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.