Clearing Firms Join the Robot Race

In the brave new, expanding world of low-cost robo-advisors, clearing firms emerge victorious: There will always be a need to process trades.

“The robo-advisor platform exemplifies personal-finance advice intersecting with digital tools to more effectively and efficiently serve investors regardless of their age or asset level. We need to embrace this technology rather than think of it as a threat,” says Jim Crowley, chief relationship officer at Pershing, a BNY Mellon company and with 1,600 clients worldwide, the largest clearing firm.

Pershing has a handful of robo-advisor clients, including Personal Capital, Marstone and Wela Strategies. And it is in the process of onboarding more.

“I expect that the impact of this new technology over the next couple of years will be much more significant than is even imagined today, although only a few [firms] will become sustainable businesses,” notes Crowley, based in Jersey City, New Jersey.

A preview report of a study by Corporate Insight indicates that as of July of this year, 11 leading online start-ups—robo-advisors—had more than $15.7 billion in managed or advised assets. Of that, $4.2 billion was added just in the three months of April through July. The firms are AssetBuilder, Betterment, Covestor, Financial Guard, FutureAdvisor, Jemstep, MarketRiders, Personal Capital, RebalanceIRA, SigFig and Wealthfront. Most debuted only within the last two years.

Further, Vanguard reportedly is conducting a pilot program, Personal Advisor Services, providing low-cost, full-service online financial planning with advisor interaction. And well known online firms such as Scottrade and TradeKing are now also in the automated advice business.

Indeed, since Generations X and Y, the latter also known as the millennials, largely live in cyberspace for shopping, socializing and, um, gossiping, they expect the same 24/7 convenience and accessibility when it comes to managing their investments.

But automated advisors—some functioning as BDs; some providing contact with human FAs—are putting new demands on clearing firms to upgrade their tech capabilities to meet robo needs.

New-age financial advisors—interacting with clients through mobile devices and social media—must keep up too, since their clients, largely the mass affluent and many in a younger demographic, have higher tech expectations than do previous generations. Thus, there is good reason for clearing firms to help reposition advisors to work with the new technologies.

“As the population’s needs evolve and expand in constant interaction with the digital world, the way in which we deliver financial services—both advice and market access—and the way in which consumers want to receive it, will mirror the changes that are taking place in that world,” says William Coppel, managing director and chief client growth officer at First Clearing, an affiliate of Wells Fargo based in St. Louis.

“The opportunity for clearing firms,” Coppel notes, “is that the digital firms will continue to emerge and depend on clearing providers to process their business.”

Digital Rivals

Though robo-advisors won’t render human advisors obsolete, the reality is that automated advice is competition. And in the wake of the financial crisis, which deepened investors’ distrust of the industry, flesh-and-blood advisors are vulnerable.

“The primary message for traditional advisors is if you don’t make technology available to your end-investors and if advisors don’t start to use technology in a much more standardized fashion—which builds stronger client relationships and raises productivity—you’re opening yourself up to a threat from some of the robo-advisors,” says Sanjiv Mirchandani, president of National Financial, a Fidelity Investments company based in Boston. It is the second-biggest clearing firm and has 481 clients, 225 of which are BDs; the balance, banks.

While National isn’t pursuing the robo-advisor market, its sister business, Fidelity Institutional Wealth Services, is in conversation with these firms, Mirchandani says.

At the same time, National is encouraging its clients to adopt the firm’s investor-facing portals and mobile technology for end-investors. The object is to boost awareness of tech training’s importance “so advisors create a value proposition that, if done right,” Mirchandi says, “is even better than the robo-advisors because [human] advisors with years of experience are delivering it.”

A number of digital services, previously technology providers only, are brand new to the financial services industry. Now they are offering automated financial advice direct to consumers. Enter: clearing firms.

“At the end of the day, there has to be a way for these [digital] companies to meet the traditional needs of holding a customer’s account to keep the assets safe and to generate regulatory reports,” says Craig Gordon, head of clearing at DST Market Services, in Minneapolis. This past April, the firm launched a clearing platform with Gordon, formerly RBC’s director of correspondent and advisor services, at the helm.

Smaller Accounts

Robo-advisory firms hold many smaller accounts, especially those of millennials, who often have not yet accumulated high asset levels. In fact, the robos have created a digital-based value proposition to attract younger investors with smaller accounts.