Close Close

Industry Spotlight > Clearing and Custodial Firms

Dynamic Clearing

Your article was successfully shared with the contacts you provided.

Tighter financial industry rules and regulations en route via the Obama administration have clearing firms psyched up and ready: They see the developments as a major opportunity to further boost clearers’ increasing value to their broker-dealer clients.

“Firms will be looking to their clearing partners more than ever for real help around managing the regulatory change that’s on the horizon,” says William Coppel, chief client growth officer, Wells Fargo’s First Clearing, based in St. Louis, with 108 clients.

The clearing industry, traditionally notable as an indispensable workhorse, is turning into one of the more dynamic forces in financial services.

“We’re in the next generation of clearing,” says Bobbi Masiello, chief administrative officer of Fidelity Investments’ National Financial, clearing for about 300. “Our clients are letting us get into the very details of what makes them unique, and we’re helping them understand opportunities, especially around the efficiency game. They want more from us now.”

Some companies, such as First Clearing, participating heavily in the regulatory conversation in Washington, already have begun implementing capabilities and systems designed to better protect broker-dealers once the new regs are in effect.

“Clearing firms and introducing firms alike are going to see more regulations around transparency, fees and making certain there’s clear definition as to roles and responsibilities, including fiduciary responsibilities and how they might be applied. This will have impact on how we report to introducing firms — what information we make available and how we make it available,” says Jim Crowley, managing director of Pershing, an affiliate of BNY Mellon, with 1,150 clients globally, the most of any clearing company.

Meanwhile, clearers remain fixed on the big picture: to be a major force in their clients’ growth.

“We want to help our correspondents grow their businesses faster than the market is growing and expand into new areas and asset classes,” says Dan Weingarten, senior vice president and co-head of global sales and marketing, Penson Worldwide.

In the wake of the financial crisis, firms fighting for market share in the fiercely competitive clearing arena are trying hard to distinguish themselves.

“There’s a big difference between a grower and a processor,” says Atul Kamra, president of First Clearing. “The biggest reason a broker-dealer needs us is to grow. That is the fundamental reason firms want to join us.”

Though the exodus of so-called breakaway brokers from wirehouses seems to have peaked, the strong trend continues.

“This activity is really moving; it’s very, very active for our firm,” says Masiello, in Boston. “Last year we helped a record of more than 190 broker teams go independent.”

Indeed, recruiting has emerged as an area in which clearers are playing a bigger and bigger part. It’s one of the most significant changes occurring in the space.

“We are aggressively working with our independent correspondents to help educate them on how to recruit brokers from wirehouses and show them that they can be supported in many aspects of their businesses,” says Craig Gordon, director of correspondent and advisor services at RBC Correspondent Services, in Minneapolis. The unit clears for 170 broker-dealers and investment advisors.

In fact, “in 2009, we had more recruiting success across our independent broker-dealer and employee-based divisions than in the previous five years combined,” says Gordon.

Following the worldwide financial meltdown, Pershing, too, has dedicated more time to recruiting. For instance, the firm, based in Jersey City, New Jersey, maintains a Web page,, that allows participating B-Ds to post company profiles and what they consider investment professionals’ ideal characteristics. Advisors visiting the site can then search for leads that match their own criteria.

Masiello, a 25-year veteran of Fidelity’s clearing arm, is pleased, if not surprised, at clearers’ recruiting involvement.

“I honestly never thought we’d see a time when broker-dealers wanted a clearing firm’s help in recruiting. The front office was always completely off-limits to us. It’s been a huge evolution of getting closer and closer to their end-customer.”

In other shifts, most firms forecast further clearing-industry consolidation, with larger entities scooping up small, broad-based companies who lack sufficient scale to survive.

“Penson is always looking for good assets,” says Weingarten, in New York City. “We’ll see more smaller players exiting the business. For a clearing firm, [the current] low interest rates and flat trading volume is a tough environment. So you have to grow organically — find new customers, whether that’s through acquisition or just winning business.”

To wit, Penson’s purchase of the Ridge clearing unit from technology infrastructure firm Broadridge is due to close by May. Penson will add about 100 new clients, bringing its roster to more than 400, thereby surpassing longstanding No. 2 firm National Financial in number of correspondents.

RBC’s acquisition of JP Morgan’s investment advisor services group — one of three clearing businesses once owned by Bear Stearns — should see completion in June, increasing RBC’s clearing-client count to the mid-200s.

Still, First Clearing’s Kamra expects little further consolidation. “There’s not a lot to acquire. I don’t think there are many good opportunities to acquire high-quality, like-minded firms in this space.”

Currently a number of clearers are taking a more global focus: for example, Pershing’s push to win additional business for its European platform; Penson’s launch last December of an Australian clearing operation (it now has offices in six countries); and National Financial’s debut of a simplified online international trading platform in 25 countries.

Changing the Rules

But it is the looming regulatory overhaul that is largely top-of-mind among clearers. “The trend for more rules and regulations continues to move into responsibilities for clearing firms,” Gordon says. “Whether they’re our obligations or the firms’ obligations, in many cases, it falls on our shoulders in order for the broker-dealer or investment advisor to comply.”

All set for the opportunities they anticipate the new regs will bring, clearing firms are working on or, in some instances, have implemented new supervisory tools; contact-management capabilities to help document client conversations vis-?-vis a fiduciary standard for brokers; and compliance round tables featuring legal experts and regulators.

On the fiduciary standard issue, National Financial, for one, is “opposed to extending a blanket application of fiduciary duties across the industry [including] the broker-dealer activity, especially…clearing…” However, notes Masiello, “we support fiduciary standards for personalized investment advice.”

But there is now greater awareness among clearers of their responsibility and liability as to what goes on in end-client accounts.

“The days of see no evil, hear no evil, speak no evil — clearing firms’ closing their eyes, ears and mouths to liability — are long gone,” Gordon says. “We have responsibilities to make sure we’re attentive to the red flags or areas of concern. That’s why it’s important for firms to provide clearing and custody for [only] the types of businesses they understand.”

To be sure, risk management remains critical. Weingarten says that in clearing for “entities that have the regulated mandate to know their customers, we can’t and don’t turn a blind eye to what those customers are doing…. When something goes wrong, it’s our capital on the line. We’re the back-stop when a broker runs into financial problems. At the end of the day, it all falls back on the clearing firm.”

Notes Jim Crowley: “The responsibilities between the introducing broker-dealer and the clearing firm are clearly defined in [our] agreements, but the reality is that we all have to be diligent in making certain that we’re carrying out our [duties] as good businesspeople. We don’t [want to] put ourselves in the position where we have reputational risk, which in this environment is something no one can chance.”

Clearing-firm innovations continue mostly in technology advancements — such as RBC’s new integrated workstation geared to advice-giving and Pershing’s NETX360 workstation, which brings together the transaction business, advisory business and managed account solutions in one desktop, a benefit well suited to the hybrid BD/RIA advisor.

In the coaching area, First Clearing’s “Growth Accelerator” program takes a new tack in helping advisors develop skills and practice management capabilities. Another program at the firm trains new pre- and post-licensed FAs in rounding out skill sets and understanding the newest investment solutions.

Changing the Mindset

All in all, much of the industry-wide action points to the unequivocal, ongoing trend of B-Ds seeking greater support from their clearing firms.

Even LPL Custom Clearing Services is focused not only on the back office but also the middle office in serving its 4,000-advisor-strong sole client: big AXA Equitable Life Insurance Company.

“We’re putting a lot of effort into our consultants in the field working with advisors and helping them manage their practices — in many cases, evolving from the traditional brokerage business to fee-based,” says Bob Oros, CCS executive vice president, based in Charlotte.

He joined LPL from Schwab last June to take over day-to-day Custom Clearing operations, reporting to LPL Financial managing director Jonathan Eaton, who continues to oversee CCS.

The firm’s approach to customization, says Oros, lies in applying it to “places where it really adds value — such as some unique technology the reps use — but [not] where it [would] degrade scalability where you need it, like in transaction-type processing.”

Oros says he is “actively looking to grow the business with new customers,” for now, sticking with CCS’s “sweet spot,” large insurance-owned broker-dealers.

Nowadays the main shifts across the clearing space come from what First Clearing’s Coppel calls “a sea change of thinking: the ability of a clearing firm to intimately understand what it is to be in the retail brokerage business….”

“In the past, it’s been a price game. But if you’re competing on price, you’re not going to position yourself in a way that will effectively meet the needs of the firms you serve,” Coppel says. “The game to play is adding assets to a broker-dealer’s balance sheet by providing access to services and capabilities, and technology and product that enable them to meet the needs of the high-end advisor.”


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.