Clear Thinking

Huge changes are in the wings for how the financial services industry does business, and no area is on heightened alert more than the clearing space.
“Regulation is the big, burning issue — what’s it all going to look like?” says Robb Combs, director of correspondent clearing at Raymond James & Associates, in St. Petersburg, Fla.

But smart clearing firms aren’t simply sitting on their hands waiting for the new rules to be shaped and documented. They’re lobbying in Washington on behalf of clients, developing systems and services in anticipation of the new requirements and broadening their scope of initiatives to support clients once the new regs are in place — months, or even years, from now.

The background is one of fierce competition for clients, with clearers lumbered by decreased revenue because of historically low interest rates, shaky transaction volume and the loss of accounts stemming from brokerage mergers that occurred with the global financial meltdown.

“On all levels, it’s very, very competitive. [Some firms] are much more aggressive both in the pricing they’re willing to offer [companies to move] and incentives — up-front money, like ‘signing bonuses’ — to win a piece of business,” says Sean Malloy, senior vice president and director of global sales and marketing, Penson Financial Services, in New York City, with about 400 U.S. clients.

Getting Political

Emerging from all this upheaval is a new version of the clearing firm. It is a business model that has morphed from the old-school clearer of bygone years to one that operates on a far broader scale. And now, even bigger changes are afoot.

“The business is evolving away from [just] being a processor. Today [broker-dealers] are looking not only for a processing leader but a thought leader because their dependency on their clearing firm goes well beyond the notion of processing,” says William Coppel, chief client growth officer of Wells Fargo Advisors’ First Clearing, based in St. Louis. The firm has 100-plus clients.

Thought leadership among clearing firms is showing up in a number of ways. Right now, probably the most important one addresses the regulatory overhaul and its forthcoming industry-wide challenges.

One example of thought leadership is major clearing companies’ significant presence on Capitol Hill. Their purpose is to reflect client views vis-à-vis the new regulations. “There are many groups spending a lot of time and money lobbying to make the change more in the direction that works best for them,” says Craig Gordon, director of correspondent and advisor services, RBC Correspondent Services, in Minneapolis, serving more than 200 firms.  Since RBC U.S. Wealth Management CEO John Taft is chair of the Securities Industry and Financial Markets Association (SIFMA), Gordon is tracking the proceedings quite carefully.

Fidelity Investments’ National Financial “channels the thoughts” of its more than 300 clients “to the folks in Washington to provide thought leadership to the regulatory bodies — opinions on how the rules should be written for maximum impact,” says Sanjiv Mirchandani, president, based in Boston. “Then we provide insights to clients on how to deal with the rules. The [regs] need to accomplish what they intend to but not create too much burden to the point where it’s unproductive.”

Pershing, an affiliate of BNY Mellon and with 1,150-plus clients, the No. 1 clearer, holds ongoing regulatory conversations with the SEC, SIFMA and FINRA.  “We take responsibility to act as a mouthpiece to reflect clients’ views as the rules and regulations are being shaped. There’s still a lot of wood to chop to clearly define what they’re going to be,” says Michael Row, managing director, from the firm’s Jersey City headquarters.

Building Skills

Thought leadership is apparent too in some firms’ efforts to help ensure that FAs are properly skilled to meet the complex needs of today’s and tomorrow’s investors.

For instance, First Clearing’s Growth Accelerator Program pairs B-Ds’ financial advisors with actual coaches to give them a boost to the next level of performance. “They act as the advisor’s conscience and hold them accountable to reach the goals [the FA] has set,” Coppel says.

Not since the 1930s and 1940s has the financial services industry undergone such major change, says RBC’s Gordon. “We’ve been spending a lot of time looking at what this means to advice-giving practitioners. It’s a game-changer: clearing firms are going to have to be very responsive to the new ways the industry will be working. Creative, successful broker-dealers and advisors will need new tools and resources in this new world.”

At the core of the regulatory revamp is investor protection. “[The government] is attacking it from all angles,” Gordon observes. “It’s disclosure, the fiduciary standard, the safe-keeping of assets. For the clearing industry, this is an opportunity, to a certain extent.”

As for protecting the broker-dealers and advisors, Atul Kamra, president of First Clearing, notes: “To protect yourself effectively, you need to have the right diligence, the right documentation — and the right mindset. The umbrella issue is that there’s going to be much more transparency and diligence in connecting clients to the right solutions.”

Indeed, First Clearing is focusing much of its energy on helping clients protect their businesses. Says Coppel: “The notion of risk management will manifest in systems we develop particularly as they relate to transparency, disclosure and documentation issues.”

One new First Clearing product is a contact management system fully integrated with its back-office system. This should be especially helpful in “capturing everything that transpires between advisor and client, including details on why [specific] investment recommendations are made and whether or not the client accepted them,” Coppel says.

First Clearing is also building its next generation of monitoring and surveillance tools so that advisors, clients and branch managers, according to Kamra, “are in a position to make sure the solutions they’re serving up match clients’ needs and risk profiles.”