Clearing firms jostle to win and retain indie BDs

NEW YORK — Despite continued consolidation, the clearing industry in some ways is becoming more crowded, with increased competition for the clearing business of top independent-contractor broker-dealers.
Of course, the number of financial services firms that provide the basic clearing and settlement of trades has been whittled down severely over the past decade. But clearing firms with the most clients, specifically Pershing LLC of Jersey City, N.J., and National Financial Services LLC of Boston, are facing pressure from new and old competitors as well as each other.
In one case, the pressure comes from a recent entrant into the field, LPL Financial Services, the largest independent-contractor broker-dealer, which broke with Pershing a few years ago to become self-clearing.
Winning biz
Now, LPL of San Diego and Boston has its sights set on winning the clearing business of 10 to 20 top independent broker-dealers, executives with the firm say. And it has had some early success.
Last December, LPL said it would take over the clearing and back-office operations for its first huge insurance-company-owned broker-dealer, AXA Advisors LLC of New York (InvestmentNews, Jan. 8). Like many other insurance-owned firms, AXA used Pershing as its clearing firm.
Competition for the clearing business of independent-contractor firms also may come from unlikely sources.
For example, Penson Financial Services Inc., which started about a dozen years ago by working with professional and active traders, wants to focus more on the market of broker-dealers with reps that are also investment advisers focusing on individual securities.
Weighing the benefits of each clearing firm is probably the most significant decision a broker-dealer makes, said one industry consultant. And that’s why broker-dealers continue to evaluate that relationship.
“If you think of a broker-dealer as a car, this is your engine,” said Philip Palaveev, senior consultant with Moss Adams LLP in Seattle.
The average independent broker-dealer pays 1.1% of its revenue to its clearing firm, he said. At the same time, the average margin of those firms is just 0.9%.
And since growth for the brokerage industry is coming from fee-based products and services, growth for clearing firms is likely to come from that same area, he said.
Indeed, Pershing, the industry leader, sees as a clear boon the recent decision by a federal court to eliminate a rule that allowed brokers to use fee-based brokerage accounts for clients without being an investment adviser.
“It’s a big opportunity to work with clients,” said James T. Crowley, managing director. Pershing is helping broker-dealers decide whether an advisory or non-advisory account is the best solution for those accounts, he said.
Pershing, like other clearing firms, is also emphasizing a broader array of services and products to its broker-dealer clients, or correspondents.
Last November, it launched a consulting group, iNautix (USA) LLC, to work specifically with broker-dealers on a number of problems, Mr. Crowley said. Those include integrating compliance across a firm’s platforms as well as managing its flow of paper.
So far, about eight broker-dealers have signed up for the service, and Pershing is discussing potential deals with twice as many, he said.
Clearing firms’ support of brokers is much more of a major factor than it was even two years ago, said Norman R. Malo, president and CEO of National Financial, which is part of Fidelity Investments of Boston.
“Broker-dealers are looking at their cost structures and figuring out the best to support their reps,” he said.
To that end, National Financial wants to offer its clients more of its best services. It is in the process of introducing a unified offering of its services, along with those of the Fidelity Registered Investment Advisor Group, to both broker-dealers and registered investment advisers, Mr. Malo said.
Other clearing firms see opportunity in the registered investment adviser area.
RBC Dain Correspondent Services of Minneapolis this year introduced a new service for investment advisers, and so far has converted one small broker-dealer into an investment adviser, said Craig Gordon, president.
The new service will continue to cater to those advisers focusing on wealth management, Mr. Gordon said.
In the end, executives at broker-dealers appear to have current or potential partners at clearing firms who are quite willing to accommodate.
“We want to have a flexible offering,” said Daniel Son, president of Dallas-based Penson Worldwide Inc. “We will tailor our product to their needs.”
And a clearing firm has to know its broker-dealer clients and can’t take a one-size-fits-all approach, said Atul Kamra, president of First Clearing LLC, a unit of Wachovia Securities Inc. of Richmond, Va.
“You’ve got to grow organically,” he said. “The game has shifted, from client acquisition to client growth and retention.”

Also online: data from the Clearing Firms Report

U.S. clearing firms ranked by broker-dealer

Clearing firms used by the top independent broker-dealers