Looking Ahead: Clearing Relationships and Succession Planning

By Jay Donlin and Dave Osborne

modern office building in Hamburg, Germany.

Introducing brokers must look down the road when considering economics and profitability, whether it is looking at a neglected clearing firm contract, or considering consolidation, succession and other alternatives to fulfill future needs. Join our panelists David Williams, Jay Donlin, Dave Osborne and Jim Roth as they talk about what they are seeing in these areas, how firms are handling the current environment and how they are looking toward the future.


Transcript provided by Temi transcript services

Oyster:  Welcome to the Oyster Stew podcast, where we discuss what’s happening in the industry based on what we see as we work with regulators and clients. Oyster consultants are industry practitioners; we aren’t career consultants. We’ve done your job and we know the issues you face. You can learn more about Oyster Consulting and the value we can add to your firm by going to our website – oysterllc.com. 

David Williams:  Hi, my name is David Williams and welcome to our Oyster Stew podcast.  With me today are Jim Roth, Jay Donlin and Dave Osborne. Let’s segue into the important discussion of economics and, hopefully, profitability. So when you think about the most important financial part of an introducing firm’s business, it’s got to be the clearing relationship. And I think we agree, a firm should absolutely be aware of the status of their clearing contract.  Questions to the panel – When should you start thinking about your clearing contract?  Is it within a couple of years of its expiration, sooner than that, later than that? What should be the beginning point of discussing your clearing contract? 

Dave Osbourne:  Hi, David, this is Dave. I would argue that you should always be thinking about your clearing contract.  The environment changes.  Your business mix changes.  Your reps change.  Clients change. I think certainly a couple of years out from the expiration or the renewal, the auto renewal in most cases, is when you should really start having some in-depth and meaningful conversations with your clearing firm around what are the next steps? What are your strategic goals and how do they align with the goals of your clearing firm? Should you find that those two things don’t mix, maybe it’s time to look at alternatives and just see what’s out there from the marketplace. 

Jay Donlin:  Dave, I’ll kind of dovetail into that as well. It kind of depends.   David, if your business has significantly changed, if you’ve acquired a large practice, that sort of thing, the economics can change quickly in the business. And so you definitely want to always be on point to look at your clearing firm contract, which is today’s point, but in general, you want to start about 18 months out, probably from when your renewal is, just to make sure that you are kind of always looking at that contract.  In general, that’s your largest relationship as a introducing firm.  And it’s something that a lot of people neglect. David, you and I have seen contracts that hadn’t been negotiated in 20 years. Well, we’ve been involved in recent projects where a firm has had the same clearing contract for over 20 years. And the clearing firm, of course, is not going to be proactive if you’re willing to just sit back and let things renew at rates from 20 years ago, which is definitely not the most financial benefit for the firm, the introducing firm.  

David Williams:  A good point. I guess when I’m thinking about a clearing contract, we usually think about today. We think about what the environment is today. What’s the business of today? Things are changing. Regulations are causing lots of traditional revenue sharing arrangements with broker dealers.  Basis points are certainly becoming popular. How should a firm be thinking about those types of evolving items so they can construct a contract that’s not only good today, but good five years from today? 

Jim Roth:  I’ll give you an example of the last three years, and here is a real-life example that we had this morning.  They had decided to give up certain revenues because of the regulatory environment.  They believed that regulators were going to second guess, as far as mutual funds, transaction fee revenues so that they said, I don’t want a part of it. And yet now in the future, we’re reminding them to don’t forget about those revenues that you decided to forgo. So I only use that as an example, because three years ago, that’s what happened then.  Who knows what’s going to happen three years from now?  So it’s difficult to answer, I thought that question, Dave, only because there might be other revenues that they’re going to stay and say, I don’t want to receive anymore. But what we’re proposing is to remind people to don’t forget those prior decisions, because they could help you in the future.  

David Williams:  And that’s where I was going with the question.  It was said, the world today is going to be different than the world three years from today. And if you’re going to forego revenues because of regulations, you’ve got to get credit for that in another part of your contract.   Are you seeing different types of financial arrangements that you haven’t seen before? 

Jay Donlin:  Yeah, we’re definitely seeing some very creative arrangements from clearing firms. And it’s a direct result of these shifts in the marketplace.  Things that we would never have thought in the past,  it’s kind of intriguing some of the things they come up with.  And it’s directly related to the strategy of the firms. The strategy the firm out lays out to the Clearing firm and the Clearing firm responds with pretty creative economics. Like we said, with the regulatory environment and firms trying to reduce conflicts and walk away from certain things, that’s part of the conversation with the clearing firms.  This economic model shifting in some cases it could be in your favor. And so let’s figure out how to structure our economic model with you to offset some of those benefits that you may be retaining as a result of this renegotiation.  

David Williams:  Sounds good.   So let’s finish up with succession planning. Many firms are multi-generational, and lifetimes have been spent creating a very valuable asset. What should you be thinking about in today’s environment where you’re seeing lots of consolidation, you’re seeing firms merge with each other or you’re seeing firms actually being acquired by other firms? Is that something that you should be thinking about and the world today? 

Jim Roth: Hey Dave. Absolutely. Yes.  Reflect back last year, you saw the deals between Schwab, the acquisition of TD. You saw Morgan Stanley, E-Trade and  LPL’s involvement with M&T BMO, Harris, Waddell, and Reed, and most recently Cetera’s partnership with Voya all to name a few.  But Dave, I think we’re going to continue to see more industry consolidation on a global scale. And it’s driven by the factors that we already talked about, the negative interest rates, the margin compression, the increased competition, and don’t forget the higher advisor compensation expenses that are aligned to it.  With some firms, I think we’ve seen that they have to sell in order to survive. And I think many of those firms are trying to upgrade their tech stacks before selling to get a better evaluation. So as we previously shared, I think there’s more interest in the RA space, the independent broker dealer space, and one area that I think is also to keep an eye on is the defined contribution plan, the recordkeepers. I think those are all going to be acquisition targets going forward in the future. 

Jay Donlin:  Yeah, Jim, we’ve seen it just as everybody else sees in the industry, a lot of these owners of these private firms are in their fifties, sixties, and even seventies, some even older than that. And they need to be thinking about the succession plan, if their children, or if their partners, aren’t willing to kind of have that in place, they need to think about what’s next.  Not just what’s next in the event that they decide to sell, but what’s next if a tragedy happens, you know? And so it’s almost a business continuity play as well. You need to have a plan, you need to have a succession kind of route the land, the firm in the event that you pass away or are disabled. And so, it’s kind of an important conversation to have with your firm and with your family to make sure that you do have a plan. 

David Williams:  There’s other alternatives besides selling.  Should firms be at least aware of other models that don’t necessarily mean that you have to sell the firm, but possibly look at a different business model? 

Jay Donlin:  Yeah, there’s definitely multiple options out there on the street. A lot of the larger firms have multiple ways that you could do business with them, whether it be a hybrid RIA.  Whether it be independent, traditional independent channel, whether it be a private client group and a succession plan later on for the private client group type branch. So there are definitely multiple ways that you could affiliate whereby you’re not a broker dealer anymore. So I think you probably need to take a look at your broker dealer and ask that question. Do I even need to be a broker dealer now?  There were various reasons you needed to be a broker dealer in the past, but a lot of those are kind of obsolete and you can get the same access to various services and maintain a certain level of control by going to one of these other models at one of these larger firms, and then have a natural succession plan within that process.  

David Williams:  One last thought I’d always stir.  One of the things we do at Oyster is help firms with succession planning. When you think about the many years, ownership has spent building your firm, you have created an important asset.  Have you thought about how you will realize the value of your firm? How you will monetize it? At Oyster we can help you understand the many alternatives you have as you prepare for succession. So I think we all agree that a broker dealer owner’s awareness of the marketplace is always something that they should be thinking about. I think we all agree that taking full advantage of all the great capabilities of the clearing relationship is extremely important because at the end of the day, it’s very important to a broker dealer to number one, serve their clients the best they can and give their advisors the best platform to do that. Thank you everybody for listening today and thanks to Jim, Jay, and Dave for giving us your thoughts. If you’d like more information, you can call Oyster at (804) 965-5400 or visit our website at www.oysterllc.com. 

Oyster:  Thanks for listening. And if you like what you heard, make sure to follow the Oyster Stew podcast on whatever platform you listen to. If you’d like to learn how we can help firms start, run, protect, and grow their business, visit our website@oysterllc.com. 

About The Podcast Speakers
Photo of Jay Donlin

Jay Donlin

Jay Donlin has led and worked on numerous projects throughout his career ranging from system conversions, data center relocations, acquisition due diligence and integrations, correspondent conversions, recruiting and expansion, and process re-engineering. Through his many years in executive leadership roles for both introducing and clearing firm operations, as well as his financial advisor roles, Jay brings a unique and extensive industry experience to the team.

Photo of modern office building in Hamburg, Germany.

Photo of Dave Osborne

Dave Osborne

Dave Osborne is a well-rounded financial services professional with over 30 years of experience in operations, risk, vendor management, relationship management and correspondent-related services. He possesses high-level project management, contract negotiation and management skills, with the ability to connect interrelated processes to assess the entire landscape.

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