Traditionally, clearing firms have helped independent broker-dealers by ruling the back office. Now these durable companies are stepping out front by tuning BDs in to vital growth opportunities—as well as to potential perils.
Their expansion is all part of the accelerating evolution of clearing firms from providers of basic execution, custody and reporting services to muscular guides helping BDs grow and flourish in these challenging, competitive times.
Just a few issues clearers are bringing to the surface include how BDs must be ahead of the curve to counter ongoing low interest rates, the pressing need for risk management of every sort and how to embrace today's—and tomorrow's—changing investor.
"All clearing firms have the ability to process trades, and the technologies behind that are not all that different. It's service that goes above and beyond that differentiates clearing firms. This is critical," says Robb Combs, director of correspondent clearing, Raymond James & Associates, based in St. Petersburg, Fla.
Such service can take the form of a clarion call for BDs to take their heads out of the sand. With interest rates continuing at unprecedented lows and the likelihood of a rise in the next year or two a fantasy, correspondent clients must focus on what this means to their clearing-firm relationship.
Indeed, clearers historically have derived one-third of their revenue from interest. But for at least the last four years, this revenue source has been wiped out because of stuck-in-the-cellar rates. Something's gotta give. That's pricing—and it is on the ascent.
"Clearing firms' prices per trade are already starting to go up. In the next year or two, you'll see this as a big trend. The largest firms will start it. The cost of services will be driven up," says Craig Gordon, director of RBC Correspondent and Advisor Services, in Minneapolis.
He continues: "The message to broker-dealers is clear: If you're not planning for an environment with higher operating costs, you're going to miss the boat. If you're not the mouse that can find a new cheese—source of revenue—you'll be in trouble."
Gordon, a clearing industry veteran, foresees further cuts in services that are now part of firms' bundled pricing: e.g., fees for IRA accounts or the elimination of order desks.
"It's already started to happen," he says. "Independent broker-dealers are being asked to do more and/or pay more."
In this scenario, BDs, not surprisingly, are likely to pass increased costs to their FAs, who, not surprisingly, won't be thrilled.
"The reps will feel it in their pocketbook and say, 'I'm not going to take a pay cut!' So they'll pass it on to their clients," Gordon says. "It's unrealistic to think that clearing costs won't be going up. Step out of the forest! Firms that don't anticipate the change and the need to diversify their revenue source are going to be left by the wayside."
The two biggest clearers, Pershing and National Financial, with 1,500 and about 270 clients, respectively, maintain that they'll keep pricing stable.
Pershing's Jim Crowley, chief relationship officer, based in Jersey City, N.J., says, "I don't necessarily see [price hikes] in the crystal ball. It's not part of our plan."
National Financial's Sanjiv Mirchandani, president of the Fidelity Investments unit, headquartered in Boston, states: "We're committed to providing competitive pricing. I certainly don't see us moving away from that approach. Nor do we have plans to cut services."
Other clearing firms acknowledge that costs are rising but also insist they have no plans to raise prices.
"Clearing has been driven down to commodity-type pricing, and the dollars being spent by the firms are for additional tools to run your business," says Combs, whose unit has 42 clearing clients. "So, it's a logical assumption that prices will rise—but not by us."
The antidote to low interest rates and lost revenue is not to raise prices, says William Coppel, managing director and chief growth officer, First Clearing, based in St. Louis, which has 88 clients. "Raising prices to maintain your market share and position is a bad strategy. Rather, you've got to help [BD] firms grow. Focus on increasing the efficiency of your business so you have the capacity to serve more clients and drive your top-line revenue."
Female Focus
One smart way clearing firms are fostering client growth is making broker-dealers aware of the nation's changing demographics and how this affects their very livelihood. Some clearers have even become founts of knowledge on how to embrace the female investor and the tremendous opportunities therein.
These firms have funded white papers detailing how FAs can better tap into this fertile market by trying to psych out the female psyche.
Co-published by First Clearing and Cannon Financial Institute, "Women and Wealth: The Invisible Opportunity" combines the latest research along with practical advice for BDs and FAs.
The paper points out that: "Over the past 30 years, the number of working women has doubled. Women control about 33% of the wealth in North America. By the end of this decade, women will be in control of $22 trillion. Within three years of a husband's death, 70% of widows choose a different advisor." Despite all that, the paper says, women often report being "ignored and treated with condescension by the industry."
"Women and Wealth" goes on to state that because of "differences in the biology of male and female brains," women, in contrast to men, want "an ongoing relationship with an advisor who takes the time to get to know and truly understand their needs."
Says Coppel: "Affluent women want a personal relationship with their advisor. But that will be really hard for a lot of advisors because they have horrible interpersonal skills."
The paper concludes that most FAs need training to learn skills to develop "the right experience" for the affluent female investor."
Notes Crowley: "Advisors need to shift their thinking. Whereas historically, the behavior has been to focus on the male, that is now a losing proposition for advisors inasmuch as women control a greater portion of the wealth, are going to control more of it and that there are more women in the work force than men.
