Outdated Account Practices Threaten Clearing Firms, Report Says

Some clearing brokers are operating in the dark, using outdated, account opening practices.

That’s what industry consultant Aite Group warned in a recent report and survey, which argues that that some fully disclosed firms have been falling behind in their methods of operation since the market meltdown of 2008. Many firms, Aite Group said, have moved slowly on making the opening process electronic and integrated with other parts of the firm.

That means clients who use these clearing firms “have to contend with less efficient processes, resulting in longer cycle times and a bigger risk of losing clients before accounts are funded,” according to the report “Account Opening Pain Points in the Front Office: Advisors in the Dark.”

The report, which questioned 515 advisors in their relationships with brokers, found that one-third of respondents said their brokerage’s primary account opening tool is “paper.” It also found that these clients are unhappy when account opening solutions aren’t integrated with other functions.

“In addition, many surveyed advisors say they lose clients during account processes that take too long due to errors,” according to the Aite Group study.”

“These survey results clearly spell the need for firms to take time to understand the full breath of the causes of inefficient account opening, whether people-or-technology related, and to study the costs of these inefficiencies for both the front and the back office,” the study said.

A brokerage industry consultant warned that anything manual is prone to error, which ends up costing firms precious resources.

“Errors in the account opening process take time to fix, and this delay was highlighted in the report as a leading reason for loss of clients,” David Fetter, CEO of Quadron Data Solutions told Traders Magazine.

Regulatory requirements on maintaining client information are “bringing these processing accuracy and efficiency issues to a head,” Fetter said.

What did participants in the study expect brokerages to do?

Aite Group said they want brokerages to adopt standards that “allow them to submit paperwork electronically with a client e-signature.” That would result “in process alerts when applications are not in good order (NIGO).”

Brokers must, the report warns, also offer correspondents the ability to buy financial products directly from the manufacturers of financial products.

“Brokerage firms that do not invest in a technology solution that is capable of aggregating data on off-platform assets will face costly and manual reporting processes as well as high error rates across the business processes which rely on this data,” Aite Group said.

The advantages of a brokerage using a total electronic account approach, or straight-through processing, and doing it on its own platform are many, Fetter adds. By automating every step, from gathering customer information to updating accounts, keeps records complete, up-to-date and accurate, as well as saving work.

“Clearly, accounts and products that can be opened on the brokerage platform enjoy account opening processes that are close to this holy grail of STP than most products held away from the brokerage platform.”

Fetter also believes some clearing firms don’t understand as the business is evolving. They are not just in the clearing business, offering custody and clearing services. They are in the platform business, according to Fetter.

“Today correspondents look to their clearing firm to provide many of the services they need to operate their business. Even large and sophisticated firms today have an expectation that their clearing provider will provide not just clearing and custody but platforms for account opening, compliance, reporting, money management and even things like commission and fee accounting,” he said.

Firms not helping correspondents with business away from the clearing brokerage’s platform are risking the loss of business and their survival, Fetter adds.

Fetter lists National Financial and Pershing as two examples of firms that are using this all-electronic model.