Pershing puts RIA custody on desktop of thousands of IBD reps (One of three articles in a series)

Consider the dilemma facing Jim Crowley and Mark Tibergien.

The respective heads of Pershing LLC’s broker-dealer and its RIA custody business, Pershing Advisor Solutions, needed to find a way to embrace the RIA model, which involves the custody of advisory assets. Elite reps at independent broker-dealers are telling Pershing: Make us into better advisors or we’ll be forced to seek it at a Schwab Institutional or Fidelity investments.

But Pershing also needed to preserve relations with 900 broker-dealers who use it for clearing trades. In giving them custody services for assets under a registered investment advisor, it didn’t want to take the accounts of their reps away from them.

It sounds like Mission Impossible. But analysts believe that Pershing has struck on a strategy that could succeed in keeping reps from fleeing their IBDs and that could position itself – and its IBDs – at the center of the competition for RIA custody businesses.

By rolling out NetX360, Pershing is giving the reps of its independent-broker-dealer clients the ability to offer RIA services alongside transactions business without making them learn a new technology. This radically reduces their temptation to consider other platforms with steep learning curves, analysts said.

In addition, Pershing rolled out RIA Complete, which provides reps with the flexibility of either putting fee-based assets on their IBD’s corporate RIA, which is housed at Pershing LLC, or outsourcing all custody to Pershing Advisors Solutions.

What makes RIA Complete palatable to reps is that they get paid well in any scenario – advisory or transactional. [Pershing declined to give details of its pricing but IBD execs say reps, in effect, get substantial referral fees for putting assets on Pershing’s custody platform.]

Having reps use Pershing for asset custody has an added benefit for IBDs. They don’t have to refer brokers to competing RIA custodians. Pershing has made a pledge to its IBDs that if they find themselves competing for custody business against a rep that clears through Pershing that they will give up the business – or even refer it to a competitor, said Crowley.

Pershing is already in discussions with 100 broker-dealers with a combined 6,000 reps about using RIA Complete.

RIA Complete is complemented by NetX360 because it gives hybrid reps a single log-on for both fee-based assets and commission business, according to IBD execs. Pershing accomplished this feat by combining its transactions software, NetExchangePro, with NetExchangeAdvisor, its advisory business software. NetX360, currently being beta- tested by more than 1,500 reps, is to begin rolling out in midsummer. Pershing serves more than 100,000 reps with 5 million accounts.

Jim Crowley: Pershing has changed the
RIA game

“We believe we have game-changing technology that nobody else has” because it has fee-based and commission-based assets on the same platform, said Crowley, Pershing’s broker-dealer chief.

HybridOne launches ahead of NetX360

Yet Steve Austin of Fidelity Investments says that his firm is a leader in serving dually-registered advisors because its HybridOne product is bigger, more capable and more established in the marketplace than any of its competition. HybridOne combines the clearing platform of its National Financial Services clearing subsidiary with the RIA custody capabilities of Fidelity Institutional Wealth Services.

“We launched “HybridOne” over a year ago, in June, 2008, and we believe that Pershing’s efforts validate the approach we have taken,” he said. “At well over $850 billion in assets and hundreds of millions of dollars invested, we believe no one has a comparable offering in size, scale or capability. Currently, there is deep integration between National Financial’s broker and advisor workstation, Streetscape, and Fidelity’s RIA workstation, WealthCentral, with features such as a single
sign-on.”

If NetX360 has a drawback, Ellis said, it’s the necessity of installing the technology desktop by desktop rather than switching it on over the web. Pershing is also working on a web-based version, according to its spokesman, Mike Geller.

Yet Pershing’s move still positions it to become a bigger force in RIA assets, Crowley said. Not only does it have $700 billion of advisor assets on its clearing platform but – for wirehouse brokers contemplating a breakaway — it has the kind of technology that they are most familiar with. Wirehouse brokers still have about $5 trillion of assets under advisement.

What makes the technology into a potential game changer for Pershing is that it can now argue it has a leg up in RIA custody on its rivals: Schwab Institutional and the combination of Fidelity Institutional Wealth Services and Fidelity’s clearing arm, National Financial Services, analysts say.

RIA Maker?

Pershing Advisor Solutions has 500 RIAs with $63 billion of assets is far behind Schwab and its 6,000 RIAs and more than $500 billion of assets. But Pershing’s broker-dealer clearing clients have assets of $700 billion and if the reps with those IBDs begin to migrate assets to Pershing Advisor Solutions [or Pershing LLC’s corporate RIA] then the dynamics of the Pershing-Schwab game could change, according to Steve Winks, principal with SrConsultant.com of Richmond, Va.

In addition, Pershing could beat Schwab to some significant RIA assets if it turns out that breakaway brokers from wirehouses are more inclined to join a broker-dealer with RIA custody than make the fuller leap to a pure RIA model under Schwab, he added. Pershing serves independent broker-dealers like Royal Alliance Associates and those in the ING network.

RIAs are not the same as the reps of IBDs

Schwab executives don’t believe that Pershing and Fidelity can use modified clearing technology to sway RIAs, according to the San Francisco firm’s spokeswoman, Alison Wertheim. “What the clearing-driven firms don’t understand is that RIAs are not the same as reps of IBDs,” she said. “The average IBD rep has $15 million of assets and the average RIA has about $100 million.”

She added: “Reshaping technology designed for the little guys to try to serve the bigger guys recreates all the inflexibility and overhead of the wirehouse environment but worse because the reps for which these systems were designed are so much smaller.”

While conceding that there may be truth in Wertheim’s remarks, Ellis says it’s also important to note that Schwab does not have a competitive offering for commission-minded advisors. Schwab refers hybrid advisors to Cambridge Investment Research of Fairfield, Ohio and other broker-dealers. “It’s a little sour grapes because Schwab knows it can’t be all things to all people and in some ways they want to be all things to all people.”

But Schwab has a long history of serving hybrid brokers well in concert with broker-dealers like Cambridge Investment Research, Wertheim said. “We’re happy to take on advisors with some commission business but it’s not really our focus.”

Schwab has a better focus for RIAs than its competition, she added. “In talking about clearing, [our competitors] are focusing on what they have, not what advisors need,” she said. “What advisors need most is expertise in the industry to ensure that they set their business up for success; a complete range of fee-based products and expertise in ensuring a smooth transition.”

Opinions are sharply divided about whether Pershing LLC has staged a coup by introducing NetX360 and RIA Complete, or not. We hope to give you more information to make that determination for yourself in the next two articles of this series. Our second article looks at IBD executives who have chosen Pershing’s new offering and others who are sticking by Fidelity’s National Financial Services. Our third article is a review of NetX360 by RIABiz webmaster, Nevin Freeman. He’ll report what he sees in Pershing’s demonstration and use screenshots to help illustrate what he sees. Mr. Freeman will offer thoughts you haven’t heard before. [That review is now published here ]