More talk, less trade seen on Wall Street

Major brokerage firms moving toward advice

Jun 9, 2008 @ 12:01 am

By Dan Jamieson

The big Wall Street firms have been talking a good game about offering advice, but how much worthwhile information will they actually provide in the next decade?

Few expect Wall Street to give up its product-manufacturing business model completely, but the importance of protecting a growing horde of retirees and the Street's claims of offering objective advice will force it to move further along the advice continuum.

"I don't know exactly what [the major brokerage] firms are going to look like, but I do know they're going to look a lot more like advisory firms" by managing a range of assets for a fee, said a Smith Barney broker on the East Coast who asked not to be identified.

A typical broker will become more of a "point man" in the client's financial equation, said John M. Nowicki, president of LCM Capital Management Inc. in Chicago, a former wirehouse rep who now does mostly advisory business with about $50 million under management.

Short of a full advisory relationship, some observers think wirehouse firms might move toward a hybrid independent/captive model, similar to Raymond James Financial Inc. of St. Petersburg, Fla.

"Maybe the [future] sales force bifurcates, or trifurcates" into different channels within one firm, said Barry Mendelson, managing partner at Capital Market Consultants LLC in Milwaukee, Wis., which develops managed account platforms.

Brokers and other observers expect the large securities firms to continue to increase their fee-based business. "Fees will probably more thoroughly dominate the retail business," Mr. Mendelson said.

Transactional business will play a lesser role. "I see that business dying," Mr. Nowicki said.

"There will always be commissions," countered Matt Oechsli, president of The Oechsli Institute Inc. in Greensboro, N.C., which consults to brokerage firms.

Furthermore, observers expect that all the majors will continue to chase wealthier clients.

"Over the next 10 years, we will have a slugfest for the $1 million to $15 million accounts," Mr. Oechsli said, adding that these investors will increasingly want comprehensive service from knowledgeable advisers.

Mr. Nowicki thinks wirehouses will continue dumping the small investor. The cost of the credit-crisis write-offs will be borne by clients, he said, and "all the [large firms] will end up raising minimums."

A wary public, combined with the growing challenges in marketing to investors, will make it difficult for new brokers to build a clientèle.

"How do you start out cold-calling now?" asked a broker with Merrill Lynch & Co. Inc. of New York who asked not to be identified.

With middle-aged brokers retiring over the next decade, and new entrants scarce, "I think there's going to be a big vacuum of brokers," this rep said.

A recent analysis by Cerulli Associates Inc. of Boston estimated the number of financial advisers in all delivery channels dropped to 245,831 last year, down slightly from the previous two years. Adviser numbers have historically been growing.

At the same time, demand for advisers is rising and recruitment deals are at all-time highs.

When they change firms, most wirehouse reps go to another wirehouse. But independent broker-dealers and custodial firms are seen by some as becoming stronger competitors for wirehouse talent.

Expect to see continued pricing pressure, said observers.

"Fees have to come down [and low-cost] ETFs have a lot more legs," the Smith Barney rep said.

Pricing pressure comes from "all the competition that we face," the Merrill rep added.

E-mail Dan Jamieson at djamieson@investmentnews.com.

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