
Fishfeld: My basic advice is to focus on problems that frustrate you personally. It is very easy to spend the time and energy fixing a problem that you personally have experience with, because nothing else about fixing the problem will be easy. As for more general advice to advisors in the changing industry that they find themselves in… always be growing and adapting.
This article was previously posted on Financial Advisor Magazine Online.
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