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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

"Operations people often speak their own special kind of language. So we must understand them. And they must understand us," Steer says. She says National Financial goes through "a pre-new business process" in which all new clients are reviewed. Sometimes they find that a prospective client would be the wrong fit for National Financial.

RBC Dain's Gordon says all prospective clients should be put through a process that never varies. This process should include the background and history of the firms and its principals. But the checks can still leave a clearer with the wrong client. That's because "a front-end review only goes so far," he adds.

"Make sure you understand the business they propose to do through you. Not doing this is how firms get in trouble," Gordon says.

"The clearer sees a revenue opportunity, but he can't explain what the client does. In that case, you will not see the red flags," Gordon says.

Usually, red flags are any significant regulatory problems or certain kinds of business that appear inherently risky. National Financial says this is generally the easiest part of the review. The more tricky part is sometimes passing on a new correspondent that has no problems with the regulators, but whose business isn't a good match.

Here, Steer says, the problem is usually that the clearer doesn't view the correspondent as understanding what it can and can't do for it or what it will need to do to become a National Financial client.

"Sometimes the client is looking for a cheaper price, but they don't understand the costs to their business of going through a conversion to become a customer with us," she says. The costs can include the upgrade of a client's systems so they can keep up with those of its new clearer.

A True Convert?

The clearer also needs to determine if there is unanimous or at least overwhelming support within a brokerage for going to another clearer and subjecting the firm to a conversion process, she notes.

"Sometimes, after talking to a CEO of a firm, one has to ask if the CEO really has the support within the brokerage to make a change," Steer says. A way to ensure that you have the right client is to "include as many people as possible in the process," she adds.

Other problems come during the conversion process, a process that can sometimes take months. New clients often don't take it seriously, she says. They don't put enough resources into it, she notes.

"That's another bad signal," Steer says. She adds that the size of the client isn't the main reason a new client shouldn't be accepted or an old one should be dropped. Instead, patterns of trading-such as rapid buying and selling as well as penny trading-are closely watched and may result in an account being terminated.

Clearing officials stress that firms must act proactively in reviewing clients. For example, First Clearing Correspondent Services jettisoned dozens of clients after a purchase because many of them were not a good fit.