If the financial services industry has an Orphan Annie, the clearing business for bank broker-dealers just might be it.
It's a business headed for a shakeout, where few players are daring to tread. It is unwanted because the clientele served by the bank channel tends to be Mom and Pop; forlorn because trades tend to be for less value (and therefore small commissions); and ignored because the share blocks are in the dozens, not thousands.
Fidelity Unit on Top
According to a study by Cerulli Associates Inc., the National Financial subsidiary of Boston-based Fidelity Investments strengthened its grip as the leading clearing house for bank broker-dealers with 36% of the total trades. Banks that cleared their own mutual fund trades accounted for 20%, followed by BHC Securities Inc., Philadelphia, with 13% and Pershing, Jersey City, N.J., with 11%.
The participants drop off quickly after that. Such players as Kemper, Chicago, U.S. Clearing, New York, Bear Stearns, and Bank of New York have been dropped from Cerulli's list because they service no more than two bank broker-dealers surveyed.
Shifting Market Shares
"You're seeing more consolidation at the top," said Eli Neuesner, a consultant with Boston-based Cerulli Associates.
National Financial, BHC, and Pershing gained market share at the expense of other companies, which do clearing if asked but don't aggressively pursue the business like the largest competitors, Neuesner said.
"That trend will continue," Mr. Neuesner said. "You won't see any heightened interest in the bank market by clearing firms. They're looking for channels where there's a good bit of stock and bond trading."
Added Bob Mazzarella, president of National Financial, "I'd like to think that firms like ourselves have raised the bar to where people feel they can't compete or can't make it profitable."
Mundane but Vital
In order to battle the increasingly thin margins associated with clearing bank mutual fund orders, a company must invest heavily in technology that allows the best efficiencies, Mr. Mazzarella said. Clearing mutual fund orders is a labor-intensive service. Firms execute broker's orders, prepare and mail trade confirmations, and prepare and mail account statements.
"It's like putting on a party," Art Lucey, vice president of Alps Mutual Fund Services in Denver. "If everything is done well, you never hear about it. If it's screwed up, it all comes apart."
While some banks handled 20% of last year's trades, Mr. Lucey noted that many others, such as Los Angeles-based First Interstate Bancorp's Westcore funds, don't want the added expense of carrying a large number of employees on the bank payroll.
The Westcore group clears its trades through State Street Bank, Los Angeles.
National Financial and Pershing, a subsidiary of Donaldson, Lufkin & Genrette, both clear for their parent organizations, said BHC Securities vice president Al Beale.
He said BHC would take on a broker-dealer client if asked, but usually concentrates on the bank market.
Finding a Niche
"You can't be all things to all people," Mr. Beale said. "You need a dedicated resource to cater to the bank market segment.
The products are different, the cultures are different, the banks want their names on everything they do, from checking accounts to statements. Broker-dealers don't care about that."
BHC counts PNC Financial Corp., Pittsburgh, and National Bank of Detroit among its clients. In many cases, smaller banks will clear through a larger bank that works with BHC.
National Financial has clients such as La Salle Bank, Chicago, Bank of New York, Barnett Bank, Jacksonville, Fla., Chase-Manhattan, New York City, and Society Bank, Cleveland, Ohio.
BHC grows in three ways, Mr. Beale said. First, by cultivating existing accounts and relationships; second, by offering new products; and third, by adding new business.
"We're different in that adding new business is not the (chief) reason we grow," Mr. Beale argued.
One example of a new product is a program to have account information at the bank site, easily retrievable on a personal computer.
That's available now, but it takes longer because account information is stored in BHC's Philadelphia processing center.
Mr. Beale acknowledges the threat to his business by banks that process their own orders. But the business is increasingly expensive as more machines and better-trained personnel are needed to achieve profit margins.
"That's always a threat in this business. They can take on self-clearing as technology becomes available, but you still need people to do dividends, margin accounts, tax information. All those things become very expensive," he said.
National Financial's Mr. Mazzarella said it is increasingly important to tailor services to individual banks as the need varies.
"Banks are changing the way they're delivering products. Years past, it was mostly discount brokerage. Now there's a heavy emphasis on mutual funds and selling through branches," Mr. Mazzarella said.
However, he added, some companies can still make it work.
"You can make money clearing. It's a matter of using technology and keeping costs reasonable. You have to be efficient in processing transactions."