‘Duel’ clearing arrangements on the rise

NEW YORK — An increasing number of independent-contractor broker-dealers are doing business with more than one clearing partner, adding to the stiff competition among some clearing firms.
This doesn’t sit well with clearing firms, which traditionally don’t like their broker-dealer clients having dual clearing arrangements, according to one broker-dealer executive.
“They want all of your business,” said Eric Schwartz, chief executive of Cambridge Investment Research Inc. of Fairfield, Iowa.
In fact, the number of independent broker-dealers with dual clearing arrangements has grown over the past two years.
Two years ago, about 13% of the top 50 or so independent firms had dual clearing arrangements, according to Philip Palaveev, senior consultant with Moss Adams LLP of Seattle. Now, one-third of the top independent firms have two or more clearing platforms.
Driving the decision
The ability for a broker-dealer to recruit reps and advisers who use the clearing platforms of either Pershing LLC of Jersey City, N.J., or National Financial Services LLC of Boston, typically drives the decision to have dual clearing arrangements, executives and consultants said.
“The allure is to make acquisitions and recruit,” said Larry Roth, president and chief executive of Royal Alliance Associates Inc. of New York, the largest broker-dealer in the AIG Advisor Group Inc.
Each of the five broker-dealers in the network is in the process of adding National Financial as a second clearing firm, joining Pershing.
But not all broker-dealers are opting for dual clearing arrangements. NFP Securities Inc. of Austin, Texas, is cutting ties with Pershing and making the transition to National Financial, industry executives and observers said.
Chief executive Jeff Montgomery wasn’t available to explain the decision, said Elizabeth Fogerty, a company spokeswoman.
James Crowley, managing director with Pershing, declined to answer specific questions about National Financial.
Having two clearing firms is “helpful in a bunch of ways,” Mr. Roth said, noting that both Pershing and National Financial are “investing heavily in their platforms.” He is particularly impressed with the unified-managed-account offering at National Financial.
“We’re riding a chariot pulled by two really strong horses,” Mr. Roth said. The AIG Advisor Group last year reported $1.1 billion in gross revenue, and its size definitely helps negotiate good pricing from its clearing partners, he said.
The large, insurance-company-owned broker-dealers typically use Pershing. But many smaller broker-dealers use National Financial, Mr. Roth noted.
If more of those are acquired, that could force more firms to have dual clearing arrangements, he said.
Although changing clearing firms is “still a painful process,” broker-dealers are reevaluating, said Matthew Bienfang, research director for brokerage and wealth management at TowerGroup of Needham, Mass.
“It’s easier to switch,” he said. Contracts between broker-dealers and their clearing firms are growing shorter, and broker-dealers sometimes search for a new clearing firm to gain leverage in negotiating with their current partner, Mr. Bienfang said.
Negatives to overcome
Mr. Schwartz of Cambridge Investment Research said there were negatives to overcome in having a dual clearing arrangement. Cambridge started using both Pershing and National Financial about 10 years ago, and one hurdle is adjusting to two entirely different systems.
“Each firm has hundreds of different policies, procedures and technology forms,” Mr. Schwartz said. “We have two separate dedicated teams for each clearing firm,” he said.
Using two clearing firms also fits with Cambridge’s dedication to an open architecture platform for its reps, Mr. Schwartz said.
Most reps and advisers affiliated with Cambridge use only one clearing firm, but some branches use two, he said.
For broker-dealers with more than $100 million in gross revenue that use one clearing firm, it may make sense to consider adding another, particularly to recruit, Mr. Schwartz said.
“If I was a $230 million broker-dealer, which I am, I would think long and hard about it,” he said.