Back office: Boost in business

“We want a healthy market,” says Martin Gagnon, chairman of NBCN. “And it is never good to see a competitor fold. But, at the same time, it is a strong message that you can’t just compete on price. Whenever we see firms retrenching in the marketplace, it provides a great opportunity for [NBCN].”

NBCN’s transition team is already booked for the next three months to bring new client accounts on board. Gagnon says the firm has had to postpone accepting any further accounts in order to ensure a smooth transition for the ones already signed up to join.

NBCN does business with 130 independent financial services firms with a total of $47 billion in assets under administration (AUA), making NBCN the biggest Canadian back-office provider.

“Some people compete with technology; others with pricing,” says Gagnon. “But we have outstanding service. That is what we are known for, and that is what we will continue to deliver.”

Penson’s Canadian arm was the last remaining broker-dealer clearing firm that its U.S. parent, Penson Worldwide Inc., operated. Penson Worldwide has been struggling with declining revenue caused by falling interest rates and a drop in client activity. After restructuring its core business, the parent company decided to sell its Australian clearing operations. It also decided to shut down its offices in Britain after failing to find a buyer for that business.

Although Penson Worldwide was trying to find a purchaser for its Canadian operations in the past year, it was not able to come to terms with any, says John Skain, president and CEO of Penson Canada. With approximately $9 billion in AUA and 100 clients on Penson Canada’s roster, the firm will take the next couple of months to transfer accounts and wind down its operations by the end of 2012.

With Penson Canada’s departure, Fidelity Clearing Canada could see as many as 20 to 30 new accounts come over to its platform, which currently supports institutional, retail and investment-management firms. Fidelity Clearing Canada has entered into a referral agreement with Penson Canada, in which Fidelity Clearing Canada has agreed to act as the carrying broker for a number of introducing brokers currently on Penson Canada’s roster.

Fidelity Clearing Canada also will act as custodian for a majority of the accounts on Penson Canada’s books that are managed by portfolio managers.

“The referral arrangement is really a great step in our evolution as a firm, as it pushes us forward in the retail space,” says Todd Roadman, CEO at Fidelity Clearing Canada, “especially in the portfolio-management space, where it [advances us] in a way that has much more of an immediate impact than if we were simply trying to grow that business organically from ground zero.”

Setting up Penson Canada’s referral arrangement with Fidelity Clearing Canada was an easy decision, says Skain, as both firms run on similar, independent business models.

“The customers that were with Penson are with us because they are generally looking for an independent, non-bank owned provider,” says Skain. “Although Fidelity is fairly new in the marketplace, [it is] not a bank and [has] been successfully growing [its] business over the years.”

For many advisors, the back-office system is the main artery for their business, providing such services as trade execution, clearing, cash custody, compliance, margin-financing loans and bookkeeping.

When that artery becomes clogged, an advisor’s business can become chaotic very quickly. This means that ensuring a seamless transition is at the top of the list for Fidelity and other firms benefiting from new business.

“A conversion of any sort,” says Roadman, “is always a challenge and can be disruptive to the firm, the advisor and the advisor’s client. But this is a process that we have refined over the past three years of being in the business. And we feel that we are now one of the best when it comes to data conversion.”

Rather than sign on with a new back-office services firm, some of Penson Canada’s clients have decided to strike out on their own. Discount brokerages Questrade Inc., based in Toronto, and Virtual Brokers, a division of Toronto-based BBS Securities Inc., both have announced plans to form in-house clearing services.

In opting for this course, Questrade and BBS join the majority of the Canadian bank-owned discount brokerages, which already do self-clearing.

But with technology and compliance costs increasing, many firms can’t afford to take the self-clearing route and have to outsource the task to third parties.

As a result, the other major players in back-office services, including bank-owned clearing house TD Waterhouse Institutional Services, could see major increases to their client rosters.

Fidelity Clearing Canada, which entered the sector three years ago, won’t be the new kid on the block for much longer. Pershing LLC, based in Jersey City, N.J., has announced it will enter the Canadian market later this year, with the introduction of Pershing Securities Canada Ltd.

That move will allow the U.S.-based powerhouse to execute and clear trades in Canadian securities for its U.S.-based customers, and will eventually bring on Canadian customers as well. The parent firm has been executing transactions in U.S. securities for Canadian firms for the past 30 years.

Says Roadman: “Competition brings a lot of challenges, in terms of pricing pressures and battling for clients. But I think having independent alternatives is good for the market. Pershing [Canada is] going to be big, so we are gearing up for that.”

Although Penson Canada will be closing its doors by the end of the year, Skain says, he still feels that the Canadian marketplace has room for another independent player.

“I think the expectation in the industry is that there will be new players coming into the market. But the market is pretty small and Canada can only sustain so many carriers,” says Skain. “We are certainly disappointed to see Penson [the parent] exit the market but we do believe that there is a real opportunity for independent players in Canada.”IE

© 2012 Investment Executive. All rights reserved.