Clearing firms count on the appeal of crossover technology

With margins shrinking, broker-dealers closing and financial-reform legislation looming that could change the industry’s economics, clearing firms more than ever are counting on technology.

The firms are relying on their commitment to platform technology to help them retain commission- and transaction-based business even as they vie to attract fee-based advisers and hybrids.

“I see continued interest and investment in front-end-technology platforms for both advisers and hybrids,” said Sean Cunniff, research director at The Tower Group Inc., a research and advisory services firm. “I do not see any slowdown in technology spending on the horizon.”

As evidence, Mr. Cunniff pointed to The Charles Schwab Corp.’s announcement two weeks ago of its Schwab Intelligent Integration platform, the continued rollouts and developments of Pershing LLC’s NetX360 platform, and Fidelity’s continued investment in both its National Financial Streetscape platform for brokers and WealthCentral platform for registered investment advisers.

“The line between brokerage clearing and RIA custody continues to blur, and the pending regulations could make the line even fuzzier,” he said.

Indeed, Lucille Mayer, managing director of Pershing’s customer technology and solutions delivery group, said that the annual technology budget for the firm’s NetX360 platform is $300 million — the most substantial such investment in the industry.

“It’s all about building in operational efficiencies, and [NetX]360 has come a long way in the last 18 months,” she said, noting that a number of day-to-day work flow features have been added in that time, including many suited to hybrid advisers. The acquisition of Albridge Solutions Inc. will give advisers and broker-dealers expanded access to data from multiple custodians, she said.

Rich Hart, head of platform solutions for National Financial Services LLC, the clearing and custody arm of Fidelity Investments, said that the firm now has hundreds of dually registered broker-dealers and advisers on its platforms, representing $960 billion in assets.

“The hybrid opportunity is here to stay,” he said.

To back that assertion, Mr. Hart pointed to a new technology pilot program that provides fee-based trading tools to correspondent-clearing firms. Six firms are enrolled, and the number is likely to grow to 12 by the time of the program’s official launch, tentatively scheduled for September.

“That’s a big part of our strategy across the technology complex between our WealthCentral and StreetScape platforms,” he said, explaining that the new tools, which include components for fee-based block trading and allocation, portfolio modeling, re-balancing and account grouping, as well as data import and export features, are meant to meet the needs of hybrid advisers.

Bernie Clark, head of Schwab Advisor Services, wrote in an e-mail that his firm’s approach to serving hybrid advisers is to continue improving its own fee-based platform and work closely with broker-dealers that employ transaction- based systems.

“About one third of our current clients have some commission business, and about 50% of new advisers to Schwab are hybrid advisers,” he wrote. “Our approach is to work with multiple broker-dealers and to find ways to create as integrated an experience as possible.”

One example of this is the February rollout of IndeSuite by broker-dealer NFP Securities Inc. That platform is designed to handle both commission- and fee-based business, and Schwab was the first custodian to announce integration with it.

Despite the uncertainty surrounding adoption of a uniform fiduciary standard, custodians and clearing firms with a single integrated technology platform feel confident. They contend that only a truly integrated platform — which can handle any type of business without having to import or export data across components or different platforms — can offer the efficiencies necessary to remain competitive.

“The Pershings and TradePMRs of the world are in a good position to provide advisers with what they need, no matter which way the fiduciary regulations go since we both offer a consolidated platform and, importantly, consolidated reporting,” said Fred Van Den Abbeel, executive vice president of TradePMR Inc., a custodian.

If the SEC eventually imposes a universal fiduciary standard leading to lower payouts at broker-dealers, many representatives would “leave the brokerage world behind,” Mr. Abbeel said.

Advisers leaving the wirehouses for independent broker-dealers, and those setting up their own RIA businesses, want to keep the same single point of contact they have had, both for themselves and clients. Having to log in separately to manage commission-based business, trading and fee-based business would be unacceptable, experts said.

The cost of converting broker-centric clearing systems to an adviser-oriented model has yet to be quantified, analysts said.

“We see clearing guys trying to think outside of the box, but the way they’ve been brought up, they think of the clearing model first and foremost,” said Chip Kispert, a consultant with Beacon Strategies LLC, a research, benchmarking and consulting-services provider to broker-dealers and clearing firms.

“The dilemma for many firms is having enough capital to invest to achieve the return on investment they’ll need to see it through,” he said.

E-mail Davis D. Janowski at [email protected].