WEST PALM BEACH, Fla. - Consolidation will continue to push companies out of the clearing services business, and the remaining players must add scale and services in order to compete, the head of Fidelity Investments' clearing services unit says.
"There are fewer and fewer players in this business, and in a couple of years there will be even fewer players again," Norman R. Malo, the president of National Financial, the Fidelity unit, said in an interview this week at a conference here.
In the past year, he said, his company has increased its market share from 7% to 12%, partly due to a big deal in December, and expects to reach 15% to 17% within three years through organic growth and strategic acquisitions.
A year-old survey by Tower Group of clearing services businesses' revenue ranked National Financial as the third-largest provider, with a 10% market share, behind Pershing BNY, at 15%, and Bear Stearns, at 11%.
At Feb. 28, National Financial supplied clearing services to 268 financial institutions with 4.1 million clients having about $416.2 billion of assets. The asset total was 18.6% higher than on June 30.
Mr. Malo said his company would increase its clearing relationships to 411 when its deal with Fiserv closes this month. In December, Fiserv Inc. in Brookfield, Wis., sold its securities clearing division, BHC Investments Inc., to National Financial for $365 million.
Companies like Fiserv are being pushed out of clearing because it is not one of their core competencies, Mr. Malo said. Fiserv's clearing business supplied about 1% of its revenue, he said, adding, "If you aren't a good portion of your firm's revenue, you won't be a part of your firm much longer."
"Over the next several years, I think more firms are going to go back to their main streams of success," he said. "The clearing business is fundamental to Fidelity's success."
Matthew B. Bienfang, an analyst at Tower Group in Needham, Mass., said that the top 10 clearing companies manage 70% of the market and their share is growing.
"There are a lot of firms with anywhere from two [to] five correspondents clearing through them," Mr. Bienfang said. "A lot of these firms are reevaluating that and looking at the risk. These firms are not squarely in the clearing space, and there is significant risk in this business."
National Financial, which had been a unit of Fidelity Brokerage since 1982, was opened as a stand-alone company in April 2003 with $231.1 billion of clearing assets. Its growth was jump-started a week after the spinoff when Fidelity announced it had bought UBS PaineWebber's correspondent clearing services unit, Correspondent Services Corp. National Financial added 149 clients in 2003, 100 from CSC.
The CSC and Fiserv deals have brought National Financial a lot of new banking clients, including Fifth Third, the former Bank One, Citizens, Bank of America, Washington Mutual, and Northern Trust. Mr. Malo said National Financial is in talks with many prospective clients, including some banks, but that banks are not a majority in the pipeline.
"We have always dominated with banks, insurance companies, discount brokers, and independent advisers but never with full-service brokers or the institutional marketplace," Mr. Malo said. "These deals put us on the map in these other marketplaces."
Since the CSC and Fiserv deals, 47% of National Financial's clearing customers are full-service brokers and 17% are institutional customers, Mr. Malo said.
Ellyn McColgan, the president of Fidelity Brokerage, said 60% of its $124 billion of net flows last year came from the clearing services business.
"The power of this platform is that we can make back-office services available to intermediaries so that they don't have to spend the money on" infrastructure to do it themselves, she said. "These services, in combination with our brand and our history, seem to be working."
Mr. Malo said that, to continue to grow, National Financial must broaden its products and services. On Monday, it introduced a unified managed account platform in partnership with Chicago-based Envestnet Asset Management Inc. And it now offers correspondent broker-dealers and their investment representatives a unified managed account platform integrated with its brokerage platform.
Some competitors have proprietary unified managed account platforms, Mr. Malo said, but this is the first-ever open architecture platform for the product. "I think this platform will help ease our clients into unified managed accounts," he said.
Mr. Malo said he wants to continue enhancing National Financial's service menu in order to compete with the wire houses. "We want to become the source for broker-dealers," he said. "We want to offer a cafeteria plan so firms have the ability to pick and choose the services they need."
He added, "We want to enable advisers to plug and play. We don't want to be told what to sell or how to sell. They like it this way."
National Financial wants to be able to compete with the wire houses for customers, he said, but this requires continual development.
