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June 13, 2007

Growth Can Mean Toxic Clients: Can the clearing firm solve the ultimate contradiction? Can the fir

By Gregory Bresiger

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  • Growth Can Mean Toxic Clients: Can the clearing firm solve the ultimate contradiction? Can the fir
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Clearer, know thyself.

Know exactly the kind of client that is a good match. Know when growing your business can hurt your firm. Know when and why to jettison clients. Know a client as you would know your spouse. Know when to marry. Know when to divorce.

These are the warnings of veteran clearing executives as well as introducing brokerage officials who work with them.

"We all get introducing brokerage firms that turn out not to be what we thought they were going to be," says W. Dennis Ferguson, president of Sterne Agee Clearing.

Know that even the best client due diligence in the world can still leave you with the wrong client, clearing officials say. And know one other thing: The regulators will do little to help you with your client selection and how it affects your business (see sidebar). That is until things go wrong.

The pressure for growth is the ultimate contradiction for clearers looking for new business. And how one looks at this contradiction may be the most important factor in determining if firms will prosper or survive, clearing executives say.

"It's a very tough issue for the clearer. There is a lot of desperation and hunger to bring in clients," says Bob Mumby, whose Baltimore-based RM Associates provides consulting services for both clearers and introducing broker-dealers.

Fewer Clients

On the one hand, Mumby says, mergers and consolidation have resulted in fewer potential clients for clearers. But, on the other hand, today clearers are more fearful that they will be sued or will be hurt in some way because of their customers' problems.

But the fault in a bad clearer/broker relationship more often is not legal. It is more likely something more mundane; such as a clearer and an introducing broker are not a good match. And the fault frequently is with the clearer, brokerage officials say.

Brokers often complain that clearers hungry for business promise them the sun, moon and stars. Other times both parties simply misunderstand what the clearer can or will do. Either way it's trouble, says a brokerage executive.

"The most common mistake an introducing broker makes in looking for a clearer is believing everything that a clearer tells them without independent investigation," says Melinda Schramm, chairwoman of the Chicago-based National Introducing Brokers Association (NIBA).

Sterne Agee's Ferguson says clearers must understand exactly the kind of business they want and avoid the temptation to venture outside of their niche.

"You should know the profile of the introducing broker-dealer that you're trying to attract that best fits your capabilities," Ferguson says.

Sterne Agee, he says, must keep a narrow focus, concentrating on its some 90 introducing broker-dealers that typically are "ma-and-pop retailed-oriented firms."

The clearer must also know precisely how it can and can't help these firms. His firm must succeed in its niche, Ferguson says, avoiding the temptation to obtain more business in areas other than its specialty; business that competitors can do better, he says.

For example, Ferguson says Penson Financial is better prepared than he is to service the day-trading/black box business.

Hungry Man