They're betting billions that they can be all things to advisors.
The fastest-growing segment of business at most clearing firms is-you guessed it-the advisor channel. So it's not surprising that clearing firms are devoting more attention and resources to advisors and their assets than ever before.
That's meant an emphasis on building advisor-centric technology and platforms that provide practitioners with ultimate flexibility in terms of custodying and reporting on all client assets, including those they hold away from the firm. Clearing firms have also been busy building or acquiring enhanced wealth management and credit products, high-end, customized technology and lower-cost trading platforms.
In short, these firms are leveraging years of experience and superior technology to make them smarter, tougher competitors. "These firms are looking to grow and they see that the advisor channel is one of the few ways to do it, so they're not shy about investing in it," says Matt Bienfang, a senior analyst with TowerGroup, a Boston-based consulting firm that tracks and analyzes financial services trends.
Not only are advisors' fee-based assets a stable and sought-after source of revenue, but they are starting to look like one of the only games in town since so much of clearing firms' traditional market is already spoken for.
"I haven't seen this drive for advisors so much in the past, but it makes sense since it's pretty much impossible for clearing firms to grow organically," says Bienfang. "They've already tapped almost all of the registered representatives in the world, so they have to grow through acquiring advisor business." Of the universe of 4,500 broker-dealers in the United States, 3,000 already work with clearing firms; the rest are either self-clearing or, like some mutual fund companies, just registered in name, according to Tower Group statistics.
The only new clients for clearing firms are those that can be lured away from competitors. At the same time, asset levels in managed accounts are predicted to grow by nearly 23% annually, to more than $1.1 trillion in 2007 from $399 billion in 2002. And relatively little of that growth-at most 30%, TowerGroup predicts-will come from reps at retail brokerages. The rest will come from fee-based advisors.
Being courted is good news for advisors, who are often able to strike fairly advantageous deals with clearing firms. Such deals often include customized, advisor-branded technology, wish-list money management, leading products and advantageous pricing "Traditionally, clearing firms have been very closed in their architecture and have built everything themselves-that was their competitive differentiator. But they have since realized that their clients had a tough time differentiating themselves," Bienfang says. The result is an opening up of architecture and a move away from homegrown products and solutions toward best-of-breed money management and products and services. "There's a much greater willingness to support efforts around third-party vendors and around advisor needs. Five years ago," Bienfang says, "if an advisor wanted to work with a vendor, the firm would say, 'Okay, but making it happen is up to you.' Now firms are much more likely to integrate these relationships into their own stable and make them Web-available."
Pershing, one of the largest clearing firms in the country, has been a leader in courting advisors, and the reason why is not surprising: The independent contractor channel has become the largest segment within Pershing in the last three to five years. "The horn we want to blow is what we're doing to try to help broker-dealers and advisors grow their businesses," says Jim Crowley, managing director of the $650 billion, Jersey City, N.J.-based Pershing LLC, which was acquired last year by Bank of New York.
"For advisors," Crowley says, "we want to develop the platforms they need to compete with the Raymond Jameses and LPLs and other independents out there. That means we have to have very competitive product and service offerings."
On the product front, Pershing recently introduced a fee-in-lieu-of-transactions account that has become the fastest growing product at the firm, both in terms of new accounts and assets. "As more and more financial advisors look to build their fee-based business, this product fits them," Crowley says. "We've also customized the offering so that advisors can put their own brand on it when they introduce it to clients."
Pershing is also ramping up its managed account offerings. First, the firm is moving assets from its proprietary turnkey money management program (PEAK) into Bank of New York's Lockwood program. "The merger of these programs really creates a better platform to attract and manage separately managed assets," Crowley says.
To give advisors added flexibility and freedom, Pershing has also ramped up its Managed Account Exchange, which gives advisors (and where relevant, their broker-dealers) the freedom to put client money just about anywhere, but still custody it with Pershing. "We've been doing this for some time, but we formally labeled and branded this program late in 2003," says Crowley. "Our solution may not be the one advisors always want and desire, so it became very important to us to support an open architecture."
Up until now, larger advisors have frequently maintained two or more custodial relationships in order to answer all client needs and provide an operating safety net, should one relationship sour or a firm call it quits. Crowley maintains that the days of advisors having to manage two or more custodial relationships and multiple sets of client reporting data are over. "We want to simplify advisors' lives and aggregate all of their assets under one roof," says the executive, who helped lead the charge in building a platform for consolidation. "We don't think advisors should have to keep assets all over, especially those advisors with both advisory and commission business," he adds.
But even advisors who prefer to maintain multiple custodial relationships may be able to benefit from the Pershing platform's openness. Here's why: Advisors doing business with third-party asset managers, or directly with mutual funds or broker-dealers, can pick and choose the business they want to bring to Pershing. That simplifies not only reporting but regulation
In a push to complement asset building, Pershing is also benefiting from the Bank of New York acquisition by making available to advisors trust services, mortgages and other lines of credit designed for higher-end investors.
On a broader scale, 2004 will be about growth at Pershing, Crowley predicts. "What this means is that we'll focus on our customers' business to help them recruit new assets, clients and new offices. And we'll devote our recourses and technology, which had been devoted to the transition in ownership for more than a year, to going out and recruiting new advisors and introducing broker-dealers. We know independents will find the best home they can for their clients, and that's what we think we are," Crowley says.
Certainly, clearing firms are not shy when it comes to investing in and leveraging technology to attract advisors. Nor should they be, considering how they build the very best technology that money can buy. Clearing firms will continue to spend about $1 billion a year through the end of the decade to perfect their platforms, reporting abilities and open architecture, says TowerGroup's Bienfang.
Bear Stearns Global Clearing Services is harnessing both architecture and technology to please existing advisors and recruit new advisors, along with the broker-dealers who cater to them. "We've developed an open account platform called Manager's Circuit that allows advisors to place money at third-party money managers," says John Tyers, a managing director at Bear Stearns. "We're also able to clearly consolidate custody and add the trading and reporting infrastructure for money managers not on our list, if advisors want that."
In fact, Bear Stearns recently has become one of the leaders in consolidated securities performance reporting, thanks to a strategic alliance with Nashville, Tenn.-based Investment Scorecard Inc., a leader in integrated performance reporting solutions. The alliance went into effect May 4, and will make available to advisors consolidated reporting of all investor securities, eventually including those held away from the clearing firm. "This is the tool that advisors have been requesting," says Bear Stearns Rich Cancro.
This may be as close to one-stop performance reporting as most advisors will get, although the race is clearly on in the industry to develop the best service available. "What this will do is consolidate a high-net-worth clients' financial pictures into one easy-to-read performance report they can access by Web or in print," adds Tyers.
A long tradition of very significant cash infusion in technology has also allowed clearing firms to lower costs. Such is the case with Interactive Brokers Group (IBG) LLC in Greenwich, Conn., which offers one of the lowest-priced and most expansive trading platforms in the business.
IBG provides advisors direct access and one account (called the IB Universal Account) for trading stocks, options, futures, foreign exchange and ETFs in over 40 markets in 13 countries. "We do everything margined real-time in this account, to give advisors the ability to trade in a highly sophisticated fashion," says John Seeberg, a manager of sales at IBG. Advisors get access to exchanges in the U.S., Canada, Europe and the Pacific Rim at commissions that are hard to match elsewhere. Costs per share for U.S. trades, for example, range from 0.01 to 0.005 per share, with minimums that range from $1 to $2. As enticing, IBG has no ticket charges.
Beyond low-cost market interconnectivity, recently IBG also revamped its asset allocation software to provide advisors with the ability to send master orders that can be automatically allocated to individual clients. "By entering a master order, the advisor can send the order for execution and the share profile they've built will allocate the trades to client subaccounts automatically," says Seeberg.
With clearing industry players so clearing targeting advisors, competition for advisor business is likely to get even more interesting very soon.