Some representatives and advisers wonder whether their broker-dealer will be able to cut it, and broker-dealer executives are dealing with the trials — and prospects — presented by the financial-markets crisis.
A study put together months before the calamitous unwinding of the credit crisis found that brokers were concerned about being able to offer a greater mix of investment products to their baby boomer clients and receive better support services from their broker-dealers to meet those clients' needs. The oldest baby boomers, those born in 1946, will hit official retirement age in 2011.
Five brokerage executives recognized brokers' concerns in a freewheeling discussion held last month in
InvestmentNews' offices in New York but were more focused on the changing of the tides in the industry, such as last month's faltering of American International Group Inc. of New York and Charlotte, N.C.-based Bank of America Corp.'s acquisition of iconic brokerage firm Merrill Lynch & Co. Inc. of New York.
The executives gathered to discuss the study "Broker-Dealer of the Future," which was conducted by Pershing LLC of Jersey City, N.J., in cooperation with
InvestmentNews and Cast Management Consultants Inc. of Los Angeles. The study was actually based on the results of two surveys taken from September to December 2007, one of 538 representatives and advisers, the other of 65 broker-dealer executives.
Broker-dealer tax mitigation support — that is, support for tax-efficient investing — was subpar, and estate-planning needs were only adequately supported. Technology was a concern too, the study found.
But at the center of the discussion was the day's news: the collapse of Wall Street because of the credit crisis and what it could all mean to independent broker-dealers and their reps.
The executives for the most were sanguine about their prospects.
"We're the good guys in the business right now," said Jim Nagengast, president of Securities America Inc. of Omaha, Neb. "We don't have the conflicts of the investment banking and the ties to the product manufacturing, so this is a great time to be in the independent channel."
Others agreed.
"We also feel it's going to be a tremendous opportunity for us to acquire some advisers," said Wayne Bloom, principal of Commonwealth Financial Network of Waltham, Mass. "Certainly, Bank of America will be trying to retain Merrill advisers, but it's going to increase the velocity of advisers who are thinking about going independent."
Everybody is at risk, one executive noted.
"The fact that these big organizations that historically used size as a means to cast us in a poorer light, I'd suggest has leveled the playing field, because anybody can go out of business today," said Adam Antoniades, chief executive of First Allied Securities Inc. of San Diego.
"We're in a better position to really make a case for having a core competency that is very much vanilla — it's very clean, very risk-averse, very easy to understand from an economic perspective," he said.
Independent broker-dealers have already made a dent in the wirehouses, one executive noted.
"One stat that we look at quite extensively is the [automated customer account transfers]," said Jim Roth, managing director of Pershing.
"It helps us benchmark who we're winning and who we're failing against. The wirehouses are losing to the independents — no question about that."
The federal government's massive loan to giant insurance company AIG has also changed the landscape.
AIG said Oct. 3 that it would sell business units not related to its core property casualty insurance business, including the broker-dealers in the AIG Advisor Group.
"In our community of independents, we have [broker-dealers] owned by AIG who have always promoted themselves as being the strongest, safest, and you would join them because of their strong capital," said Eric Schwartz, president of Cambridge Investment Research Inc. of Fairfield, Iowa. "And then you have the other extreme, the really small broker-dealers, five of which have been sold in the last four months to other broker-dealers."
"So all of a sudden, there's potential for the midsize independent broker-dealers to show that they're the safest place," Mr. Schwartz said. "I personally have always made our audited financial statements available to anybody who asked for them."
FEE-ONLY MODEL
There was more to the meeting than an analysis of the recent disastrous days for Wall Street.
The study warned that broker-dealers were in danger of losing reps who wanted to change their businesses to a fee-only registered investment adviser model.
Executives countered that notion, saying that broker-dealers can work with reps who base their businesses on fees over commissions.
"If a broker-dealer puts their attention on it, they can build a compelling fee-based model that will keep advisers in the game with them," Mr. Schwartz said.
One executive, however, was clearly concerned with the growth of registered investment adviser side of the business.
"I do think that the RIA-only model is disruptive to our business model," said Mr. Antoniades. "I think you need to be able to articulate your value proposition in an unbundled pricing model."
"We're unbundling our pricing so that we can clearly articulate the price for a particular service that a fee-only adviser might be able to obtain," Mr. Antoniades said. "We're working with our preferred custodians to be able to present a truly hybrid solution."
Mr. Antoniades added: "So I do think there is a challenge to our model. It's our job as CEOs to respond to that."
E-mail Bruce Kelly at [email protected].
