Advisers, leaving wirehouses, are targets for clearing firms

Jul 12, 2009 @ 12:01 am

By Jed Horowitz

When Ben Marks set up shop as an independent registered investment adviser in November, he wasn't ready to give up the commissions that helped support him for more than a quarter century at large brokerage firms.

Even though nearly 70% of his revenue came from managing portfolios in fee-based accounts, he still wanted to arrange municipal-bond ladders for clients, collect 12(b)-1 fees for picking mutual funds and offer his clients a clear view of their holdings through one statement that included both their advisory and brokerage accounts.

“I spent more than a year investigating what platform would be best-suited for us,” said Mr. Marks, founder of Marks Group Wealth Management, an RIA firm in Minnetonka, Minn., that manages about $275 million in assets.

Mr. Marks, who worked at UBS AG of Zurich Switzerland, and its E.F. Hutton and PaineWebber Holdings predecessors in New York, became one of the first customers of LPL Investment Holdings Inc.'s new “hybrid” platform. That platform allows financial advisers to operate their own RIA firms while also providing a home for their commission-based businesses.

At that time, Boston-based LPL was the only company that could offer Mr. Marks the look and feel of a brokerage firm, while maintaining complete independence, he said.

Today, it is a different story.

Mr. Marks and other brokers that offer both fee-based and commission-based services have become prime targets of traditional clearing firms, custodians and broker-dealers.

“It's rare to find an adviser coming out of a wirehouse today that is 100% fee-based, which means they are looking for a broker-dealer where they can hang their Series 7 [brokerage license],” said Mindy Diamond, president of Diamond Consultants, a Chester, N.J.-based search firm that specializes in helping brokers move toward an independent model.

Firms such as Fidelity Investments and Jersey City, N.J.-based Pershing LLC, which straddle both the correspondent clearing and custodial worlds, are best-positioned for attracting the new business, she said.

Boston-based Fidelity operates National Financial Services LLC, the second-largest correspondent clearing firm, after Pershing, as well as Fidelity Institutional Wealth Services, the second-largest custodian, after The Charles Schwab Corp. of San Francisco.

Pershing, a unit of The Bank of New York Mellon Corp., offers RIA custodial services through Pershing Advisor Solutions.

Schwab, for its part, contends that its lack of a clearing arm poses no problem for hybrid brokers.

“We have solutions for advisers who need commission support,” said Jim McCool, executive vice president for institutional services at Schwab.

Schwab has alliances with several independent broker-dealers, including Cambridge Investment Research Inc. in Fairfield, Iowa, and Purshe Kaplan Sterling Investments in Albany, N.Y. Year-to-date through May 30, Schwab had attracted 58 RIAs from large brokerage firms, up from 40 in the comparable period a year earlier.

TD Ameritrade Holding Corp. is working on a similar program.

“We are developing a broker-dealer network that will allow advisers to choose from a range of different types of regional broker-dealers across the country,” said Brian Stimpfl, a managing director at the Omaha, Neb.-based firm's RIA custody arm.

TD Ameritrade hopes to sign “letters of understanding” this quarter with one or two brokers that would be willing to cede fee-based revenue to the custodian, he said.

Not everyone is persuaded, however, that the hybrid platforms are as efficient for advisers as claimed.

“My personal experience is that there is no such thing as a seamless hybrid platform,” said Rich Gill, vice president of Focus Financial Partners. The New York firm has equity interests in 17 RIA businesses and also provides start-up services for breakaway brokers.

One problem is that most advisers set up separate brokerage and fee-based advisory accounts for clients.

As a result, clients receive two statements — even if they use the custody and clearing services of the same firm. Another issue is that custodians without clearing arms and brokerages that accommodate their clients' commission business aren't always felicitous partners, as each tries to build its own business with the hybrid adviser.


The custodians trying to capture the assets of wirehouse brokers appear to be pursuing different strategies, according to consultants and securities industry veterans.

Pershing, for example, seeks to persuade its large roster of broker-dealer clients to set up RIA capabilities, thereby competing directly with Fidelity, Schwab, and its own advisory arm. Pershing officials frequently say that they are “agnostic” about what channel their clients' assets come from.

Fidelity's National Financial Services clearing unit is encouraging its broker-dealer clients to refer business to its custodial platform through a program called Hybrid One. That program offers various incentives for referrals.

Schwab, despite its referral connections with independent broker-dealers, is most interested in converting hybrid brokers to an all-fee model residing on its platform.

The primary advantage of firms that offer both brokerage clearing and RIA custody in luring breakaway brokers is their ability to offer financing, prime brokerage and other services already in place for their brokerage clients, said Matt Bienfang, a clearing consultant at Tower Group in Needham, Mass.

Independent broker-dealers and regional brokerages that operate in both channels have the potential, and some actual ability, to help their clients more efficiently integrate their commission and fee-based activities for end clients, he said.

LPL couldn't agree more.

“The differentiator is the true integration that we provide,” said Gary Gallagher, executive vice president of the independent broker-dealer's RIA services arm, which no longer requires advisers to use only in-house custody services.

E-mail Jed Horowitz at


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