Posts tagged ‘brokerage’
Opening the Broker Departure Floodgates
Even though the equity markets have rebounded massively, investors remain in a sour mood in light of sluggish domestic economic headlines. Technology, for example High Frequency Trading (HFT – read more), along with the harsh realities of financial regulatory reform is creating profit growth challenges for the global financial gargantuans. More specifically, the floodgates have sprung open with respect to broker departures from the big four brokerage firms.
According to Bloomberg, more than 7,300 brokers have left the four largest full-service brokerage firms (Merrill Lynch [BAC], Morgan Stanley Smith Barney [MS], UBS Wealth Management [UBS], and Wells Fargo Advisors [WFC]) since the beginning of 2009. But the brokers have not floated away quietly – more than $1 trillion in assets have fled these major brokerage firms and followed the brokers to their new employers.
Several factors have led to the deluge of departures of bodies and bucks:
1) Mergers: The financial crisis triggered an all-out economic assault on the brokerage firm industry. A subsequent game of musical chairs resulted in the marriage of disparate cultures (e.g., B of A-Merrill; Morgan Stanley-Smith Barney; Wells Fargo-Wachovia). Not only did the clashing cultures rub brokers the wrong way, but the surviving executives were left with redundant and unproductive brokers to cut.
2) Heightened Recruiting: With a shrinking pie and less growth comes more fierce competition. The discount brokerage firms have realized the Darwinian challenges and reacted to them accordingly. Take TD Ameritrade (AMTD) for example. In the first seven months of 2010, the discount brokerage firm added 212 independent advisers to its network, a +44% increase over the previous year. Charles Schwab Corp. (SCHW) with its network of 6,000 independent advisers is also ratcheting up its efforts to poach brokers away from the large brokerage firms.
3) Economics: Would you like 40-50% of profits generated from new clients, or 80-100%? In many instances, the broker from the large branded institution funnels the majority of the commissions to the mother-ship. Sure, the broker receives back-office, marketing, and branding support, but some brokers are now asking themselves is the brand an asset or liability? Wall Street has gotten a large black eye and it will take time to heal their corporate images…if they ever manage to succeed at all.
4) Customer Choice: Lastly, and most importantly, customers are voting with their dollars. As I have indicated in the past, I strongly believe the current system is structurally flawed (see Financial Sharks article). Financial institutions craft incentives designed to line the pockets of brokers (salespeople) and prioritize corporate profits over client wealth creation and preservation. The existing failed industry structure is based upon smoke, mirrors, opacity, and small print. Many independent, fee-only advisors are structuring financial relationships that align with portfolio performance and make transparency a top priority. Customers appreciate these benefits and are shifting dollars away from the brokerage firms.
LPL Loving IPO Life
If you are having a difficult time processing the magnitude of this investment advice shift, then consider the $4.4 billion estimated value being placed on the planned IPO (Initial Public Offering) of LPL Financial, the independent brokerage firm of 12,000+ financial advisors. LPL serves as a conduit for legacy brokers to become independent, and still allow them to benefit from an array of ala carte support services. Growth has been strong too – over the last decade the advisor count at LPL has more than tripled and assets under their umbrella now exceed $250 billion.
The Wall Street broker floodgates have opened, so unless regulatory changes are enacted, the old flawed way of doing things will require a life support raft. If not, independent, fee-only advisors like Sidoxia Capital Management will benefit from the current sinking migration of brokers.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in BAC, MS, UBS, WFC, AMTD, SCHW, LPL Financial or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Surviving in a Post-Merger Financial World
The financial institution dominoes have fallen.
Over the last two years we have experienced the worst financial crisis since the Great Depression. As a result, financial institutions have come under assault from all angles, including its customers, suppliers, and regulators. And as we have watched the walls cave in on the banking and brokerage industries, we have seen a tremendous amount of consolidation. Like it or not, we need to adapt to the new environment.
The accelerated change began in early 2008 with the collapse of Bear Stearns and negotiated merger with JP Morgan Chase. Since then we saw the largest investment banking failure (Lehman Brothers), and the largest banking failure in history (Washington Mutual). Other mergers included the marriage of Merrill Lynch and Bank of America, the combination of Wachovia into Wells Fargo, and most recently the blending of Smith Barney into Morgan Stanley. These changes don’t even take into account the disruption caused by the government control of Fannie Mae, Freddie Mac, and AIG.
So what does all this change mean for consumers and investors?
1) Rise in Customer Complaints: Change is not always a good thing. Customer complaints rose 54% in 2008, and climbed 86% in the first three months of 2009 according to FINRA (Financial Industry Regulatory Authority), a nongovernmental regulator of securities companies. The main complaint is “breach of fiduciary duty,” which requires the advisor to act in the best interest of the client. Making the complaint stick can be difficult if the broker only must fulfill a “suitability” standard. To combat the suitability limitation, investors would be well served by investigating an independent Registered Investment Adviser (RIA) who has a fiduciary duty towards clients.
2) Less Competition = Higher Prices: The surviving financial institutions are now in a stronger position with the power to raise prices. Pricing can surface in various forms, including higher brokerage commissions, administrative fees, management fees, ATM fees, late fees, 12b-1 fees and more.
3) Customer Service Weakens: The profit pool has shrunk as lending has slowed and the real estate gravy train has come to a screeching halt. By cutting expenses in non-revenue generating areas, such as customer service, the financial institutions are having a difficult time servicing all their client questions and concerns. There is still fierce competition for lucrative accounts, but if you are lower on the totem pole, don’t expect extravagant service.
4) Increased Regulation: Consumer pain experienced in the financial crisis will likely lead to heightened regulation. For example, the Obama administration is proposing a consumer protection agency, but it may be years before tangible benefits will be felt by consumers. Financial institutions are doing their best to remove themselves from direct oversight by paying back government loans. In the area of financial planning, proposals have been brought to Congress to raise standards and requirements, given the limited licensing requirements. Time will tell, but changes are coming.
Investing in a Post-Merger Financial World: Take control of your financial future by getting answers from your advisor and financial institution. Get a complete list of fees. Find out if they are an independent RIA with a “fiduciary duty” to act in the client’s best interest. Research the background of the advisor through FINRA’s BrokerCheck site (www.finra.org) and the SEC’s Investment Adviser Public Disclosure Web site (www.sec.gov). Get referrals and shop around for the service you deserve. Survival in a post-merger world is difficult, but with the right plan you can be successful.
For disclosure purposes, Sidoxia Capital Management, LLC is an independent Registered Investment Advisor in California.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
Investing Caffeine 
