From the September 2014 issue of Research Magazine • Subscribe!

Clearing Firms Join the Robot Race

Robo-advisors and other new technologies are transforming the clearing space

Illustration by Richard Borge Illustration by Richard Borge

In the brave new, expanding world of low-cost robo-advisors, clearing firms emerge victorious: There will always be a need to process trades.

“The robo-advisor platform exemplifies personal-finance advice intersecting with digital tools to more effectively and efficiently serve investors regardless of their age or asset level. We need to embrace this technology rather than think of it as a threat,” says Jim Crowley, chief relationship officer at Pershing, a BNY Mellon company and with 1,600 clients worldwide, the largest clearing firm.

Pershing has a handful of robo-advisor clients, including Personal Capital, Marstone and Wela Strategies. And it is in the process of onboarding more.

“I expect that the impact of this new technology over the next couple of years will be much more significant than is even imagined today, although only a few [firms] will become sustainable businesses,” notes Crowley, based in Jersey City, New Jersey.

A preview report of a study by Corporate Insight indicates that as of July of this year, 11 leading online start-ups—robo-advisors—had more than $15.7 billion in managed or advised assets. Of that, $4.2 billion was added just in the three months of April through July. The firms are AssetBuilder, Betterment, Covestor, Financial Guard, FutureAdvisor, Jemstep, MarketRiders, Personal Capital, RebalanceIRA, SigFig and Wealthfront. Most debuted only within the last two years.

Further, Vanguard reportedly is conducting a pilot program, Personal Advisor Services, providing low-cost, full-service online financial planning with advisor interaction. And well known online firms such as Scottrade and TradeKing are now also in the automated advice business.

Indeed, since Generations X and Y, the latter also known as the millennials, largely live in cyberspace for shopping, socializing and, um, gossiping, they expect the same 24/7 convenience and accessibility when it comes to managing their investments.

But automated advisors—some functioning as BDs; some providing contact with human FAs—are putting new demands on clearing firms to upgrade their tech capabilities to meet robo needs.

New-age financial advisors—interacting with clients through mobile devices and social media—must keep up too, since their clients, largely the mass affluent and many in a younger demographic, have higher tech expectations than do previous generations. Thus, there is good reason for clearing firms to help reposition advisors to work with the new technologies.

“As the population's needs evolve and expand in constant interaction with the digital world, the way in which we deliver financial services—both advice and market access—and the way in which consumers want to receive it, will mirror the changes that are taking place in that world,” says William Coppel, managing director and chief client growth officer at First Clearing, an affiliate of Wells Fargo based in St. Louis.

“The opportunity for clearing firms,” Coppel notes, “is that the digital firms will continue to emerge and depend on clearing providers to process their business.”

Digital Rivals

Though robo-advisors won't render human advisors obsolete, the reality is that automated advice is competition. And in the wake of the financial crisis, which deepened investors’ distrust of the industry, flesh-and-blood advisors are vulnerable.

“The primary message for traditional advisors is if you don't make technology available to your end-investors and if advisors don't start to use technology in a much more standardized fashion—which builds stronger client relationships and raises productivity—you’re opening yourself up to a threat from some of the robo-advisors,” says Sanjiv Mirchandani, president of National Financial, a Fidelity Investments company based in Boston. It is the second-biggest clearing firm and has 481 clients, 225 of which are BDs; the balance, banks.

While National isn't pursuing the robo-advisor market, its sister business, Fidelity Institutional Wealth Services, is in conversation with these firms, Mirchandani says.

At the same time, National is encouraging its clients to adopt the firm's investor-facing portals and mobile technology for end-investors. The object is to boost awareness of tech training's importance “so advisors create a value proposition that, if done right,” Mirchandi says, “is even better than the robo-advisors because [human] advisors with years of experience are delivering it.”

A number of digital services, previously technology providers only, are brand new to the financial services industry. Now they are offering automated financial advice direct to consumers. Enter: clearing firms.

“At the end of the day, there has to be a way for these [digital] companies to meet the traditional needs of holding a customer's account to keep the assets safe and to generate regulatory reports,” says Craig Gordon, head of clearing at DST Market Services, in Minneapolis. This past April, the firm launched a clearing platform with Gordon, formerly RBC's director of correspondent and advisor services, at the helm.

Smaller Accounts

Robo-advisory firms hold many smaller accounts, especially those of millennials, who often have not yet accumulated high asset levels. In fact, the robos have created a digital-based value proposition to attract younger investors with smaller accounts.

Though some digital providers keep accounts of that size at mutual fund companies, which typically don't charge fees for this service, “new-age advisors and robo-advisors are looking for ways to support the smaller-account marketplace” clearing-wise, Gordon says. “Small-account solutions are one of the biggest challenges for clearing firms because of their legacy systems.” That is, there isn't much cost differential between maintaining a large account or a small one. Since DST has no legacy system cost and infrastructure, it is well positioned to serve the small-account market cost-effectively, Gordon notes.

Some clearers are catering to BDs’ and advisors’ younger clients in more traditional ways. Raymond James, for instance, gains access through FA relationships with their parents as well as via centers of influence. The RJ accounting system puts the accounts of each family member under one umbrella. Thus, advisors get to see the whole family picture.

“We hope that at some point, those [smaller] accounts are going to grow. Many millennials are the folks who will own businesses in the future and develop new technologies,” notes Robb Combs, director of Raymond James Correspondent Clearing, in St. Petersburg, Florida.

Succession Issues

Independent FAs should also consider state-of-the-art technology as a major aspect of succession planning. Advisors hoping to sell their businesses at retirement will be at a tremendous disadvantage unless high tech is part of the package. Buyers judge unprofitable those practices that lack tech to drive efficiencies and productivity.

To be sure, succession planning is another area in which clearing firms are giving BDs needed guidance. This, once again, demonstrates how clearers have expanded and moved up from back-office workhorse to valuable consultative partner.

Raymond James, for example, has a succession planning-and-assistance group that gives firms know-how on financing the transition and tending to legalities; it even helps BDs find buyers.

“We’re hoping that if someone transitions or sells their practice,” Combs says, “the assets will stay on our books.”

National Financial offers succession-planning practice management tools, templates and frameworks that firms can deliver to advisors.

Moreover, clearers are helping BDs draw new advisors that may one day take over a retiring FA's practice. In light of the widespread number of aging FAs, that's significant.

“The direct effect of [aging advisors] on the clearing industry,” Gordon says, “is if the independent broker-dealer doesn't find a way to constantly attract new advisors, the business will shrink.”

First Clearing recently held a three-day forum for 20 client CEOs on BD innovation. Succession planning was one of the hottest topics.

When it comes to that transition within families, three areas must be addressed, according to Coppel: “Transfer of leadership from one generation to the next; how the organization will continue to thrive and grow into the future; and response from the rest of the firm.”

Certainly, next-gen advisors are far more technology-oriented and digital-savvy than their parents. Nonetheless, the new technologies are redefining how nearly everybody spends their time—including older generations. Hence, a trend to automated wealth management was inevitable.

Forecasting the brand-new category of a two-tier BD positioned to pursue online investing, Coppel envisions one tier for clients “willing to accept advice delivered in an electronic format without interacting with another human; the other having call centers with banks of professionals who can be accessed in a way similar to how some discount firms operate.”

But First Clearing is not yet seeking out digital firms with which to do business. They’re too small, Coppel says. “Most of the start-ups are just that—start-ups: great concepts and well executed but still the fringe of the marketplace.”

Gordon sees robo-advisors as a far greater threat to do-it-yourself discount brokerage firms than to traditional advisors since clients may experience digital advice providers’ tools as giving them greater control.

Overall, more and more clients expect financial advice to be delivered electronically. This requires big investments in technology. That's where the leading clearing firms shine.

“There's a new generation coming, and they’re not going to tolerate the old model,” Mirchandani insists.

But as Coppel adds, “The industry will have to embrace the digital factor much more aggressively than it has—though not at the expense of the advisor. Clients are still going to want to talk to someone.”

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