In these challenging times—lethargic economy, record-low interest rates, high market volatility, softer trading volumes and a regulatory overhaul—the top firm in the clearing space has decided to totally transform its business model.
Pershing, an affiliate of BNY Mellon, is indeed making profound structural changes to deal with the issues facing financial services.
In so doing, it is broadening its custodial responsibilities and placing more focus on assisting its 1,500 clients to grow. Within that imperative, it is helping advisors transform their practices through increased operating efficiencies and methods to expand client assets.
"The way that broker-dealers and RIAs operated two or three years ago won't be sustainable to get through this environment and come out the other end," says Jim Crowley, a Pershing managing director, based in Jersey City, N.J. As part of the transformation, Crowley was recently assigned the additional post of chief relationship officer, encompassing the full breadth of Pershing's customer base. He continues to be responsible for global customer U.S. business, though day-to-day responsibility is now under another managing director, Michael Row.
Clearing firms are middlemen in more ways than the usual sense: On one side, they are pressed by the onslaught of tighter industry regulation; on the other, the urgent needs of clients to differentiate themselves, compete and grow. Increasingly, BDs are looking to these intermediary firms for help and guidance.
That is a huge attitudinal change.
"In the old days, broker-dealers said, 'You're a vendor—stay out of my business. We're not interested in your point of view.' Today, it's the complete opposite—a 180-degree turn. It's 'Come on in, sit down, help us understand how we can do things better and more effectively to get more return on the assets we have and help us manage risk'," says William Coppel, chief growth officer of First Clearing, in St. Louis, which has 90 clients.
At RBC Correspondent and Advisor Services in Minneapolis, Craig Gordon, director, sees the clearing firm's pivotal role as "the heart of the financial services industry. It holds the assets: Everything connects to it. And, like the body's heart, the clearing firm's [job] is to make sure everything flows through smoothly and to support financial advisors so they can run fast and have stamina."
Indeed, the big challenge for the heart continues to be low interest rates. "You just don't have that revenue that was there previously," Gordon notes.
This situation is one reason Pershing stresses "the necessity" for business-model transformation. "You just can't wait for interest rates to come back up. That can't be your strategy," he says.
BDs are suffering just as much as the clearers when it comes to low interest rates.
Like Crowley, Sanjiv Mirchandani, president of National Financial, emphasizes: "This is a time when strategy is important. And so firms are reassessing their strategies." A unit of Fidelity Investments, National, with nearly 300 clients, is the No. 2 clearer.
"There's no way [for clearing firms] to completely offset the revenue that's being lost because of low interest rates," Mirchandani adds. "You don't want to take on too much risk to attempt to offset it all. But we're focused on helping our clients grow their recurring revenues, reduce expenses and improve efficiency."
The firm is assisting BDs to grow their fee-based business with, for instance, managed accounts. "As [FAs] move to a fee-based model," Mirchandani notes, "these accounts become recurring revenue sources."
Growing Menu
Pershing has given BDs a boost to increase their fee income by providing mutual fund programs that allow them to process trades at no cost. That was made possible through the firm's collaboration with BNY Mellon's Capital Markets broker-dealer subsidiary.
Further, in April of this year, Pershing aligned its fixed income trading desk with Capital Markets, a move that allows it to underwrite fixed income products.
"This lets our broker-dealers receive fee income they previously didn't get," Crowley notes. "We're trying to help them find new sources of income because as a result of higher interest rates, revenue sharing is not going to be the solution."
The government's sweeping regulatory reform, though proceeding slowly, weighs heavily on clearing firms.
"The bar is going higher. There is no question that it will continue to go up—and the expense related to dealing with it is real," Crowley says. "This will continue to put pressure on the operating margins of not only clearing firms but also introducing broker-dealers because additional capital will be required to address the new regulatory changes that are coming through."
This is another major reason for the recurrence of a trend toward self-clearing firms moving to a fully disclosed model, thus outsourcing through clearers.
"We've seen renewed interest from self-clearing firms," says Mirchandani. "We're very focused on the outsourcing trend because there are real opportunities for us to pick up market share."
Meantime, the clearing firm count continues to dwindle.
Last May, Penson Worldwide exited the business in the United States. A new company, Apex Clearing Corp., is acquiring Penson's approximately 230 U.S.-based correspondents.
