Game Plan 2002

By all accounts, axes will continue to fall in 2002 as Wall Street firms try to shore up their tattered bottom lines. According to the SIA, Wall Street shed around 26,000 jobs last year — and could chop another 20,000 in 2002. Merrill Lynch alone cut 5,600 positions, and its president, E. Stanley O'Neal, has hinted at further downsizing. Merrill and Morgan Stanley, have announced salary freezes until the second half of 2002.

But while investment bankers, analysts, back-office workers and other brokerage employees are packing up their offices, brokers (at least a disproportionate number of them) are likely to remain employed. That's because brokers at the big wirehouses “eat what they kill,” says David Trone, brokerage analyst at UBS PaineWebber. In other words, as long as they keep producing, brokers should have higher job security than other financial-services workers.

Indeed, brokers who play the game successfully could be the heroes for their companies this year. Firms badly need their brokers to succeed: According to First Call, Wall Street expects earnings for the securities brokerage industry to plunge by 8 percent in 2001, followed by a 19 percent rebound in 2002. To achieve those numbers, “asset gathering and the retail side in general will absolutely be more important” than in the past, says Louis Harvey, president of the Boston-based consultancy Dalbar.

Up and down The Street, there is a simple game plan for the players on the field: Go score more fee-based relationships with high-net-worth clients. “Assets under management is the endgame for the retail brokerages,” says Dennis Gallant, an analyst at the Boston-based consultancy Cerulli Associates. “The broker-dealers are all pushing, and will continue to push, reps to transition in that direction.”

Part of the drill is to pursue those assets with brokerage teams, partnerships within branches in which each player specializes. The objective is to bring in more customers by having the talent on hand to serve differing needs.

“It's the old two heads are better than one,” says one Credit Suisse First Boston broker. “Now, some firms have their muni guy; their derivatives guy; their financial planning guy, and the broker acts as quarterback,” he says. Significantly, the setup frees the quarterbacking broker to go out and gather assets.

Compelling Economics

The economics of the fee-based business are compelling, especially at a time when many investors are still reluctant to plunge into new equity positions. “Fee-based accounts throw off money even when no one's transacting, and the commission-based accounts don't,” notes Harvey.

Morgan Stanley's 2001 third-quarter report tells the story. For both the three- and nine-month periods ending Aug. 31, revenue from commissions tumbled 14 percent compared to the year-earlier periods. Revenue from fee-based accounts fell only 1 percent and 7 percent, respectively.

And Merrill, the industry's largest brokerage, had similar results. Revenue generated by commissions tumbled by 26 percent year-on-year in the third quarter of 2001; revenue generated from fee-based accounts, though, dropped a more modest 5.4 percent.

In the go-go 1990s, with its galloping trade volumes, commission revenue always outpaced fee revenue at Merrill. But by the second quarter of 2001, the two came roughly into balance, each contributing about 28.5 percent to the firm's gross. By the third quarter, fee-based revenue pulled ahead, contributing 31 percent to the overall top line versus 28 percent for commissions.

“That's where it's all at,” says one veteran Merrill broker, who is based in the South. “It's the total direction of this firm,” he says. “The reality is that new brokers do about 80 percent to 90 percent fee-based business. Guys who have been around for 15 years, we are doing about 30 percent.”

Merrill is leaving nothing to chance. In October it set up separate-account training programs both for newly hired reps and experienced producers. It's also rolling out new technology to help reps handle managed accounts and expanding the number of managers in its managed-accounts group by 15 percent. And its new compensation grid (RR, Dec. 2001) rewards producers who have established strong fee-based books. Brokers at Merrill's Private Client Group, which focuses on fee-based business, receive a 57 percent payout for fees generated, compared to a 40 percent payouts for commissions.

Expect more moves by big firms to push reps into fee-based accounts. Across the industry, just 20 percent of gross production was associated with fee-based products in 2000, according to the Securities Industry Association. “Clearly, that trend will intensify going forward,” Harvey says. Indeed, according to exclusive broker research by Prince & Associates (see p. 46), just 5 percent of reps say they are concentrated in fee-based business.

New Rules

To win the hearts and minds, other broker-dealers are changing the rules of the game. PaineWebber, for example, on Jan. 1 altered its compensation plan to reward brokers who open fee-based accounts and punish brokers who don't. PaineWebber increased its payout to brokers by 2 percent on revenue generated by fee-based accounts and cut 1 percent from transaction-based-accounts.

Brokers who don't get with the program could be among the unfortunate few on the sales side who wind up out of work. “Firms are looking very carefully at minimum asset levels, and they're becoming far less tolerant of brokers who don't make the cut,” Harvey says.

Just ask a broker on Morgan Stanley's 14,000-strong brokerage team. According to a recent report by Goldman Sachs securities-industry analyst Richard Strauss, Morgan Stanley axed an undisclosed number of brokers for performance reasons in late 2001, even though the firm retains its long-term goal of increasing the size of its broker force to 18,000 brokers.

It's a clear — and chilling — signal to brokers who don't have the right clientele. “I don't see any massive layoffs for brokers in 2002, because they bring in the money,” says Bob McMillan, brokerage analyst for Standard & Poor's. “But the firms will get rid of the less-productive brokers.”

If you are a proven producer with a book of wealthy clients, of course, you are in greater demand than ever. A recent Dalbar study showed that 76 percent of top producers at wirehouses were contacted by another firm within the past year. “Ten years ago, a firm would go to the nearest college campus, grab the graduating class, and stick them on the phone. That worked when you had lots of IPOs and hot stocks to pitch. Not anymore.”

It's safe to say that the recruiting focus will remain through 2002. Of course, after the calamities of 2001, no one can predict what surprises the year holds in store. But “for reps who ‘get it,’ the rewards will be large,” says Cerulli's Gallant. “It costs more to train new reps than to develop the skill sets of experienced ones.” As a result, “the wirehouses are still spending substantial money recruiting and retaining experienced, successful reps,” he says. Now, that's a trend that should cheer any rep who knows how to play by the game's new rules.

Lame Sales Pitch of the Month

Twin Towers Fund Seeks Advisors

Financial Planners Will Help families of Terror Attack Victims Manage Money.

The Twin Towers Fund, which has received more than $100 million in donations, plans to offer families of the World Trade Center victims access to free financial advisors, former New York Mayor Rudolph Giuliani said in December before his term ended.

Details were still being worked out then, but the mayor's office said it was “setting up meetings with possible firms that will provide pro bono financial services.” The office would not disclose how they were choosing the firms or who would monitor the advisors.

Giuliani said he would like the advisors to act as caseworkers, helping families find resources, including scholarships. He also said advisors would be available for as long as the families need.