I remember when those who worked on the institutional side of Wall Street walked with swagger. Investment bankers, sales traders, bond salesmen — the whole lot of ‘em — used to look down on the retail stock broker, er, financial advisor. Retail FAs were regarded as déclassé, the guys who had to suffer the ignorance of moms and pops and do business at their coffee tables, groveling to get a few tens of thousands to manage. The institutional guys, on the other hand, would receive bonuses in the millions and could be found doing business, not at coffee tables, but at fancy Big City restaurants, carousing with “sophisticated” asset managers, quaffing expensive claret and masticating Fred Flinstone-size T-bones.
My, how things have changed. The executive suites of financial firms, over the years, have come to understand what a wonderful business retail brokerage is; sure, there are some occasional missteps (auction rate securities, for example). But the institutional side of the business has been truly humbled, forced to walk under the yolk of Washington legislatures, who were playing to the back of the theater with populist rhetoric during the recent televised hearings on Capitol Hill.
Cost control is the name of the game, these days, as Dodd-Frank legislation will most certainly result in depressed performance (as measured by return on equity) for institutional business. Wall Street is bracing for massive layoffs, as the Volcker Rule gets implemented and proprietary trading desks are disassembled and derivative trading is constrained.
Indeed, the financial services industry is in something of a “wait and see” posture. It will be anywhere from six to 18 months before regulators announce the 200-odd new rules and regulations that were mandated by the Dodd-Frank legislation.
Meanwhile, on the other side of the house, the retail side, business isn't great. Retail trade volumes and mutual fund flows are depressed. But the wirehouses are getting amped up for an expected recovery next year and have been aggressively spending money to attract veteran financial advisors from other firms. The brokerage business is a volume game, of course. Perhaps no two brokerages epitomize the battle for assets more than Merrill Lynch and Morgan Stanley Smith Barney. Merrill is the perennial heavyweight champion that has suffered some serious client asset defections over the last two years — as has just about everybody on the Street. Merrill says it is poised to strike in 2011.
Morgan Stanley, which is still digesting Smith Barney, is also regrouping and poised to strike sometime next year. In short, it's go time. The two behemoths are not worried about defections to RIAs or independent b/ds. They have their eyes on each other, each determined to win the right to call itself the Number One retail wealth manager on Wall Street. It sure is going to be fun to watch. And FAs can take advantage of this fight by locking in some of those rich recruiting deals.
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