What Advisors Should Know About Clearing Houses with Michael Scaplen

in financial services, we frequently use terms that are confusing not only to outsiders, but those within the industry. We feel it's our duty at Advisorpedia, not only to bring content to financial advisors that make them better in every way, but to table set and educate. This is the first in that educational set that we hope benefits everyone. Today's topic is, what's the clearing firm? Why do they matter to advisors? And what does the future hold for these firms? For that we welcome back Michael Scaplan, who's the senior vice president of sales and relationship management and Axos Clearing. Welcome back, Michael.

Michael Scaplan  00:47

Hey, morning, Doug, how you doing out there?

Douglas Heikkinen  00:49

I am good. Let's start off with your wheelhouse. What is a clearing firm?

Michael Scaplan  00:56

All right, very good. Thank you very much. So starting this morning, talking about what is a clearing house. And it's it's a lot of things to a lot of different people. But basically, what a clearing house is, is it's a silent partner underneath of an independent broker dealer, or possibly an ri a, that allows them access not only to the markets and to technology, but again, the oversimplification of, of a trade of taking the equities, or that position and moving it to where the trade should go. So again, the oversimplification would be to take the the shares in your left hand, and the cash in your right hand to pay for that, and switching those from one side to the other. So that's, again, the oversimplification, it's just that is where it all starts is that movement from one side to the other. And then there's a whole infrastructure that we build on top of that.

Douglas Heikkinen  01:52

So is that the only transaction that a clearing firm affects? Or are there many transactions that happen within a clearing house,

Michael Scaplan  02:00

there, there are very, very many, many transactions that happen inside of that. So again, the start is where the positions are moved from one side to the other. But on top of that, what a clearinghouse has done over the years is built an entire infrastructure around it, not just to move the positions but to support other business lines. So you're talking about adding leverage in there. So if you want to go out and margin, position and trade on margin, you have that capability, if you want to do some banking, a clearing house will offer light banking via checking and a CH and wires, we do things like s blocks a back line of credit against the equity portfolio, or the portfolio positions that you have, if you want to draw down a line, you could do something like that. a clearing house is also going to do your statements and your conference and your tax documents. And they're going to integrate across a wide network of order management systems. OMS is an LMS is an other CRM, where we're going to push data back and forth. And it's all of that, that is what really makes a clearinghouse a clearinghouse and that's what makes them unique is how far their technology stretches into these different areas. And how much capability they allow the the ibds and the customers or clients to reach other products. So it's it's that diversification that makes each Clearinghouse unique.

Douglas Heikkinen  03:34

Let's get into that uniqueness. What are the differences between clearing houses?

Michael Scaplan  03:41

So when I began on Wall Street, 20 years ago, there were dozens of clearing houses and there were 1000s of broker dealers. Over the years, what we saw was a consolidation, these firms folding in so some de risked off their platforms and decided they were no longer going to be in certain business lines, or were up for sale. And they were sold in other clearing houses. So the difference is became in in what firms were not only willing to do, what business loans they wanted to be in. It was the technology that they either had to start with, or that they evolved into. Right so the difference now that we see in clearing houses is the willingness or the ability to take on various products to understand and handle that risk and to continue to move into other areas. So that those clients have access to different tools. As all the consolidation has come through. The broker dealers that remain have picked up books of business from other areas, right. So you had a firm that might have only been doing equities, and then the market turned and they picked up a group that was doing fixed income and then it turned again And they picked up some options traders? Well, the question becomes, is your Clearing House equipped to handle all of those business lines? Or have you made some conscious decision to say, I'm only doing equities, or I'm really good at high frequency trading. So that's what I'm going to do. Or I'm only going to concentrate on broker dealers in Miami that specialize in Latin American clients. So the difference between those, all of the clearing houses is what we're willing to do, and then what our capabilities actually are.

Douglas Heikkinen  05:36

Why does a firm or an advisor choose one Clearinghouse over another?

Michael Scaplan  05:44

They make them on a lot of different reasons. But tech is a again, a big part of that. So is your technology always evolving? Are you ready and able to take on the next area that that starts to pop. So in this day and age, we see fintechs, we see the millennials that are wiser, smarter, they have access to so much more information. And what they can do with that information, from a tech standpoint is is something that we've never seen before. So, you know, if you're looking to choose your, your clearing partner, or you're looking for an off the shelf kind of offering, or is your vision of what you need for your customers, tech driven and tech forward? And can your your Clearinghouse support that so when broker dealers are choosing their Clearinghouse, they're choosing them for the technology, they're choosing for the business line, the ability to handle that risk. But at the end of the day, they're choosing a firm like axos, not just for all of the tangibles that we can deliver and that we do deliver. They're choosing us for the white glove service, right? would you would you rather be assigned a relationship manager, somebody who's going to own your account day to day handle your account day to day, establish a relationship with? Or do you want to go to some other firms where you're going to get an 800 number. So there's much more than just the tangibles of the technology and the offering. It's the intangibles, it's the service, it's that level of comfort that we can give through the Client Services team and the conversion team and the the relation management team that all surround the broker dealer. So they're they're choosing on reasons like that.

Douglas Heikkinen  07:42

Speaking of technology, have the advances in technology given buyers and sellers, advantages they haven't had in the past?

Michael Scaplan  07:51

It depends who you ask. Right? So from a risk standpoint, I'm sure it makes some risk deaths nervous. But But yeah, I mean, by and large, there is so much more access to to just information alone, where you can learn how to trade different products, options are no longer as scary as they were because you can jump on the internet and you can learn what an iron condor is, or some other strategy that you know, 15 years ago, you had no idea what it was. So starting with the information that's out there, it's evolved the mindset of the end investor, and then bring on the fintechs. Right, so now you've got a more educated retail broker dealer, clientele that are starting to understand more advanced products. And now you're giving them the tools to get in there to get into the market to to line up with the professional traders and that that knowledge plus that access, and that FinTech is what is delivering this advancement in the marketplace. So yeah, the technology is, it's phenomenal. And we've I think we've only seen just the beginning of what that's going to come because we're really on the precipice of this technology, layering into the API's that a clearing clearing firm like axos has. So we're able to pipe in the newest technology and continue to evolve with whatever the next one is going to be. Because of our API and our open architecture.

Douglas Heikkinen  09:22

You've been in the game for so long. You've touched on some of this, but other other ways, other nuances that clearing firms have evolved over the past 10 years.

Michael Scaplan  09:34

Yeah, I mean, again, it's it's that that hindsight being 2020 it's it's those next generations coming up with the different design models and different technology models in different different ways to integrate and a different thought pattern. So I've been in the industry for right for for 20 years for quite some time and I've exclusively only ever been on The clearing side I've been from from my early days in my career, I was a clearing liaison, which was a basically a relationship manager, managing a subset accounts. And I saw how we did things back then. Right. So, by the time I moved up in my career, I had seen what the generation before me had built and how they had built it. So when I came to this position, as a senior manager at a, you know, at a clearing house, I had my own ways of what I thought and what needed to change. And I brought that with me. And behind me, there's a whole new generation that's coming up into these these management, mid level management positions, bringing their own ideas and their own experiences. So that is what's pushing the development in some of the clearing houses is this, this influx in this this smarter way to do things, and the technology is the available that was not available 15 years ago, or 20 years ago. So we're pushing this evolution in this mindset. And the technology is allowing us to better evolve and make things easier and straight through process and change, what clearing was 20 years ago, to what it's starting to be now and what it will be 20 years from now,

Douglas Heikkinen  11:24

Speaking of what it will be 20 years from now, or five years from now, let's get out your crystal ball. And let's talk about what is the future hold for clearing houses.

Michael Scaplan  11:36

So we have a vision on what a clearing house is going to be and what it needs to be. But it's you know, we've been pretty vocal about it. It's it's an all encompassing model, right. It's not just, it's not just a standalone clearing house. And being part of a much larger organization, we're able to start tying that stuff in. So we have a cutting edge technology platform on the bank side. So the holding company access financial, we're under a huge umbrella. There's multiple divisions, right, so we've got a bank unit, we've got a clearing division, we have a custody division, we've got a robo advisor, but it's about how we tie all that in. So that it's it's a single point, so that you can come in, and you can log into your account, and straight through process your trades and look at mortgages and car loans and look at jumbo loans and light bank lines of credit so that you can put your portfolio together and draw a line down against it. So what we're building is this holistic atmosphere where you come into a single account, and all of your needs are taken care of right then in there by access. So we're continuing to develop this, this this idea, as we tie down the API's between clearing and the bank, and we bring in custody. And we're continuing to push that and moving by acquisition, right. So you know, when, when my clearing house was acquired by by axos, they started leveraging in the technology right away, and they brought in their ideas and some personnel. And we started to build this and we tied in a robo advisor. So we've got that we're tying in the banking. So we'll have that. And there's a couple other things we have on the horizon that we haven't put out there yet that we're starting to tie down. And then most recently, we just acquired an E trade advisory. So we're tying in that network as well. But again, it's it's a holistic approach to the financial markets, it's more than just securities trading. It's an idea. It's a way of life, it is a holistic piece where you can just come in and do everything you need, from your banking to your brokerage in one shot. Is this holistic approach,

Douglas Heikkinen  13:48

This idea that you're building for the future? Is this what you feel is going to separate you from your competitors.

Michael Scaplan  13:55

That among other things, I don't want to let out too much of a secret sauce, right. So we'll keep some of our competitors guessing but but yes, I mean, just just alone in what we're rolling out. Now, it already separates us separates us from what some of our competition is doing. We offer a diversified offering on the security side between equities options, fixed income, foreign and local settlements, high frequency trading, portfolio margin, stock loan with fully paid lending. So just being in all of that, we've set ourselves apart from our competition, who only wants to be in one piece or one line of some of those businesses. But when you tie all that security stuff, and all that experience and all that products into this developing idea with the bank and tying everything in, yeah, that's going to separate us today and it's going to certainly separate us as we set the foundation to do all that and move it into the future.

Douglas Heikkinen  14:59

You've had a fantastic year. And it's it's still early. Are these other reasons why you're gaining so much market share?

Michael Scaplan  15:07

Yeah, I would say so. I mean, again, it started with an idea. And it started with a vision. And and now we've started to make those things come true, right? So being public, public company helps because we're, we're not just selling the brand and the vision and the technology, but we're selling stability. And in the financial markets, that's important. So we have had a great year, and not just on the clearing side or the custody side, but on on the bank side as well with with what they've done on their mortgage division. But we're public, like I said, so we can go out there and talk about being a strong company. But we'd rather show you look at our quarterly earnings reports, look at what we've done, look at the acquisitions. Look at the stuff that we're putting out there. We're leading by example. And that is what's what's leading to our success is not just putting the idea out there, but executing it, delivering it, keeping our clients happy, giving them the technology that they need, and providing their end customers with the stability that they need to keep their clients here.

Douglas Heikkinen  16:14

Michael, thank you so much for clearing up what a clearing house does for us. We appreciate your time.

Michael Scaplan  16:21

I appreciate your time, Doug. It's a pleasure as always, and I look forward to our next conversation.

Douglas Heikkinen  16:26

I need to to learn more about access clearing, visit access clearing.com. Please follow us for all the latest updates on Twitter, LinkedIn, and Facebook, all at Advisorpedia. For everyone at Advisorpedia our producer Jakie Beard and the Power Your Advice podcast team. This is Doug Heikkinen. Thanks for joining us. All right. Thank you