Cybersecurity and financial fraud are top-of-mind, high-priority issues today — and two areas in which the clearing industry has become increasingly vigilant.
Much of the security effort is aimed at helping broker-dealers develop best practices to safeguard computers from attack, thereby protecting investor identity and information.
“The industry is working very diligently to address cybersecurity by putting safeguards in place,” notes William Coppel, managing director and chief client growth officer at First Clearing, an affiliate of Wells Fargo based in St. Louis. “We’ve asked our firms to be aggressive around evaluating their networks and infrastructure and are working hand-in-glove with them to monitor” systems.
At RBC Correspondent Services in Minneapolis, there's “an enhanced focus” on the security front, according to Catie Tobin, head of correspondent and advisor services. “We’re making sure that firms know what to look for that might be of concern and are working on new technology solutions to help provide more security,” she says.
The financial services industry faces many risks; fraud certainly isn't the least of them. Safe to say that clearers are putting greater emphasis on detecting and preventing it.
“Fraudsters are getting increasingly creative with third-party transfers,” notes Sanjiv Mirchandani, president of National Financial, a Fidelity Investments company, based in Boston, and the second-largest clearing provider. The firm, with 400 clients, has integrated into its advisor workstation advanced tools addressing fraud, money laundering and security. It is training firms both in how to identify fraudulent wire transfer requests and procedures they can implement to protect advisors and clients.
“We spend a lot of time and energy training our correspondents on how to protect themselves against fraud,” Mirchandani says. “Ultimately, it's their risk; but we do everything we can to help them know what can be done to minimize it.”
Simultaneous to coping with these major worrisome problems is an industry-wide effort to attract new financial advisors.Here, too, clearing firms are stepping up as never before.
Studies have shown an alarmingly shrinking FA population. For example, Cerulli Associates research has found that 71% of advisors are projected to leave the business within two decades. Over the next 10 years alone, one-third of advisors plan to retire or otherwise quit the industry. As many as 12,000 to 16,000 FAs per year will retire during the decade, Cerulli says.
This means that the replacement rate to keep pace with advisor demand must average 6.4% annually, Pershing—the largest clearing firm, with 1,500 clients globally—notes in its 2013 “Broker-Dealer of the Future II” study. The BNY Mellon company also has published several white papers on how two draw younger advisors “to make certain that practices are sustainable for the long run,” Jim Crowley, Pershing's chief relationship officer, based in Jersey City, N.J., notes.
But, Crowley adds, “retiring and dying clients tend to be of the same age set as their advisors, so there's great risk embedded not only in advisors retiring but also in clients [exiting] because that threatens business models.”
In their expansion, clearing firms are continuing to take on a greater role in helping BDs recruit FAs.
For example, Raymond James, with 43 clearing clients, has a marketing department that builds custom campaigns for firms, including the creation of recruiting websites and marketing materials.
Proactive recruiting isn't the sole way to add advisors, of course. “Passive recruiting” often may be more effective, according to Crowley.
“Going out and finding a new recruit—the next breakaway wirehouse advisor—is very expensive,” Crowley notes. “Also, there may be an upfront cash incentive payment that a firm has to make to draw that advisor to their platform—the wrong reason to move” anyway. In contrast, “passive recruits are joining firms they’re attracted to because they’re consistent with their values and beliefs. They feel they’ll be a good fit with their practices.”
Crowley continues. “Rather than being [approached] by a recruiter, passive recruits network through trade associations, friends and [spheres of influence], inquiring about firms they’re interested in, asking, ‘What's it like to be affiliated with XYZ?’ Some of our clients have a highly selective process that takes as many as two or three years for a potential recruit to become affiliated—they want to see their track record and how they run their practice and deal with clients.”
Succession planning, allied with recruiting, emerged as the biggest issue at RBC's Advisor Council Meeting in February, Tobin notes. The firm's clearing business, which has 180 clients, is marketing a number of tools and programs on how to efficiently transition and is educating firms on how to talk about a succession plan with advisors. This includes, Tobin says, “what you need to be concerned with in bringing in a new partner or if something catastrophic happens to someone on the team.”
Correspondent Clearing at Raymond James has a practice planning group that assists advisors in considering options for transitioning their business and a separate transition team to help move assets and clients.
“We want to make it a smooth process so that when the advisor retires or moves on, the client's financial world isn't upset,” says Robb Combs, Raymond James’ director of Correspondent Clearing, with 43 clients.
National Financial's Mirchandani calls the potential striking loss of advisors “an impending retirement crisis in the industry.” “It's important to bring in young advisors, and I believe a much higher proportion of them will be women,” he says. “Women are very good at connecting with clients in an empathetic way, and some women prefer working with a woman advisor.”
Coppel, of First Clearing, with 78 clients, forecasts that the next generation of FAs will be “uniquely different” from the current one now nearing retirement. “We’re helping firms to provide 21st-century skill sets to advisors, so that they can build much more pronounced relationships with clients and transcend the gap from being a salesperson to a true advisor and consultant to the family.”
New advisors are facing, and will continue to face, a tighter, more pressured regulatory landscape. This includes fresh rules focused on regulatory reporting, suitability monitoring and records retention, along with a possible fiduciary standard of care for all advisors, not just RIAs.
“The regulatory burden in the aftermath of Dodd-Frank will continue to be very [heavy]. It's a new reality,” Mirchandi says. “I tell clients to figure out how to be really productive and good at it. We think of it as ‘Return on Compliance’; we’re going to do it as efficiently and productively as possible so that it can actually be a competitive advantage.”
Though pricing remains competitive among clearing providers, what perhaps matters more in the battle to win and keep clients nowadays is the value clearers deliver.
“We compete on a set of capabilities that looks at how we can create value for the firms—our ability to help them do more business,” Coppel says. “We’re moving away from ‘Let me process that trade cheaper and faster than you can’.”
Much of the value-added centers on the high technology that clearers bring firms and advisors. Provided they can make substantial tech investments, clearing companies can really shine here.
For instance, Raymond James’ “Goal Planning & Monitoring System,” integrated into the advisor's desktop, is also accessible by mobile devices such as iPad and iPhone. Clients visiting the BD's website to pull up their account can even make trades, notification of which is sent to their FAs.
“This gives advisors the opportunity to call the client,” notes Combs, based in St. Petersburg, Fla. “It's a talking opportunity and potentially a sales opportunity.”
First Clearing is rolling out new desktop technology: the “Smart Station 2.0,” “built to provide counsel and advice to advisors’ clients over the next five to 10 years,” Coppel says. Pershing has introduced a redesigned investor portal, “NetXInvestor,” that can be customized in accordance with clients’ level of experience and comfort with technology.
National Financial makes available mobile check-deposit technology, allowing advisors to photograph a client's check by smartphone or tablet camera, then rapidly deposit the funds directly into their account. Also, the provider has integrated into its workstation social media oversight capability allowing firms to monitor activity and content that their advisors post to sites such as Facebook, LinkedIn and Twitter.
“Broker-dealers must adhere to certain standards in monitoring every communication with clients,” Mirchandani says. “This surveillance tool lets them offer advisors the ability to engage with clients in social media—which is, of course, how clients want to be engaged with.”
When it comes to new services, RBC is kicking off a practice management series with a coaching component as well as a wealth management series on how to uncover and solve clients’ estate planning needs. First Clearing offers a program, dubbed “End-to-End Consulting,” wherein a team visits BDs intent upon improving their efficiency and thoroughly assesses the way they operate.
“We look at how advisors are interacting with clients and help them ‘up-skill’ themselves,” Coppel says. “The more efficiently a firm operates, the more likely they will increase their competitiveness in the marketplace.”
Product-wise, National Financial has a program furnishing access to a variety of alternative investments, including hedge funds and REITs, and a number of private equity alternative investments from Goldman Sachs Asset Management.
Though BDs and clearing firms have been negatively affected by the historically low interest rates of the past few years, rising rates, presumably on the horizon, stand to improve profitability.
But higher rates “certainly aren't the panacea for success” seen in the past, Coppel insists. “The incremental increases are so immaterial that they won't have a profound impact on anyone. Therefore, we’re encouraging our firms to realize that reliance on revenues from interest income needs to be replaced. Our focus is on helping them and their advisors create stronger relationships with clients—that's where you get your growth.”
In their expansion from back office workhorse to supportive consultant, clearers have embraced a focus on aiding clients’ growth.
“When we ask our firms what we can do for them, the top answer is, ‘Help us grow our business’,” Coppel says. “That gets back to the theme of clearing firms moving away from the notion of being a processor to becoming a real collaborator.”