In the three years since the passage of the Gramm-Leach-Bliley Act, banks have clawed their way into a position of consequence in the brokerage game, and Glenn Riley has watched from a front-row seat.
Riley jumped from Morgan Stanley to Bank One Securities a few months after the financial modernization legislation took effect. He made the move with misgivings. At the time, banks were considered stodgy and slow by the standards of the brokerage industry — hardly the place for a hard-charging young broker like Riley.
Nevertheless, a friend at Bank One was insistent: “Come on over,” the friend said. “It's so much better.” He took the advice and hasn't regretted the decision. He says his book has grown immensely since he made the switch.
“The job is essentially the same. You just have more support here,” Riley says. “It's a whole different world — a better one.”
Riley is not alone in this assessment. Though the banking industry's foray into the securities business is still in its early stages, some banks have made great strides, culturally and structurally, in the days since Gramm-Leach-Bliley removed the walls separating banking, securities and insurance. Precise market share numbers are nearly impossible to pin down, but it's clear that banks are making headway. And bank-based brokerage operations are even living down their reputation as the breakdown lane of the fast-paced brokerage business. In other words, Riley is in good company, as former wirehouse brokers find their ways into bank brokerages.
“The banks' efforts certainly seem to be bearing fruit,” says Mike Flanagan, an analyst at Securities Industry Analytics, in Oreland, Pa. “The threat to your more traditional brokerages is very legitimate.” The primary evidence is the sheer number of brokers that are now employed by banks. In 2001, banks employed about 17,000 brokers, 3 percent of the industry's total. That number has since exploded to an estimated 120,000, or 18 percent of the brokerage workforce, according to Jin-Chul Kim, analyst at Financial Insights in Framingham, Mass.
In many cases, banks have bought their way into the business. In 1998, for instance, Citicorp merged with Travelers Insurance, parent of Salomon Smith Barney, to form Citigroup. That gave Citi Smith Barney's 13,000-rep brokerage network. Similarly, Wachovia (which had already assembled a huge network of bank-based brokers via its merger with First Union), this year agreed to buy Prudential's roughly 4,000-employee brokerage unit. When that deal closes, probably in late 2004, Wachovia will have 12,000 reps, making it the No. 3 brokerage network in the U.S., behind Merrill and Smith Barney.
Another large player in bank brokerage is Bank of America. The giant bank holding company, which bought Montgomery Securities in 1999, has over $90 billion in brokerage assets under management. But that's small compared to Merrill, which has $1.1 trillion in client assets and netted $10 billion in new money in the fourth quarter alone.
The Threat Is There
Analysts say the more potent threat to the mainline brokerages is the leverage that the banks have with their customers. With millions of depositors and mortgagees and credit-card borrowers, banks such as Wells Fargo, Bank of America and Bank One have the potential to capture a greater “share of wallet” than brokerages. This is one reason why wirehouses such as Morgan Stanley and Merrill Lynch have moved so aggressively into banking and mortgage lending with their clients. Morgan Stanley has been the most aggressive of the wirehouses in this regard, perhaps most notably with its Discover credit card business.
But when it comes to finding the consumers with the right wallets, the banks have an edge — they have financial and demographic information in their internal data bases that they gather as a matter of course in their lending and deposit operations. That provides bank brokers with a ready pool of qualified leads.
The ability to identify the most promising bank customers is no guarantee of success, of course. Banks have had many setbacks in brokerage, too: U.S. Bancorp bought Piper Jaffray, only to spin it off five years later. Fleet's acquisition of discounter Quick & Reilly has had mixed results. All too often, bank marketing and operations haven't offered investing as one of the primary services of the institution — but as an afterthought.
Bank execs say that is no longer the approach being taken. Dan Deegan, national sales manager for Bank One Securities, says it hasn't been easy, but Bank One has managed to integrate its internally grown brokerage operations with other operations. “We have three major components: Loans, checking accounts and investments,” Deegan says. “There isn't a person who comes in the bank who isn't asked what kind of investing they'd want to do. It's usually the second question we ask, after ‘What is your name?’”
Despite the rough markets, Bank One's private client services assets rose to $42.7 billion in the fourth quarter of 2002, and the retail brokerage assets rose to $6.7 billion. The first quarter provided more optimism. The company reports assets under management at $158 billion, a 7 percent increase. The net inflows into long-term assets were $2.5 billion, and net income from investment services was $80 million, which was down from last year, but not relative to the market.
“There's no reason we can't continue to grow exponentially,” Deegan says. Why the optimism? He figures that bank brokerages will benefit from the woes of the big investment banks. “Lots of people are feeling that the service they've received at traditional brokerages is less than they had hoped.”
Riley, the Bank One broker, agrees. “Many wirehouses are having trouble right now simply because of their names,” he says. “I've certainly benefited from that.”
Wachovia, with its mix of bank-based brokers and its Prudential branches can play both sides of this fence. From the company's point of view, the multiple marketing platforms are a big plus — customers have a choice of how to buy investments from Wachovia and brokers have a choice of environments in which to work. On the product side, the company also has bought considerable breadth, including wealth management subsidiary Offitbank and mutual fund subsidiary Evergreen Investments.
Catching Up To Do
However, even Wachovia still has a great deal of work to do to bring Prudential into the fold and meet the likes of Merrill and Smith Barney on their level. The sales force is 8,000, but less than 5,000 have Series 7 licenses; Wachovia brokers have less in assets as well (roughly $45 million per broker, vs. $75 million at Merrill).
One broker (who requested anonymity) at a regional firm purchased by Wachovia a few years back, worries about competition issues. His office is located just down the street from a Wachovia branch that also offers brokerage services. Though he considers bank brokers “inferior,” he argues their access to the foot traffic at the branch and to account systems should give them an advantage in luring clients from brokerages.
This broker's opinion notwithstanding, the notion that bank brokers are per se less savvy no longer jives with reality. Given the shape of the job market, advisors looking for jobs are no longer turning their noses up at bank-based brokerage slots. Several recruiters say one of the more common requests they hear is: “Where's a great bank job?”
“Some of the absolute best brokers out there are working for banks,” says Mindy Diamond, president of Diamond Consultants, a Mendham, N.J.-based recruiting agency. “There used to be a perception that you went to the bank for your common denominator, lowest-of-the-low type broker.”
Banks are not only bringing in higher-caliber recruits, they are also beefing up their technology, research and product offerings. Analysts say the days of the wirehouses' clear technological and intellectual superiority could be dwindling. One rep who has worked at both a wirehouse and a bank says he sees no significant difference in technical capabilities. “There's nothing I could do at the firm that I couldn't do at the bank,” he says.
For hard-core Wall Street types, however, a bank brokerage attracts a less entreprenurial type, and will never be the same as working for a top wirehouse. It's rarer that a high-profile reps defect to a bank from a wirehouse. “For us, if you go to be a bank broker, you're out of the business, for all practical purposes,” says New York-based recruiter Mark Elzweig. “Once you go to a bank, you're off the map.”
For all the progress that banks have made, the wirehouses continue to evolve as well. Elzweig notes that banks have been late to the managed account business. Moreover, he says, once an investor moves beyond simple trading, “bank brokers are often out of their depth.” He adds that banks tend to underpay their brokers because “being a bank broker, simply, requires less skill.”
Bank brokers would disagree. “You still have to depend on yourself, but it seems like we're much more of a team here,” says Riley. “You don't have to sell any certain funds like we had to [at Morgan], and, certainly, you get in front of a lot more people because of the walk-ins.”
The appeal of banks to brokers in a wretched bear market is clear. One of the eternal struggles at any brokerage is fighting for new clients while holding onto the ones you have. At a bank, brokers have a built-in client base with reams of data about potential clients. Think of it as warm calling — at least you have some clue about the person on the other end of the line. That, says one bank rep, is what makes life better at a bank. “Particularly in this environment, it's a good option, probably the best option for young, less experienced brokers,” he says.