From the September 2006 issue of Research Magazine • Subscribe!

September 1, 2006

Innovations in Clearing

Many reps well-seasoned in the business and moving full steam ahead into their high-net-worth practices focused on retiring boomers, will well remember the days when clearing functions occurred Wizard of Oz style: executed stealthfully by the proverbial "man behind the curtain." While back-office clearing functions quietly and efficiently keep our entire global, digital economy humming without attracting much attention from consumers or investment reps, clearing firms have gradually found themselves in a position to offer much more than clearing.

Throughout the last 20 years, and fuelled by pure necessity mixed with old-fashioned competitive ambition, the clearing industry invested heavily in the technological infrastructure which now positions it, perhaps even compels it, to evolve along a seemingly organic trajectory toward providing sophisticated offerings far removed from clearing, strictly speaking. Clearing powerhouse Pershing's managing director, James Crowley, observes that the dominant theme in clearing is "dealing with changes in the industry, and responding to the challenge of change management."

Crowley continues, "We support our broker/dealers in the background with a rules engine that allows customization, and with excellent compliance and service support, but we respond to the profound changes in our industry with communication and training."

Practice Management Training

In June over 700 advisors attended Pershing's "INSITE 2006" conference in Hollywood, Fla., which, in addition to product-centered events, included best practices training workshops in technology. Additionally, Pershing's broker/dealer support includes hosting regular conference calls for chief technology officers and chief compliance officers.

Norman Malo, president and CEO of National Financial, has observed the same trend: "It's not just clearing anymore. Fifteen years ago I never had a broker/dealer ask me to help them with their brokers. All I did then was clear and settle trades. Now they want market data, they want research tools, they want wealth management -- all of that with one click! And they want it consolidated. Clearing is no longer just clearing -- it really is about integrated brokerage solutions. We have to look at what we see the marketplace evolving into, and we are trying to make sure that we are at those places when we need to be, and that we are making the right investments. Brokerage today encompasses a broad spectrum from the youth coming into the market, the average investor, to the affluent investor -- and we've got to deal with those differences and the changes in life modes that all those clients will go through."

As part of the Fidelity organization, National Financial has the advantage of a built-in training apparatus with Fidelity's established training facilities located all over the U.S. "We are leveraging off of Fidelity, which has a strong training presence," continues Malo. "We ourselves have had to transition to this because before we didn't have to develop broker training tools, and we never had to help our clients recruit -- this is fairly recent."

For example, five years ago advisors deciding to make the transition from a commission-based to fee-based book of business had very little formal support, and it is not uncommon to hear war stories of advisors borrowing money for living expenses or taking second jobs while they essentially retooled their practices for a fee-based model. National Financial reports that their correspondents are increasingly turning to them to offer that support to the broker. "You've really got to help a broker understand how to do that, both from a training perspective and from a support mechanism; it's a huge adjustment. But we don't want them to leave their commission business. Rather, we want them to understand what it takes to attract fee-based business. I think you have to determine: Is there a sub-set of my clients ready to look at the fee-based side? So our integrated platform allows them to take advantage of both modes. Commission business, equities, fee-based -- no problem -- we have all those capabilities now. What's important is that we train them on how to most effectively do that."

Independent advisors expect and require a different type of practice management training than their wirehouse peers. For example, LPL has developed an aggressive training program for their affiliated advisors branded under Fast Forward. As LPL's William P. Morrissey, senior vice president of advisory consulting services, puts it: "All of our advisors own and operate their own businesses, so not only are they forced to wrestle with some really sophisticated planning topics as their clients are aging, but they have to learn how to be super efficient in their practice." LPL's training themes for its six-city tour this year are entirely focused on practice management and how to market and expand your business. Esther Stearns, LPL's COO, notes that, "With our increasing ability to focus data in our reports, we can give [our advisors] a greater business feel for assets under management, sales levels and client profitability."

LPL has been self-clearing for over six years, and Stearns acknowledges the challenge: "It was hard to do. It was a risk. It was a risk we took partly because we take the long-term view. Initially we were focused on creating operational efficiencies for our advisors, then we turned our attention to building model-based platforms, and now we have everything in place so that we can help our advisors use our building blocks to take their practice to the next level. It's been an exciting evolution, and one that we always knew we were headed for."

Service Call

For reps, the first thing that comes to mind when you mention clearing is service. Banks are acquiring the expertise to retain brokerage business and traditional brokerage firms are offering banking services. Raymond James, for example, has identified bank-owned broker/dealers as a critical target market for their sophisticated products and services tailored to serve high-net-worth clients.

Robb Combs, vice president of correspondent services for Raymond James and Associates, laughs: "Everybody has their own bank now! But we have the capabilities to bring not only the products but the compliance and management to make banks more competitive." For example, this year, Raymond James began providing its advisors with SunGard's PlanningStation, a highly sophisticated modeling and planning tool for high-net-worth clients.

One thing you can bank on, whether you are a wirehouse or independent advisor, is that your clients' entry into the wealth-distribution phase of life will mean an up-tick in exceptional issues for clearing firms to address. Recognizing this, Pershing has put technology tools in place that allow them to trace service calls and track response times when reps have exceptional issues that take them behind the curtain and into the traditional domain of the clearing firm.

"What we offer our advisors," continues Esther Stearns, "is the quality of our execution at LPL and our caring when they do have a problem. One of the advantages of being self-clearing is that it's very clear who is accountable, it's very clear who you're talking to, and we have no one else to point the finger at. At the end of the day, we are responsible for fixing our own problems. We have seen a real acceleration of complex retirement issues, like required minimum distributions. Our service center here in San Diego is our product. They define the firm's success, and they take a tremendous amount of pride in that."

Imagine This

The consensus in the clearing business seems to be that the key to success in the area of service rests in a firm's ability to make the majority of the paperwork in the system go away. This means that imaging systems designed to make all the parts of the client-service puzzle available electronically will soon lead the industry into a fully digital domain where a rep opens an account, scans the document, and 16 seconds later it is reviewed and released. Nothing goes into the mail or over a fax line.

In the fourth quarter of 2006, National Financial will roll out a new imaging platform that will eliminate the need for paper. All documents can be scanned, or, if necessary, National can scan them for their clients and manage all the records for the entire organization. Likewise, LPL's new imaging system, branded with the handy name iDoc, will work through the firm's Branch Net platform. According to vice president of technology marketing at LPL, Jen Bergman-Gloss, the platform combines service and technology in a way that often eliminates the need for the advisor to pick up the phone while also providing a complete audit trail. Throughout the entire clearing industry, look for emerging imaging platforms that will force us, once again, to reinvent our management of change. --RGR

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Clearing Your Oats

July 10 marked the final deadline for compliance with NASD's Phase III O.A.T.S. (Order Audit Trail System) reporting requirements, which look at how firms report their orders. Where before order reporting to the NASD was combined and lumped together at the level of the clearing firm, now, depending on the type of NASD firm, trades must be reported with an identifier that is unique to that firm.

Says Linda van Oosting, vice president of correspondent services with Raymond James and Associates: "What we have been doing with our introducing firms is helping them to understand what type of a firm they are so that they can figure out where they fit in these new regulations."

Many firms can be excluded from the new reporting requirements. However, firms with dual or multiple clearing arrangements must determine how to interpret and comply with these new rules. As James Crowley of Pershing observes, "This type of duplication is making dual clearing much more expensive." --RGR

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