From the September 2008 issue of Research Magazine • Subscribe!

September 1, 2008

Clearers on the March

Bear Stearns' sudden collapse last March indeed shook Wall Street and sent shock waves throughout every financial market around the globe.

But at least one behind-the-scenes corner of the industry scored new business as a result of the downfall: clearing firms. Many of Bear's clearing-arm clients, their confidence eroded, had begun talking with competing clearing companies before and after JP Morgan's rescue takeover of the investment bank. The upshot: a number of these broker-dealers departed Bear.

"It wasn't an opportunity because of somebody's else's demise. It was an opportunity to step in to help firms that perhaps needed some assistance in distressed times," says Dan Weingarten, senior vice president for clearing and execution with Penson Financial Services in New York.

Months earlier, Penson, in the clearing business only since 1995, had already started conversations with some of Bear's clients. In early March, when it became evident that Bear was in jeopardy, those talks "fast-tracked," says Weingarten. As a result, Penson "was able to capture some good clients."

The largest clearing firm, Pershing, an affiliate of The Bank of New York Mellon, with about 900 clients, also picked up several new accounts. Pershing was perceived, says Jim Crowley, managing director, as "a safe haven in a turbulent time."

Fidelity Investments' National Financial, 325-clients strong, also benefited by adding new clients and increasing business with existing dual-clearing broker-dealers that opted to exit Bear Stearns and consolidate with one firm.

"There was as much proactive contact by some of Bear's clients as clearing firms [taking the initiative] talking to them. And that wasn't only driven by the clients but by their underlying clients," says Anne Steer, National's executive vice president-relationship management, in Boston.

Today, clearing firms insist, there is still uncertainty as to how much support JP Morgan will give the former Bear Stearns clearing operation.

"We'll have to wait and see what force will be put behind this business going forward," says Steer.

For its part, JP Morgan insists it's "excited" about Bear's clearing business, now integrated into its investment bank. Says a spokesperson: "We inherited a very good, world-class clearing business ... I don't know if they've legally changed the name yet, but it is now part of JP Morgan."

Expanding ToolboxMeantime, the beat goes on as clearing firms make strides in giving introducing broker-dealers the products and services they need in this difficult market. One prime objective is to save BD advisors time by helping to boost their efficiency.

"The average amount of time good advisors spend with clients today has significantly increased from five or 10 years ago," says William Coppel, chief officer of the Client Growth Group of Wachovia's First Clearing Correspondent Service, based in St. Louis.

"Advisors need the tools and technology that enable them to dedicate more of their time and resources to having conversations with their clients so they can better understand them, particularly in uncertain times like today. Now is when they should be talking to them."

First Clearing, with 130 clients, offers turnkey advisor products and desktop technology aimed, in part, at reducing paperwork. The mission of its new, now-formalized Client Growth Group is to help FAs share best practices so they can acquire skills to meet today's clients' broader needs.

First's second "Building Client Loyalty" conference last month in St. Louis featured workshops with experts explaining what FAs could do to better equip themselves.

Recently introduced, Pershing's time-saving "paperless office" system is gaining traction among clients. The management process scans documents once, then marries them to a workflow system for future instant access.

Also key on clearing firms' agendas is heightened technology training. Some companies, such as National Financial, have found that repeat sessions help folks learn better and make the most of advanced computerization.

LPL Financial's Custom Clearing Services is teaching not just the producers of its first client, AXA Advisors -- of AXA Equitable Life Insurance -- but sales assistants and other staffers how to optimize its technology offering, which includes order entry and other administrative tasks.

"We want them to get all the practice-management efficiency that the platform is designed to produce," says Jon Eaton, Custom Clearing's managing director, based in San Diego.

He expects to announce the addition of a second clearing client right after Labor Day. Though the down market and economy have delayed finalizing this union, Eaton says the worrisome environment actually has been a positive: much of Custom Clearing's value proposition is saving money through outsourcing.

"While the market has been tough for consumers and for many organizations, it sparked a [rise] in the level of interest and activity in our offering that I don't think we would have had if the market had been better," says Eaton.

Advisor recruiting is another area where clearing firms are pitching in more. For instance, last June National Financial hosted its first "Recruiter Forum." Attended by a number of clients' top recruiters, the action centered on how National can "support clients in a more effective way," Steer says.

"We want to make sure the recruiting heads are among the first to know about our products and the new capabilities that we develop for our platform," she adds.

At First Clearing, the firm's FA recruiting works exclusively for clients to help them identify outstanding advisor candidates.

Clearers are also coming forward to address the complex needs of the hybrid business model that many FAs have adopted: Though they've mostly transitioned to fee-based compensation, these advisors also conduct commission-based business.

"It's been a bit of a challenge to many broker-dealers: How do you support someone who has both an advisory- and a transaction-based book of business?" says Pershing's Crowley, based in Jersey City, N.J. "We've been working extensively with our introducing broker-dealers to make certain they're talking to their best advisors to be sure they've got the technology, services and platform to support their advisor business as well as their transaction business."

Hybrids WelcomeThis fall, LPL Custom Clearing will start rolling out a platform supporting dually registered FAs -- hybrids -- and registered investment advisors too. All such introductions designed for LPL independent advisors are also available to clearing clients, Eaton notes.

"We found a lot of interest in that platform, whether from a pure RIA or a hybrid approach. It will appeal to a whole demographic that we traditionally haven't worked with as an independent broker-dealer," he adds.

Under development for nearly two years, National Financial's HybridOne system, available since June, allows access, with a single sign-on, to both its broker-dealer platform and Fidelity's Institutional Wealth Services (IWS) platform. The cost-effective partnership avoids redundant product development.

"If clients operating on the IWS platform are missing some commission business," explains Steer, "we're giving them the ability to work with broker-dealers that can give them those capabilities and make it easy."

Likewise, she says, "if National Financial clients feel that some of their business belongs on the IWS platform, Hybrid-One offers a broader range of services to their advisors."

Compliance is an area that continues to demand everyone's attention. In fact, Steer says that BD CEOs typically spend a full 30 percent of their time on compliance and regulatory issues.

To help clients, National's quarterly "Webinars" feature Fidelity compliance experts discussing a variety of topics. As many as 200 people hop online for the Internet talks.

When it comes to compliance concerns, Pershing recently introduced a new sales-practice package, through sister company, iNautix USA, that allows BDs to monitor advisor sales practices. Pershing has also enhanced its basic rules engine, which now has more than 200 rules embedded in the front end to track and monitor trading and asset movement, among other activities.

First Clearing, to allow broker-dealers to better manage the way advisors are conducting business, offers an electronic tool called SuperVision. It "safeguards the firms, safeguards the advisors and safeguards clients," notes Coppel.

Further, First annually conducts four roundtables with clients' compliance leadership. Guest speakers provide insight on legal issues to help firms get better prepared.

"The rules and the law say that [clearing firms] aren't responsible for what [broker-dealers] do," says Coppel. "But that doesn't mean we can't be helpful in educating them."

And LPL's Custom Clearing offers a number of compliance surveillance supervisory tools to "effectively mitigate clients' regulatory risk," says Eaton. The proprietary surveillance system that LPL independent FAs use is fully integrated into Custom Clearing's technology platform too.

Nowadays, Clearing firms are also busy expanding globally. No. 1 reason?

"The global theme is becoming increasingly prevalent across many of our broker-dealers," says Crowley. Pershing is therefore offering "more and more solutions to both on-shore and off-shore clients."

For example, it provides access to 65-plus global execution points and maintains custody services in more than 100 countries. In addition, it boasts an integrated multi-currency system that reflects dollar and non-dollar assets in one account on a single statement.

Globalization is Penson's biggest area of growth, according to Weingarten. Worldwide, the firm is up to 284 clients.

"It's a 24/6 world in trading if you're everywhere. The challenge for the smaller broker-dealer is: How do I staff [far-flung] operations?" he says. Beyond the U.S., Penson has operations in London, Canada and Hong Kong.

With those huge, ongoing investments that the clearing business requires, further industry consolidation is virtually a given.

"There is no let-up in the need for investment, so the capital requirement is significant," says Steer. "The forces that are driving the market today that would cause one firm to go out of business not that long ago will continue."

The big-dollar needs are propelled chiefly by the evolution of financial services from an industry of selling product to one of offering wide-ranging, sometimes lavish, consultative services.

"This is a sea change," says Coppel. As for clearing companies, "what was traditionally a processing business, is today an empowerment business. We're empowering firms to deliver the kinds of services that today's clients are looking for."

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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

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