It hasn't happened yet. But it could.

One day Merrill Lynch's 14,000-plus financial consultants could walk into work and find themselves suddenly employed by Chase or Citibank after a mammoth takeover. Improbable? Not in the least. Just ask brokers at Wheat First, Oppenheimer, Piper Jaffray and The Ohio Co., who watched their firms and others gobbled up by commercial banks last year.

Nationwide, banks' market capitalization dwarfs full-service investment firms' by 10-to-1, according to James Schmidt, manager for John Hancock's Financial Industries Fund. With Glass-Steagall barriers crumbling and banks sniffing for ways to recoup their falling share of the consumer pie (see "The Rise and Fall of Glass-Steagall," Page 74), more and bigger deals seem inevitable.

"There's nobody that can't be bought--even Merrill," says Mike Lyons, a veteran broker with Piper Jaffray in Phoenix.

A takeover of Merrill by a big bank is strictly idle speculation at this point. But last December, Minneapolis-based regional, U.S. Bancorp, agreed to acquire Lyons' firm, Piper Jaffray and its 1,127 investment reps in a $730 million deal. But it didn't surprise Lyons.

"Because of the ongoing consolidation in our industry, all the high-quality large- and mid-size firms are probably in play," Lyons says. "It's just a matter of time. Banks have the capital, and we're lightweights compared to our banking brethren."

Brokers whose firms were taken over by banks last year have mixed emotions about what these acquisitions will mean for them. Lyons believes brokers will be treated well by bank management. "Brokers are the lifeblood of the market," he says.

Tom Gresham, a Profit Formula broker for Wheat First Union in Kansas City, Mo., likewise thinks his firm's acquisition by First Union won't affect his business much. First Union's management has said it will keep the two organizations separate, allowing Wheat First to continue its operations unfettered, including the option for reps to set up their own operation under the Profit Formula program.

"I don't see there's anything to worry about," Gresham says. He works in a semi-independent office with six support staff. He believes he'll still be able to do what he wants without interference. In fact, affiliation with the nation's sixth largest bank might be a boon in some ways. "It makes clients feel better that there's more capital and gives me an extra feeling of comfort, too," he says. More products will be available and Wheat First investment bankers can undertake larger deals, Gresham adds. It may even raise his profile: "Wheat First wasn't a household word, but First Union has been on CNBC" and other media outlets, he says.

What Might Go Wrong? But not everybody's so enthusiastic. Fears of culture clash and heavy-handed bank management make some brokers uneasy. One Piper Jaffray broker says John Grundhofer, the CEO of U.S. Bancorp, has been affectionately referred to as Jack the Ripper.

"I understand he runs a tight ship," the broker says. Others concur that when it comes to running their brokerage subsidiaries, bank management has often used hard-line tactics for seemingly minor infractions.

"I've seen two or three people terminated by banks for minimal infractions," says Dan Burkhart, a recruiter with Gateway Executive Search in Newbury Park, Calif. "One [bank] broker was terminated from Citibank because he had failed to put updated stickers on the mutual fund literature on his brochure rack," claims Burkhart, who has worked for Citibank and now works for several competing banks.

Others worry that bank management won't be in tune with the fast-paced world of securities sales. One former bank broker with Bank America Investment Services (BAIS) who is now a broker with Piper Jaffray fears meddling by bank managers with no securities sales experience.

"There is tremendous organizational culture clash," the rep says. "It [was] a bureaucratic, red-tape environment at [BAIS]. If I wanted flexibility to do some good business, I had to jump through 10 hoops and three fire rings. ... The bank made some promises they didn't keep."

Bank Reassurances But despite their burdensome oversight by a number of regulators, banks think they can make it work. Don McMullen, executive vice president of First Union's Capital Management Group, says Wheat First brokers have little to fear.

"I don't think Wheat First reps will see anything [negative] at all. It will be a positive experience," he says. "We want to have them develop the channel just as they've always done, but give them some of our products and technology. ... We need to get to know each other, and they'll see there's nothing to worry about."

McMullen says First Union will continue to operate its brokerage subsidiary as well as manage Wheat First. "We believe there's two different channels," he says. "We have close to 450 Series 7 individuals in our bank--3,000 licensed altogether. ... We'll be trying to serve customers the way they want to be serviced. A lot of people want to be serviced in a bank. People are choosing to do business in different fashions."

One bank brokerage recruiter agrees that the bank brokerage niche won't disappear entirely with the acquisition of full-service firms. Nor should full-service reps be worried about being turned into "bank brokers."

"There is plenty of business to go around," says Shelley Molton, a bank brokerage recruiter with Molton Associates in Pescadero, Calif. "There are many different customers and needs. Some customers want to have the sophistication of wirehouse, but there are some customers who don't feel comfortable in a wirehouse. If [banks] listen to their customers, it will work out well."

For more than 60 years, Glass-Steagall stood as a Berlin Wall separating investment and commercial banking in the United States. In the 1920s, commercial banks were just entering the rapidly growing investment banking arena and beginning to thrive. After the stock market crash and massive bank failure, however, Depression-era reformers erected a barrier to eliminate conflicts of interest they said occurred when private lenders arranged public financing. Reformers argued that banks failed because they pushed unsound public offerings to offset loan portfolio losses.

Later research showed this to be false (banks with diversified securities activity actually fared better in the wake of the Depression), but the Glass-Steagall barrier and its premise endured, both in the minds of consumers and financial services professionals. Indoctrinated under 60 years of Glass-Steagall, banks have marketed one concept hard to their loyal customers: Don't invest money in securities. It's risky business.

For many years, their conservative strategy worked. Banks derived massive profit from (not-so-risk-free) commercial lending, and selling CDs and savings accounts to their risk-averse clientele. By the late '80s and early '90s, however, it was clear, Glass-Steagall had become anachronistic. Commercial banks watched their market share of U.S. financial assets erode from nearly 50% to less than 32%. At the same time mutual fund assets ballooned from $134.8 billion in 1980 to more than $2.7 trillion in 1996, more than the combined deposits of the 100 largest U.S. banks. Mutual fund assets grew 24% a year while deposit growth has averaged just 3.4%.

Increasingly, consumers demanded higher yields on their investments. Small businesses needed access to capital markets. Through securitization, investment banks have taken away some of banks' traditional markets. Corporations were more able to issue debt through public markets. Even junk bonds affected commercial lending.

In 1987, as a result of amendments to banking regulations, banks began to establish so-called Section 20 subsidiaries, through which they were able to offer limited investment products and underwriting. They developed their own bank brokerages to market investment products to clients. These subsidiaries initially could obtain just 5% of their revenues from investment banking, then 10% (which banks were constantly in fear of bumping up against) and finally in December 1996, the Federal Reserve raised that limit to 25%, essentially wiping out barriers toward bank acquisition of investment banks and securities firms.

Under the new rule, banks purchased 10 securities firms in 1997. Among the deals: Bankers Trust of New York bought Alex Brown; Swiss Bank merged with Dillon Read & Co.; BankAmerica took Robertson Stephens; and NationsBank acquired Montgomery Securities. Desire to obtain investment banking capability drove these initial acquisitions, but the next round of mergers showed the banks also were out for retail distribution.

"First Union was the first one that rings to me of having a retail angle," says John Keefe, securities analyst and president of Keefe Worldwide.

Says Perrin Long, an independent securities industry analyst in Darien, Conn.: "Most of the deals, other than First Union/Wheat First, were primarily to get expertise and acquire firms with strong investment banking business and IPO capability."

Analysts believe the second tier of acquisition will be geared even more toward retail distribution as banks look to compete. "Most banks on their own have not been able to become appealing places for top-producing brokers," says James Schmidt, manager of the John Hancock Financial Industries Fund. "You can't recruit a good broker unless you're a full player and have a flow of deals and good research." The mergers will give banks "recruiting leverage," he says.

So far, the market appears to agree with banks' decisions to pay up for brokerages. Despite the high costs of acquiring securities firms (Piper Jaffray went at about four times book value, Montgomery at eight to 10) the stock prices of acquiring banks have predominantly closed up after the deals.

Dec. '96: The Federal Reserve Board increases the amount of revenue that a commercial bank's Section 20 subsidiary may derive from underwriting and dealing in securities to 25% from 10% of its total revenue. Rule takes effect March '97.

April '97: Bankers Trust of New York agrees to buy Baltimore's Alex. Brown for $1.7 billion. The deal is the first quasi-commercial bank purchase of a securities firm since Depression-era enactment of Glass-Steagall restrictions.

May '97: Swiss Bank Corp.'s SBC Warburg unit announces $600 million deal for New York-based Dillon Read & Co.

May '97: BankAmerica strikes $540 million deal for Robertson Stephens & Co. Both based in San Francisco, the two companies already share a building.

June '97: Charlotte, N.C.-based NationsBank announces $1.2 billion acquisition of Montgomery Securities in San Francisco. The mammoth deal is worth eight times Montgomery's book value.

July '97: The brokerage unit of Canadian Imperial Bank of Commerce, CIBC Wood Gundy, strikes a deal for privately owned Oppenheimer & Co. of New York for $350 million.

Aug. '97: First Union Bank, of Charlotte, N.C., announces acquisition of Richmond, Va.-Wheat First Butcher Singer for $481.9 million, acquiring 1,040 retail reps.

Aug. '97: Dutch financial services giant ING Group acquires employee-investment banking firm Furman Selz of New York, for $600 million in cash.

Sept. '97: SunTrust Banks Inc. of Atlanta signs agreement to acquire Nashville, Tenn.-based Equitable Securities Corp. for $89.4 million in stock.

Dec. '97: U.S. Bancorp announces deal for Minneapolis-based Piper Jaffray worth $730 million, creating U.S. Bancorp Piper Jaffray and bringing with it Piper's 1,127 retail reps.

Dec. '97: Fifth Third Bancorp of Cincinnati buys The Ohio Co. in Columbus, Ohio.