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Industry Spotlight > Clearing and Custodial Firms

Symbiotic Relationships

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When broker/dealers select a clearing firm to partner with, it pays to be choosy. This is one of the most critical relationships that any broker/dealer has, a true partnership–and the subtle and not-so-subtle differences in clearing firms can make a big difference in how well the broker/dealer’s affiliated advisors perform, how much time advisors can spend with clients as opposed to taking care of administrative tasks like ironing out trade problems and, ultimately, to a broker/dealer’s growth and bottom line.

Of course of all the clearing brokers, the three that get the bulk of the independent B/Ds’ business are Jersey City, New Jersey-based Pershing, a subsidiary of Bank of New York; National Financial, a Boston-based Fidelity Investments company; and First Clearing, in Richmond, Virginia.

What do correspondents want?

Independent B/D executives told us that the essential characteristics they look for in their clearing partner are service, responsiveness, flexibility in their systems, great platforms, especially of fee-based services, the ability to put information right on desktops in the field, and a level of comfort with executives at the clearing firm. In addition, the B/Ds want “the data” and that means all the data from accounts that clear through a clearing broker as well as away, such as annuity sub-accounts and mutual funds purchased outside of brokerage accounts.

“Really we were looking for service,” says Ralph DeVito, president of The Investment Center, in Bridgewater New Jersey. His firm had been with Wexford Clearing when First Clearing bought that firm, and DeVito decided it was an opportune time to look around at other potential clearing partners. They ended up at Pershing and have been happy with that choice. He was “sold on their service model, their systems, and technology that was geared specifically toward independents–NetXPro. It was a tough decision between the three: First Clearing, National, and Pershing.”

Woodbury Financial, the Woodbury, Minnesota-based independent B/D that is part of The Hartford, has been with Pershing for nearly 14 years, according to President and CEO Brian Murphy. They routinely send out an RFP at the end of their contract period, but Pershing consistently has won Woodbury’s business. Pershing Chairman Alton Jones, COO Brian Shea, Managing Director Jim Crowley, and others “spend a lot of time engaging with not just the senior leaders at their correspondent firms but our heads of technology and compliance and other areas to really try to find out what are our stress points as a broker/dealer and how they can they effectively come up with services, technology and other types of functions that help to relieve those stress points. Far beyond just being a clearing firm they really are a true business partner.”

Gordon D’Angelo, chairman, president, and CEO of NEXT Financial in Houston, has cleared through Pershing for all of NEXT’s existence, partly because the founders of NEXT cleared through Pershing before. He echoed the sentiments about service and responsiveness at Pershing, adding that they are “very easy to work with.” One way in which Pershing will partner with NEXT is to meet next month to discuss Pershing’s various platforms NEXT may not be using yet. D’Angelo praised Pershing’s fee-based platform with its Lockwood Advisors and others, an area, he says, that is “growing very fast.”

Thinking outside the box

For their part, the clearing firms are really thinking along the lines of what they can do to help correspondents grow their businesses and alleviate the stress points at B/Ds. Fidelity’s National Financial, which cleared 259,000 trades a day for the first nine months of 2006, is aggressively going after the aggregated data that B/Ds want, and announced last April an alliance with Miningham & Oellerich for data that they plan to integrate onto National Financial’s Streetscape workstation.

Annuities are a perfect example of the type of effort clearing firms are making to partner with B/Ds. Annuity business is done away from the B/D, yet the B/D must know what is being done with them to stay compliant. Annuities are a “very paper intensive business,” kind of like the brokerage business was 20 years ago, explains Norman Malo, president and CEO of National Financial. They have a “system now that automates all the application processes and carries it on the statements as well, and gets updates from the annuity provider.” He adds that there are “pieces that are still out there that we’re working on to try to bring in so that we can help our broker/dealers, number one, manage the risk associated with the business–because they’re responsible for what their reps are doing but you don’t see it all in one place so it’s kind of hard to manage all of that” with direct investments like annuities.

National Financial is developing a hybrid model allowing independent B/Ds that want to self-clear to outsource part of the headcount–and corresponding cost–to National Financial. Firms of a certain size “want to control their own financing, control their own stock loan, and stock borrow” themselves, “versus a fully disclosed model,” Malo notes. “The self clearing firms go out and hire their operations group, cashiering group, reorg group, dividend group, margin group–all of those,” says Malo. “With our platform you can do your financing, you can do your margin, but you can outsource back to us reorg, dividends, new accounts, and cashiering,” some of the real nitty-gritty operations. “We do it already for the fully disclosed, [clearing clients]; it’s the same systems, our people know what they’re doing for the fully disclosed, we’re just going to offer the same service for the self clearing firms.” Malo says they plan to Beta test the hybrid clearing model at the end of 2007 and roll it out in 2008.

In addition to sponsoring studies with Moss Adams and other consultants on practice management issues, Pershing, with over $800 billion in assets under administration, conducts “consultative processing reviews” with its clearing correspondents, spending days in customers’ offices looking at workflows to see “how well the are leveraging Pershing,” says Pershing’s Crowley. Pershing hosts regular “compliance calls” where compliance executives at correspondents get on a conference call with Pershing’s compliance experts. It’s a matter of “getting the brain trust together, sharing best practices and insights as to how to deal with the fast-changing regulatory landscape,” says Crowley.

Pershing’s thinking outside the box goes further, to “extending our consultative services in the area of technology, and application development, and other areas, and perhaps even beyond just technology–to be determined,” offering correspondents a way to do “third-party development work with someone they know,” instead of having to find, vet and hire an outside vendor with whom they may not have a larger–or prior–relationship.

Clearly, broker/dealers have found a strong ally in their clearing partners, and clearing partners have a vested interest in seeing their correspondents thrive and expand. From this symbiotic relationship, advisors may expect to see more innovation by clearing firms to help B/Ds with the issues they face every day.


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