How to Choose A Clearing Firm: A 2020 Guide for Roboadvisors

January 16, 2020 7:00 am by Walter Peczon

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.

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.

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.

Fast forward to this past decade, a new breed of firms has emerged, opening the wounds that were healing from the rise of deep-discount brokerages: zero commission robo-advisors.

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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.

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.

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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.

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

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:


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.


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?


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.


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.


Photo by Austin Distel on Unsplash

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.

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.

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:

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