From the April 2008 issue of Research Magazine • Subscribe!

April 1, 2008

More than Just Clearing

Financial advisors are quick to call theirs a people-to-people business; and since they're out on the front lines, that's completely correct.

But now some traditionally backstage participants in financial services are earning the right to call their enterprises fairly people-oriented too: clearing firms. Over the last decade, they have evolved from back-office workhorses to key players in helping broker-dealers grow. The people with whom they're initiating more direct contact? Advisors themselves.

Whether through face-to-face group meetings, workshops, training sessions, presentations at big broker-dealer conferences or via Internet webinars, clearing firms are reaching out to FAs to build stickier relationships with their correspondent clients.

National Financial, for example, a unit of Fidelity Investments, with 340-plus clearing clients, talks with advisors about new products and capabilities at client conferences and interfaces with select groups of FAs about its platform at both its own Boston headquarters and on correspondents' premises.

Through National's webinars featuring industry experts, advisors can also chime into discussions about timely issues such as risk and regulation. Plus, once a year the firm hosts clients and advisors in a wide-ranging discussion of clearing and broad investment issues.

"There's more of all that. It's changed a lot over the last year-and-a-half. There's more openness with our clients in having these direct connections than ever before," says Anne Steer, executive vice president-relationship management at National Financial. "If somebody thinks of us as [just] a 'vendor,' I feel that we've failed. We are absolutely a partner with our clients."

The largest clearing firm, Pershing, an affiliate of The Bank of New York Mellon, with 1,100 clients, is making more direct contact with advisors, too -- particularly in the education and training area. Jim Crowley, managing director, says that Pershing, based in Jersey City, N.J., has developed "a whole new core competency" by partnering with third parties to create leadership papers and a seminar series for FAs, among other aids.

Such advisor-orientation is just as evident at some smaller-sized clearing companies too. Raymond James & Associates, with 42 clients and growing, has what it's dubbed "Fireside Chats," in which members of the parent company's wholesaler staff sit with producers and clients to strategize on how to best use products and desk-top modeling software to help meet goals.

"All our solutions are built with the financial advisor in mind," says Robb Combs, director of correspondent services, in St. Petersburg, Fla. "We're developing solutions around our clients' business plans and actively participating in their businesses."

The thrust to address FAs directly has been evident during this extended period of market volatility.

LPL Financial's Custom Clearing Services, which last August converted its first client, AXA Equitable Life Insurance Co.'s AXA Advisors, provides these 4,500 producers with full access to its research group -- the same one LPL independent FAs use. Further, a customized Web page for use by all the advisors serves up hotline tips and information, such as the meaning of interest-rate changes, throughout the day.

"We're getting heavy traffic on that," says Jon Eaton, managing director of LPL's Custom Clearing Services, in San Diego.

Raymond James makes available daily a staff of economists, market strategists and a research team that covers market sectors and about 700 different securities. Their input is accessed via conference calls, printed materials or through the firm's research liaison call desk.

During wild market swings, Wachovia's First Clearing Correspondent Service, with 125 clients, counts on the firm's Envision system, which helps identify life goals, to enable FAs to shift client focus from market indexes to investment objectives.

"The discussion goes from, 'Oh my God, the market is down 4 percent!' to 'Am I on track?'" notes William Coppel, First Clearing's senior vice president. "It's a very different conversation from 'How am I doing against an index?' Advisors are actually going out and initiating conversations on tough days when the market is getting hammered, holding clients' hands and saying, 'You're OK.'"

Going one-on-one with advisors, First Clearing holds workshops and panels that address critical practice management issues. This May and August, for instance, it will conduct two client loyalty-building workshops with experts providing insight into, among other areas, gathering the additional assets of existing clients.

Understand Your ClientWith retirement investing demanding major industry attention, First Clearing is supplying FAs with practical help on, for example, how to address the distinct issues that arise in meetings with aging clients. It has delved into such matters as the elderly's hearing loss and the need to provide close-by parking to advisors' offices.

"It's how to take care of [things] like that when it comes to understanding your client," says Atul Kamra, president of First Clearing. Instead of just "Know your client" the firm is emphasizing to advisors, "Understand your client."

"Knowing your client is about how big their portfolio is and what their investment objectives are. Understanding your client is understanding their life, their family, their special situations. This," says Kamra, "is the heart of what we do."

Recruiting is another area where clearing firms are helping BDs by striving for face-time with FAs. National Financial, for one, often meets with advisor candidates in which its broker-dealers are expressing strong interest. Once an FA joins a firm, National immediately supplies 90 days' training on their clearing platform.

"We're focusing on this even more," says Steer, "because our clients are asking us to."

Whether employing direct advisor contact or other tacks, the overarching mission for clearing firms today is how to help BDs differentiate themselves in the marketplace, expand their businesses and boost their efficiency.

Helping its correspondent firms to grow is No. 1 at Penson Financial Services, a Penson Worldwide subsidiary, which itself has grown to serving 250 clearing clients since its 1995 launch.

"But we continue to try to maintain a small-business mentality," says Dan Weingarten, senior vice president-sales and marketing. "We have [quite] a history of taking small start-up ideas and partnering with these firms, and watching their businesses expand."

That, however, can prove to be a double-edged sword. "When the clients get big enough, they sometimes decide to look at self-clearing; and then you lose them. But the nice thing is that it's a mutual understanding. When you've had such a long relationship, you're almost supporting them in their effort" to go it alone, says Weingarten.

No ComplacencyThese days, certainly, no one in the clearing space can afford to be complacent -- what with pressure on margins, the difficult securities markets and the ongoing trend toward industry consolidation.

"This year will be challenging. If you don't have scale, it's going to be tough to survive in this business," says Eaton.

LPL Financial, which opted for self-clearing in 2000, is a new competitor in the clearing arena, venturing forth, as it has, to capture clients of its own. AXA Advisors previously cleared through Pershing.

"I think a lot of people wanted to see if we could do [the conversion]. In fact, we achieved that on schedule; and it was successful," says Eaton. "That confirmed we're serious players. We're committed long-term to growing this line of business. We see a tremendous amount of upside opportunity."

Now LPL, which intends to go public "in the next few years," according to Eaton, is about to announce its next clearing partner, which has about 3,000 advisors.

"We have two or three [possibilities]," he says. "It depends on which comes in first."

With Wachovia's acquisition last year of regional brokerage A.G. Edwards, First Clearing increased volume to its platform by about 60 percent. The merger has enabled First to enlarge in scope and scale and to invest more dollars in infrastructure.

Self-clearing A.G. Edwards is due to convert to First's platform in February 2009. Meantime, First's staff and processes are gradually moving from Richmond, Va., to Edwards' headquarters in St. Louis, the clearing firm's new base of operations.

Of course, state-of-the-art technology is a must-have in the clearing world. But no longer is it enough simply to offer it. Firms need to show advisors, repeatedly, how to use all that high-tech gear to maximize their efficiency. This is where the need for lots of training comes in.

With electronics, Pershing is "working hard to drive the paper out of the system across the board," says Crowley. It has a new document-management system that allows advisors in their offices to computer-scan and upload client applications and other documents. The digital images, indexed and stored, are instantly available to refer to in connection with transactions.

"If you get the application process made paperless and the sign-off process made paperless, you've got happy advisors and clients...and you've improved the experience for everyone," says Crowley.

LPL Financial has a mutual fund electronic check-and-application processing system for advisors that Eaton says helps BDs "mitigate their regulatory and compliance risk."

To assist advisors with their abundance of retirement-planning and retiree clients, clearing firms are introducing a number of products and services designed to meet specific needs.

For example, National Financial has rolled out a retirement-income evaluator, developed by Fidelity, that producers can use to discuss precisely what clients need to do to prepare for retirement.

Raymond James' Correspondent Services is touting a "Freedom Retirement Income Solution," which, combined with research from its asset management services group, uses desktop software and Monte Carlo simulation to manage retirement assets.

The same firm also plans to introduce in May a straight-through processing system for annuities, designed to meet new, upcoming compliance rules.

And LPL has an automated annuity order-entry system that's in sync with new requirements for BDs' annuity-business suitability oversight.

Further, First Clearing is rolling out later this year a comprehensive contact management capability that, coupled with Envision, will be integrated into advisors' current technology enabling them to keep track of new developments in clients' lives.

Indeed, there seems to be no end to clearing firms' evolution of innovation. But that doesn't mean the business is getting easier. Actually, these companies have found that new challenges keep coming.

"The game," says Crowley, "is getting harder because of the complexity of the products, the complexity of the regulation, the complexity of the technology, the transparency and because of profit margins."

No one is surprised. For as First Clearing's Coppel points out: "The world has changed in our business. And while we still call it 'clearing,' it clearly is not."

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Freelance writer Jane Wollman Rusoff is a Los Angeles-based contributing editor of Research and is the founder of Family Star Productions.

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