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Clearing Firms Extend Their Outsourcing Businesses

January 1, 2007
By John Hintze

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.

"There's a huge market now for imaging and workflow," Honoré said. "But it's so expensive to implement at smaller firms that I think outsourcing the service is a really smart bet on Pershing's part, especially if it can make the process very simple." He added that major broker-dealers such as Merrill Lynch & Co. already convert documents into electronic form by requiring their reps to mail all of their forms to processing centers for scanning. Pershing is offering smaller firms the same benefits.

"It's not just about providing an imaging service, but meeting the record retention challenge and beefing up compliance and risk supervision processes," said Jim Crowley, managing director at Pershing. "This provides the adviser with a more efficient way to do business."

Pershing is also adding services to bolster its clearing business. It has worked informally with a few customers to expand the data it collects for them beyond securities trades, such as in banking and insurance. Pershing will provide a comprehensive view of sales-related data, such as commissions across business and product lines, and by branch and region. "The goal is to consolidate the data into one data warehouse, and then provide consolidated reporting about those activities," said Crowley.

Such services aim to automate tasks that were once performed by reps or by a broker-dealer's own back office. Outsourcing allows correspondents to focus on their core competency of brokering investment transactions.

ADP's Hybrid

In a fully disclosed clearing relationship, broker-dealers outsource most of their back office, while self-clearing firms have tended to outsource only trade processing. Automatic Data Processing launched a hybrid service in 2005 to permit self-clearers to remain that way while outsourcing most back-office functions, such as street-side settlement and the status of fails, and the margin and cashiers desks.

"We think this is a sweet spot in the market right now," said Michael Alexander, EVP of operations at Roseland, N.J.-headquartered ADP, which gained initial traction by selling the hybrid service to retail-oriented TD Waterhouse (now part of TD Ameritrade Holding Corp.) and E-Trade Financial Corp. He added that the service enables broker-dealers to adapt quickly to wide swings in trade volume without having to adjust their own back-office personnel and systems. This flexibility should prove beneficial to high-volume firms catering to institutional customers, and ADP recently signed on such a firm, said Alexander.