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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

Schramm's gripe about clearers is an echo of what some clearers say about clients: They believed everything they heard about the client when they were in the courting stage. So the clearer and the client in a failed relationship were possibly both fooled. Or possibly they both misunderstood each other. Both need to be more serious. They need to listen to each other, according to a clearing executive.

"It's like getting married. You want it to last. You don't want it to end up in divorce," adds Anne Steer, executive vice president for relationship management for National Financial, Fidelity Investments' clearing arm.

National Financial has some 350 correspondents. So both parties should critically examine each other, she says, before they make a commitment. And clearers should be their own harshest critics, she says.


The self-knowledge that the clearer must have, a persistent, critical self-evaluation, is the only way it can survive in a business that both demands growth and careful client selection, clearing officials say.

Part of the problem of this contradiction comes from the division within the clearing industry since the 1970s. Today, says Craig Gordon, president of the 170-client RBC Dain Correspondent Services, there are two models.

One model is a giant business that sees clearing as a part of an attempt to leverage other core businesses, Gordon says. Here clearing is a niche within the firm. The second is the processing model that views clearing as a scale business. It has a constant need for new clients.

"This one faces a conflict of interest. They need to trade more volume, yet they need to watch the business very closely," Gordon says.

Nevertheless, Gordon concedes that the giant firm faces its own growth pressures that can lead to the wrong clients. For example, the biggest firms have economies of scale, but they also have large overhead.

Never Enough

And that means that the biggest firms can also end up with the same growth pressures as the smaller competitors. "I've never been with an organization, large or small, that said, We've got enough,' " according to Gordon.

So whatever the clearing model, it can be a variant of the same problem. Grow too fast, or grow the wrong way, and

toxic clients may kill or hurt the firm along with the regulators. For example, veteran clearing officials note that Bear Stearns, which paid millions of dollars in fines because of the A.R. Baron & Co. case in the 1990s, has generally shied from the low end of the clearing market.

So what's a clearing firm using either model to do if it hopes to escape the contradiction? Make sure everyone at the firm knows and understands a new client.

Veteran executives say the clearer should ensure that a prospective client has done more than just spoken with sales representatives. He should insist that operations officials for both have gone over exactly how the two firms will work together, clearing officials say. This includes extensive sessions on various technology platforms, the risk group and products.