Pershing banking on opportunity in helping indies retain hybrid reps

Will smaller broker-dealers be able to make a nimble shift toward supporting fee-based financial advisers?

Pershing LLC executives sure hope so.

“We look religiously at [account transfer] statistics, and it catches our attention when we see assets go to other custodians” when a representative leaves to set up an independent RIA, said James Roth, a Pershing managing director.

“Sometimes the brokerage firms aren’t aware of it” until the broker transfers assets, he said.

Mr. Roth is head of Pershing’s RIA Complete program, which is responsible for helping broker-dealer correspondents better serve the hybrid adviser.

Pershing, of course, would like to retain those assets, and its executives made the point clearly last week at the firm’s annual Insite conference in Hollywood, Fla. Although they want the assets, they are agnostic about how advisers and Pershing’s brokerage firm customers handle those assets.

Retaining hybrid advisers who might fly the coop is an important strategic consideration for broker-dealers as investment advisory revenue becomes a larger part of their businesses, said James Crowley, Pershing’s chief relationship officer, who is responsible for the firm’s U.S. business units.

Correspondent firms “need the technology, the managed-account platform, the service model and the oversight structure” to accommodate hybrid advisers, he said.

The RIA Complete program aims to do that by beefing up correspondent firms’ corporate registered investment advisers or referring breakaway prospects to Pershing’s own RIA custody firm, Pershing Advisor Solutions.

Smaller breakaway prospects often are referred to Shareholders Services Group Inc., an introducing custodian that clears through Pershing.

Pershing has more than 100 firms involved with RIA Complete, Mr. Roth said. The firm clears for about 840 broker-dealers.

But affecting change among traditional independent B-Ds isn’t easy, Pershing executives acknowledge. Figuring out the economics of the RIA business is also a hurdle.

“With too many B-Ds, their models are flawed,” said Sandy Motusesky, director of product management and development at Pershing, who is working on product solutions for independent dealers to use within their corporate RIAs.

“The way they’ve structured pay to the advisers, they’re not keeping anything for themselves,” she said.

Ms. Motusesky works with product sponsors to create pricing systems that work under a B-D-run advisory model.

The typical Class D mutual share, with higher fees but no 12(b)-1 fees, is closest to what is needed, she said. In contrast, RIAs typically want bare-bones cost structures.

Currently, brokerage firms usually charge an oversight fee from 3 to 7 basis points, Mr. Roth said.

WORRIES ABOUT COMPLIANCE

Aside from how to get paid for oversight duties, independent B-Ds worry about taking on the compliance risks from their representatives’ advisory businesses. But Pershing officials said B-D firms are already on the hook for supervision.

Thin margins or not, doing nothing could put independent broker-dealers at even more risk.

The number of brokerage firms is down by 300 to 400 from the peak prior to the financial crisis.

“It’s very much attributable to the economic environment” and investors’ migration to the RIA model, he said.

Meanwhile, Pershing’s separate RIA custody unit is growing quickly.

Pershing Advisor Solutions last month quietly hit the $100 billion milestone, up from $33 billion less than five years ago, said Mark Tibergien, chief executive of the unit.

Mr. Tibergien said PAS is getting assets from competing RIA custodians, from advisers who are directing new assets to Pershing or using the firm for global access, bank custody, and better fixed-income products and trading services.

“Our message is different enough that people are taking a look,” he said.

Including PAS, Pershing holds just over $1 trillion in assets in custody as of April 30.

About 40% of that total is assets managed by investment advisers or managed under one of Pershing’s advisory platforms.

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