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March 19, 2008

Bear Stearns Focuses on Retail for Clearing Biz

Seeing new opportunities in RIA business

By Gregory Bresiger

While many other clearing firms are seeing more growth opportunities in institutional business (see CQ&D News Winter), Bear Stearns officials say they believe big growth will come on the retail side. They see selling turnkey investment advisory services to broker-dealers as one of the areas that will boom as more Americans retire and look for help.

In a recent interview with CQ&D, Bear Stearns clearing executives Joe Triarsi and John Tyers the co-heads of Broker Dealer & Investment Advisory Services (BDIAS), explained where the clearing business is going.

CQ&D: Can you give me a profile of your core clients and where you think the major growth areas will be in clearing in the next five years?

Tyers: We categorize our clients in two broad segment types: institutional brokerage and financial advisors. The financial advisor segment consists of retail broker-dealers, independent broker-dealers, registered investment advisors (RIAs) and dually registered RIA-BDs. We're about a 60/40 financial advisor to institutional mix. Institutional firms range from traditional sellside brokerage firms to proprietary trading and hedge-fund-oriented broker-dealers.

In terms of growth, it's no surprise the independent broker-dealerand RIA markets are seeing tremendous growth. Our research shows the RIA business has the highest growth rates in financial services, with the independent contractor broker-dealer market not far behind.

CQ&D: And where is this growth coming from?

Triarsi: Beyond organic growth, we view brokers leaving wirehouses as a major growth driver for both our independent broker-dealer business and our RIA business. We also see trends toward international-both U.S. and non-U.S. firms doing business internationally. On the institutional side, we are seeing some broker-dealers beginning to offer prime brokerage services to hedge funds. We call these mini prime firms.

CQ&D: How does BDIAS plan to respond to these trends?

Triarsi: We'll stay focused on growing and improving our services for independent broker-dealers, RIAs and institutional firms. Our RIA and independent broker-dealer businesses have outpaced the market's growth and our institutional.

CQ&D: For your clients to succeed in this business, you'll need to help them recruit wirehouse brokers. How do you do that?

Triarsi: The first step is to position our firm's clearing strength and capital markets resources to help our broker-dealer clients recruit big production groups. The second is to help big production groups start their own RIA firms. In all client segments, we aim to take advantage of our strength as a global investment firm by offering our clients access to the sophisticated capital markets resources and products we offer. To thrive today, a clearing firm must offer much more than just securities processing. Our mantra is "Deliver the firm." That's how we differentiate ourselves.

CQ&D: Is the growth primarily domestic, or will there be foreign opportunities?

Triarsi: We are looking at Europe from an expansion standpoint and have begun to access our strategic options. In the international arena, we have a distinct advantage, in that we can leverage the global trading infrastructure already in place for Bear Stearns' institutional clients. As U.S. firms conduct more international business, we find they are less satisfied with their current clearing firms' capabilities. We are well positioned to benefit from the globalization trend.

CQ&D: What new services do you expect to add this year?

Tyers: We've been very active in the last year working on new initiatives that will begin to roll out to clients in 2008.We have invested a lot of resources in BearVIEW, our integrated Web portal. Our multiyear plan to fully replace our technology platform began about 12 months ago. We recently rolled out a streamlined money transfer process. Plans for 2008 include automated workflow and integrated trading functionality. We're also introducing an alerts and status dashboard that will allow clients to easily monitor business event requests in real time. On the product side,

we are launching Managed AccountEDGE. Managed AccountEDGE streamlines the process for investment professionals using managed accounts.

CQ&D: But institutional business is still important. What services does a clearing firm have to offer?

Triarsi: Clients are becoming more sophisticated. They demand a wide array of solutions and products. We've found that institutional brokers have a lot of their own capabilities in-house, so they look to their clearing firm for additional services. Infrastructure is key. The ability to interface with trading systems and liquidity providers is important. So are buyside connectivity capabilities, risk management systems and institutional reporting. Clients are also interested in alternative financing and products including futures, structured products and other derivatives.

CQ&D: How do you compete in the institutional space?

Triarsi: The institutional space marks our roots in clearing. We've been there for 30 years, institutional broker-dealer business is one of our strengths, and we've long been committed to clearing these clients. As a bulge bracket firm with leading capital markets and international capabilities, Bear Stearns is a good fit for these firms because we understand their business.

CQ&D: Pershing just started a new client advisory council just for institutional clients. Is that concept-distinguishing between institutional and retail clients-a good idea?

Tyers: It's how we've segmented our clients. We've learned over time that the needs of institutional and retail clients are very different. We believe that to the extent that we have people in product development focused on institutional and we segment our client service teams in the same way.

CQ&D: Whether it's retail or institutional, there are common reasons why a broker retains a new clearing firm or gets rid of an old one. What are they?

Tyers: Service. It's not always what they buy. But if they're leaving a firm, it's typically because of service. Joe and I were at a dinner last week with a prospective client, and one of the main reasons he was speaking with us was because of service.

CQ&D: Dissatisfied clients complain that their old clearing firms didn't know their business. How does a firm overcome that?

Tyers: The first thing we do is to segment our service teams by client type. So we have a team for retail and institutional clients. And we also break it down into a variety of service models, including money managers, and we have a group that services the mini prime, hedge fund and proprietary trading segment.

CQ&D: So the key reasons for signing with a clearing firm are usually price, technology or brand recognition, but the key reason to stay is the service?

Tyers: Absolutely. The buying decision is different. But the reason to stay is service, and the reason to leave is service.

CQ&D: Give me an example of good service.

Tyers: Providing clients with solutions and new business opportunities to help them generate new revenue. We don't let our clients' calls go to voice mail during business hours. We want people to talk to our clients, so that there is no hunting around for someone to help you solve your problem.

CQ&D: What is the clearing firm doing for the introducing broker today? What are this broker's special needs?

Tyers: At the core, clearing firms provide securities processing. But to be a leader, and to really help broker-dealer clients, you have to do more. Due to the competitive nature of this industry, broker-dealer clients are finding profit margins tightened. We've found that one way we can help our clients is to introduce them to potential new revenue sources. Our firm's capital markets strength allows us to do that by providing our clients with products they can sell and distribute. An example is structured notes, as well as other fee-based products.

CQ&D: How does a clearing business make money today in such a low-margin business?

Tyers: The clearing business today is a lower-margin business than is used to be, but I would not call it a low-margin business. There has been huge price compression over the last eight years, and correspondent firms are demanding more. So, you make less and you deliver more. With the right scale, which we and a few other firms have, this is a good business to be in. Clearing firms make money through interest income, transactional revenue like ticket charges, execution revenue and the offering of value-added products.

(c) 2008 Clearing Quarterly & Directory and SourceMedia Inc. All Rights Reserved.