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Industry Spotlight > Clearing and Custodial Firms

Solution Providers

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Today’s changing financial services industry is faced with a stunning number of new challenges. But clearing firms — duking it out in their ever-shrinking arena — are stepping up to supply a slew of innovative solutions. Indeed, that’s why these enterprising companies are no longer calling themselves clearing firms but “solutions providers” to broker-dealers.

“We have to be prepared to help firms adopt new ways to approach an old business,” says William Coppel, senior vice president of Wachovia’s First Clearing Correspondent Service, based in Richmond, Va.

Among the pressing issues facing BDs are heightened competition, tighter compliance requirements, the transition from transaction- to fee-based advisor compensation and the ongoing need for souped-up technology.

Helping broker-dealers become more efficient is a prime focus. To be sure, “efficiency” has become something of a buzzword. For example, Pershing, a unit of The Bank of New York with about 800 clients, partnered with accounting firm Moss Adams to publish a series of “thought leadership” papers, including one detailing “operational efficiencies of investment advisory practices.”

At Fidelity Investment’s National Financial, a chief pursuit is helping BDs “create efficiency” and value-added largely through efficiencies of scale.

Self-clearing since June 2000, LPL Financial Services says it is assisting advisors in learning best practices so that they can run their firms more efficiently. One of clearing’s few new entrants, LPL last December arranged to handle clearing for AXA Equitable Life Insurance Company’s AXA Advisors, effective this August. The broker-dealer has been clearing through Pershing.

Behind every clearing firm’s initiative is the key objective: staying in step with, if not a step ahead of, the evolving financial services business.

“This is an industry in transition. Ultimately, we are not just a partner in name. We regard ourselves as a partner in making [our] firms truly competitive,” says Atul Kamra, president of First Clearing, whose clients number about 125. “The industry is moving from asset gatherers to lifetime advisors and engendering client loyalty.”

But what about the intense competition among clearing firms themselves? The largest ones, Pershing and National Financial, the latter with 340 clients, have scalability on their side. Smaller factors, such as Raymond James & Associates — clearing for 41 BDs and growing — are putting the accent on a high level of service, product and technology.

“There’s a limited group of customers out there, and clearing firms have to distinguish themselves in a number of ways,” says Robb Combs, director of correspondent clearing at Raymond James. The St. Petersburg, Fla.-based company has a diverse platform for advisors, whether fee-based or on commission. For instance, it just signed an expanded partnership with SunGard for a comprehensive financial planning suite to “help advisors deepen their relationship with clients.”

The firm started a new bank deposit (or cash sweeps) program at Raymond James Bank in St. Petersburg last year. “Now money from brokerage accounts will sweep into a competitive money market at [the bank],” notes Combs. “Industry lines are blurring across distribution channels, and there is a major rush to grab assets.

“We’ve moved quite a bit of our idle cash assets from our brokerage accounts into the Bank to help fund the start-up and are now actively using that money to get loan activity,” says Combs. The Bank is a separate company; managers “have the ability to lend money where they see fit.”

Accent on Training

Near the top of the list of BD challenges is smoothing advisors’ transition from transaction- to fee-based compensation. Addressing this, Pershing provides introducing broker-dealers with a Unified Managed Account (UMA), featuring multiple asset classes and allowing FAs to supply broad-based investment advisory services, all under one umbrella.

“Many firms have been working on these for years now, but we’ve [already] been offering the UMA for about two years,” notes Jim Crowley, managing director of Pershing, headquartered in Jersey City, N.J.

At LPL, fee-based platforms are “deeply integrated into our operation so that they aren’t third-party [programs] just glommed on — they’re an inherent part of what we do,” notes Esther Stearns, chief operating officer, based in San Diego.

Increased use of state-of-the-art technology is essential to any business nowadays, but in the detail-centric world of clearing, it’s critical. Beyond processing, though, firms are furnishing high-tech computer software to BDs for their advisors. However, according to First Clearing’s Kamra, FAs fail to touch much of the new, advanced gear and software.

“But if you make technology truly tasty and delicious,” he says, “they will adopt it.” In-depth training and support are critical. “You have to recognize what a challenge it is for someone to actually change his or her habits — then walk and talk them through it and give them the confidence to use the technology.” First Clearing has had an enthusiastic response to Wachovia Securities’ Envision software program, which promotes meaningful dialogue about advisory clients’ lives.

Raymond James has added two new high-tech pieces to its offerings: Business Analyzer, which allows advisors “to slice and dice their books,” says Combs, and Supervisory Alert System, helping to notify managers of position concentrations.

National Financial has what it calls a Managed Accounts Solution for workstations; it lets FAs plan across a number of fee-based programs. The firm provides online and onsite training as well as marketing support to assist advisors in identifying clients best suited for the product.

Additionally, helping advisors expand and learn new competencies is “a very big focus” for National Financial, says Sandra Metraux, executive vice president-marketing, based in Boston. It’s all part of supporting BDs’ growth. The principal tack, she says, is offering new products and services, along with training and marketing support. For instance, to be rolled out later this year and integrated into advisor workstations is a new retirement-income planning tool.

No clearing firm has overlooked the move by FAs to a more holistic approach in serving clients. Pershing, for one, offers a series of workshops and conferences geared to advisor practices, such as what FAs can bring to the table when it comes to, say, trust or mortgage services. Pershing also holds larger get-togethers, like “Insite 2007,” a conference in Hollywood, Fla., set for this June and keynoted by former U.S. Secretary of State Colin Powell.

LPL’s strategy on the holistic front is to create platforms that allow advisors to offer such products as mutual funds and variable annuities, for which the firm provides plenty of administrative support, thus “allowing advisors to focus on the customer’s needs in a broader sense,” says Stearns.

Raymond James makes available to clients in-house experts in, for example, estate planning and annuities. This past January, it added a high-net-worth Wealth Services Group that helps model custom portfolios for clients with assets over $1 million.

Building Scale

Without a doubt, compliance and regulation are demanding more time and energy; and that’s another area where clearing firms are trying to ease the burden for BDs. Pershing recently introduced a new report on a New York Stock Exchange rule dealing with non-advisory fee-based brokers. “It gives guidance as to what an account would have generated in commission revenues compared to what the account generated in fee revenues — to make certain the arrangement that the institution or advisor made is suitable and best for the individual,” says Crowley.

A new array of data management tools from National Financial in tandem with Fetter Logic, a financial services information-systems provider, is designed to help manage risk, letting the advisor see client holdings even if they’re not in the brokerage account. Instead, such assets might be purchased through a mutual fund company. National’s compliance experts also conduct conference calls with as many as 200 broker-dealers at a time. Discussions focus on best practices “to make sure [BDs] know the most up-to-date regulations, and the do’s and don’ts around them,” says Metraux.

In the last decade, the past five years especially, the clearing industry has been subject to substantial consolidation. That isn’t over.

“I think there’ll be more consolidation in the next three to five years,” predicts Crowley. This past February, Pershing acquired Lehman Brothers’ Neuberger Berman correspondent clearing business.

National Financial’s Metraux also sees more consolidation upcoming. “Absolutely,” she says. As for NF, specifically, “we’re always looking for new opportunities.” Its most recent acquisition was Fiserv in 2005.

To be sure, as Kamra of First Clearing puts it: “Probably some other firms will throw in the towel. We continue to look for opportunities to acquire, but we’ll always [focus on] quality — not just to get scale.”

But in the midst of such contraction, there’s a formidable new player: LPL jumped into the back-office fray big-time with its agreement last December to clear for AXA brokerage-division advisors. To date, LPL is the only independent broker-dealer among clearing companies.

“We’ll see what this brings,” says Pershing’s Crowley. “It’s too early to say how many of the new firms that are coming into our business may or may not impact us.”

LPL is building a dedicated team to service the insurance company unit: 4,500 of AXA’s 6,000 advisors are in the brokerage business, according to Stearns.

“We have a systems capacity up to about 40,000 advisors, so we’re not worried about scalability,” adds Stearns, who declined to comment on reports that LPL plans to go public in the near future.

As for adding more clearing customers, she says: “We think there are other institutions that could benefit from leveraging our expertise in the brokerage space. There are not hundreds — there are more like 10 — opportunities. Each one has a long planning cycle, and it’s a big decision for them to make.”

Jane Wollman Rusoff is a Los Angeles-based contributing editor of Research and is the founder of Family Star Productions.