Instead of waiting on the sidelines as the disruption happens around them, advisors are seizing the opportunity to expand their geographic reach and attract next-generation investors. These forward-looking advisors are now implementing robo-advisory services firmly underpinned by the human expertise that they have spent their career building – expertise that many novice investors will likely consider valuable as their needs become more complex. The decision to launch a robo is undoubtedly an exciting one yet it represents just the first hurdle in a series of vital choices. And, of the subsequent decisions you must make, selecting the right clearing firm for your clients’ assets is arguably among the most important.

1. Selecting a Clearing Firm
A Guide for Roboadvisors
by Walter Peczon

2. On May 1st, 1975,
the earth underneath 11 Wall Street shook.
At first, tremors were expected leading up to
this day, but no one expected a full quake.

3. On May Day 1975, the Securities and Exchange Commission
introduced extensive securities regulation reform and
abolished fixed trade commissions — widely considered the
most comprehensive securities legislation in decades. For
the first time in living memory, market competition would
set trading fees.

4. This move triggered the emergence of deep-discount
brokerages, which viewed trading commissions as loss
leaders while making money in other areas (order routing,
customer balances, managed portfolios and more).
Clients, inevitably, left pricier wirehouses in droves.

5. Fast forward to this past decade, and a new breed of firms
have emerged, opening the wounds that were healing from
the rise of deep-discount brokerages:

6. Zero Commission Robo-Advisors

7. Zero commission robo-advisors offer passive investment
strategies and leverage client data to develop free
trading, automated portfolio allocations, adopting user-
friendly digital interfaces that enabled clients to engage
with their finances from anywhere, at any time.
Pledging to further democratize index investing, robo-
advisor juggernauts such as Robinhood were among
the first to mobilize online trades by promising no
commissions and no account minimum deposits.

8. Now, the securities industry has caught its breath,
wiped the sweat from its forehead, and is racing to
adapt once again, including brokerage behemoths
that are rethinking their legacy business models.
Unsurprisingly, “Millennials” and “Gen Z” investors
have been instrumental in the growing popularity
of robo-advisors. And, despite the pessimists,
robo-advisors have been successful in attracting
retail assets away from incumbent players — one
study estimates that robo-advisors’ assets under
management will expand to $4.1 trillion in 2022,
from an estimated $330 billion in 2017.

9. Instead of waiting on the sidelines as the disruption
happens around them, many advisors are now seizing
the chance to attract next-generation investors and
expand their geographic reach.
These forward-looking advisors are now implementing
robo-advisory services firmly underpinned by the
human expertise that they have spent their career
building – expertise that many novice investors will
likely consider valuable as their needs become more
complex.

10. So, you’re launching a robo-advisor.
What’s next?

11. The decision to launch a robo is undoubtedly an
exciting one yet it represents just the first hurdle
in a series of vital choices. And, of the subsequent
decisions you must make, selecting the right
clearing firm for your clients’ assets is arguably
among the most important.
With that in mind, we’ve put together a handy
guide to some of the key factors you should
consider as you weigh your options...

12. Technology
Cybersecurity
Service
Pricing
Four Things to Look For in a Clearing Firm:

13. It goes without saying, but a large part of the reason that investors
have thus far embraced robos is the convenience and user
experience that their technology affords. A worthy clearing firm
should therefore be equally tech-savvy, with robust front and
back-office systems that are equipped to handle the high trading
volumes associated with today’s markets.
For robos in particular, it is important to ensure that a clearing
partner offers flexible APIs that support integrations between
various platforms and facilitate streamlined business processes.
Technology

14. Data breaches and hacks stand to undermine clients’ trust, and
can even pose an existential threat to some small businesses.
Financial services firms continue to represent attractive targets for
exploitative cyber-hackers and, as such, robos should take care to
vet prospective clearing firms’ cybersecurity procedures.
Talk to them about the specific protections they have in place
to ensure that client and firm data is safeguarded. Do they have
a formal contingency plan in the event that they fall victim to a
cyberattack? What is the protocol for training new employees
on security best practices? What kind of cybersecurity insurance
policy does the firm in place? How often is data backed up?
Cybersecurity

15. The promise of automated, tech-driven customer service might be
appealing in some instances, but when it comes to ensuring that
your business is running smoothly, a chatbot isn’t going to cut it.
Launching a robo is a big undertaking, and you’ll want to ensure
that your clearing firm understands—and supports—the needs of
your firm.
Will the clearing firm offer a dedicated account representative/
team? What is the process for reaching them, and what kind of
response time can you expect? What are their credentials and
industry experience? Knowing that you have the right team in
place to support you can be a huge weight off your shoulders.
Service

16. Robo-advisors’ client acquisition costs can be quite high and
furthermore, these clients typically expect to pay lower costs than they
might elsewhere. This presents a new problem, with various robo-
advisors attempting to gain market share while operating on razor-thin
profit margins.
For this reason, robos should be engaging in candid conversations
with prospective clearing firms about their pricing models and whether
there’s room to grow together – are they willing to be flexible on fee
structures now, while your business is still in its nascent stages? It’s also
important to be clear on what you are getting in return. A trustworthy
clearing partner will work with you to limit execution costs, mitigate risk,
support compliance demands and enhance overall efficiency.
Pricing

17. The industry is at a digital threshold, with a crop of new robos
emerging to offer investors free brokerage, achieving scale via
differentiators such as algorithmic, TPAM, chat room and fractional
share trading.
Innovation is non-negotiable in today’s environment and, as
you embark upon this new journey with your robo offering, it’s
important that you’re able to focus on what you do best: serving
your clients effectively.

18. Ultimately, it’s worth taking the time to ensure that you
identify a nimble and forward-looking clearing firm that can
navigate emerging trends while sharing in your values and your
commitment to clients’ needs. The right partner can make all
the difference.

19. About Velox Clearing
If you’d like to further discuss what a clearing firm can do for
your robo-advisor, then consider Velox Clearing as your future
partner: www.velox-global.com/Solutions.