For a few years now, consolidation and regulatory scrutiny have been the buzzwords in the clearing business, but executives at clearing firms say another trend that's taking center stage of late–and will be a major factor in the competitive equation–is broker/dealers' call for clearing firms to be their strategic partners. "It's not just clearing anymore," says Norm Malo, CEO and president of National Financial, Fidelity's clearing arm. Unlike five years ago, broker/dealers now want to do business with a clearing firm that can provide them with "an integrated package of products and services," he says, and can help them "grow their business, recruit, reduce costs, and manage risk."
Indeed, the competitive bar for clearing firms in attracting and retaining broker/dealer clients has "moved higher" than just providing cutting-edge technology and products, says Jim Crowley, managing director of Pershing, the big clearing firm based in Jersey City. Before aligning with a clearing firm, introducing B/Ds are first assessing "the stability, longevity, and expertise of the management teams running these organizations," Crowley says. B/Ds want to know: "Are these people going to be here tomorrow?" Also, he says, they want to know if the clearing firm is the right business partner to "deliver the solutions that the broker/dealer, advisor, and [end] clients need."
Staying ahead of the competition and heeding broker/dealers' siren call is manageable for big clearing firms like Pershing and National Financial, but Malo predicts that smaller firms and those firms doing clearing on the side will ultimately go out of business or be bought out. In the mid-1980s, one could count 165 clearing firms, he notes. Today, however, that number has dwindled to 60 (there are 17 clearing firms in our annual directory), and within only a few years, Malo predicts it will drop to 30 or 40. Clearing firms must have the capital to invest in technology that's needed to keep pace with more regulations and to provide advisors with the financial planning tools they need in order to transition from transactions to fees. Clearing firms must also "have capacity and volume because the pricing for clearing has been driven down, so all of [the firms'] spreads have been squeezed," Malo says. "It's truly a buyer's market out there because all of us are trying to compete on price. If you don't compete, you won't get the business."
Hands-On Educational Service
National Financial is staying ahead of the pack by offering hands-on services to brokerage firms through product consultants, who provide face-to-face training on, for instance, how to use managed accounts to "grow their business, effectively compete with wirehouses, and attract high-net-worth clients," Malo says. National Financial held its first "rep training" program of this kind in September, with more tutoring sessions on the way. "We had over 100 producers from a multitude of different companies" attend the first training session, he says. Pershing, too, is investing heavily in technology and products to help introducing B/Ds capture more fee-based business, Crowley says. Pershing is also "sharing the technology that we have so that advisors can conduct a fee-based business," he says.
