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Clearing Firms Extend Their Outsourcing Businesses
January 1, 2007
In the face of a shrinking customer base and a decline in fees from their core business, correspondent clearing firms are using their technology and outsourcing wherewithal to open new markets and generate revenue growth.
The number of National Association of Securities Dealers member firms fell to 5,111 in 2005 from 5,451 in 1995. The number of registered representatives at broker-dealers increased 30 percent, from 505,647 to 655,832, but that's down from the 2001 peak of 673,822. Yet investment assets are rising, and clearers are in a position to make reps more efficient at gathering and managing investment assets. With more assets flowing through fewer correspondents, retaining each clearing customer is a necessity, and attracting new ones a priority. So clearers are aggressively augmenting their platforms.
To maintain their growth patterns, clearing firms "have to be looking at markets outside traditional introducing broker-dealer relationships, because broker-dealers are not exactly growing in number," said Adam Honoré, an analyst at Boston-based research firm Aite Group.
One factor shrinking the commission-based business is the increasing popularity of fee-based registered investment advisers (RIAs). Some broker-dealer reps are becoming pure RIAs, while others hold both licenses. Either way, a new market has opened up for clearers to help reps in their transition, preferably moving their assets into the custody of a clearer's RIA affiliate.
Fidelity Investments' registered investment adviser group has long been one of the largest service providers to the RIA market. The application that Boston-based Fidelity provides to support RIAs is embedded in the Streetscape workstation, which the mutual fund giant's correspondent clearing affiliate, National Financial, provides to broker-dealers. Because both commission-based brokerage applications and fee-based RIA applications are on the same platform, it is relatively easy for agents with brokerage and RIA licenses to use both.
Mark Healy, COO of National Financial, said Fidelity's goal is to have registered reps rely on its technology as they make the transition to fee-based advisory services. "We're eliminating much of the work behind servicing both of those businesses separately," Healy said.
Fidelity is also pushing information and functions that have been available only over Streetscape to correspondents' retail-client Web sites. By increasing information flow to investors, the aim is to reduce financial advisers' administrative duties in the client relationship and accentuate their advisory roles. Since early November, customers of Fidelity correspondents have been able to view the same aggregated picture of their investments-held at Fidelity and other financial firms-as do their financial advisers. Next year, the clearer plans to add information about clients' mortgages, credit cards and other loans.
"The planner gets a much better view of the customer overall," Healy said. He added that another feature of Fidelity's aggregation service allows for searching for mutual fund breakpoints, which qualify shareholders for lower fees. It also can be used to determine whether assets held at other firms can be converted to the Fidelity platform.
Honoré called the Fidelity offering a "smart business move," but he added that technology that eases administrative tasks and reduces the need for broker-dealer support staff is likely to have more staying power.
Bank of New York Co.'s clearing unit, Pershing, also sees opportunities in the shift toward advisory services, and its recent revamp of its advisory workstation bolsters RIA sales efforts. Another new offering helps advisers cater to wealthy clients by allowing them to set aside assets for tax-exempt charitable contributions in a donor fund. Looking at new revenue prospects, Honoré said he was most impressed by Pershing's efforts to expand the imaging services it offers to financial advisers, encompassing documents a clearing firm wouldn't normally see. For example, broker-dealer correspondents typically do not send new-account forms to their clearers, but the information on these documents is important to those service providers. Pershing's imaging service allows it to gather this information and convert it to electronic format, so the correspondent can access it from the same database that stores clearing-related data.