Inside the death of the regional broker-dealer

Many have either been acquired or are trying to become national firms.

A.G. Edwards & Sons Inc., Advest Inc., McDonald & Co. Twenty years ago, all were respected names in the securities industry — highly competitive regional broker-dealers whose advisers were employees, not independent contractors. Smaller than the full-service wirehouses, each firm had a retail or investment banking footprint in a particular part of the country: the Midwest, in the case of A.G. Edwards and McDonald & Co., and the Northeast in the case of Advest.

Now, like dozens of such once-respected regional firms, they have passed on. Two died relatively quietly, while one had a slow, painful death, switching hands multiple times before its name finally disappeared.

McDonald was sold to KeyCorp, the Cleveland bank holding company, in 1999, a year before the dot-com bubble burst. It was eventually sold to UBS AG in 2007.

A.G. Edwards was acquired in 2007 by Wachovia Corp., which was in turn swallowed up by Wells Fargo during the credit crisis a year later.

And Advest, poor Advest. In 2001, it was sold to the MONY Group Inc., which was then acquired by Axa Financial. Four years later, Axa sold MONY to Merrill Lynch & Co. After that, Advest’s advisers scattered.

Over the past 20 years, many such regionals had similar fates, acquired by a bank or insurance company looking to increase distribution of its products or another securities house in a drive to boost its headcount. The success of many of the mergers is questionable. Old loyalties between advisers and management disappear when senior executives are replaced. Advisers find new firms when retention bonuses run out.

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The number of broker-dealers registered with the Financial Industry Regulatory Authority Inc. — which includes all types of firms, not just regionals — has declined steadily since the credit crisis. With technology and compliance costs on the rise, and a decrease in the margins on money market accounts because of record low interest rates, running any type of broker-dealer has become more expensive. Finra reported 4,020 broker-dealer members as of September. That’s 12.2% fewer brokerage firms than five years ago.

Of course, regional firms still exist, though their numbers are dwindling. Industry observers routinely point to national or large regional firms such as Raymond James Financial Inc., Stifel Financial Corp., and Robert W. Baird & Co. as firms that have been able to grow but maintain that special “regional firm” quality of service and close-knit culture that financial advisers like. Large regionals generally don’t like to be branded that way and neither Raymond James nor Baird would agree to be interviewed for this story. Spokesmen for Stifel didn’t return a reporter’s phone call.

Registered reps, investment advisers and securities professionals routinely lament the passing of the regional firms.

Terry Lister, a veteran industry attorney who started his career in 1981 at a regional firm, Hanifen Imhoff Inc. in Denver, said the regional broker-dealer had a role in the marketplace. “It was local and you were dealing with local people. The investment banking and municipal finance was being done by people you knew as opposed to some guy in New York.”

“The theory was that the regional firm would take a deal that the people in New York wouldn’t because it was unique or too small,” said Mr. Lister, who left Waddell & Reed Inc. this year and is now an industry consultant. “The bankers and underwriters knew the owner of the business because they grew up together.”

“The equity underwriting business is so different today,” he said. “IPOs and deals that were bought by individuals are now bought by institutions, and the regional firms couldn’t do deals big enough to feed institutions like the hedge funds, mutual funds or sovereign wealth funds. The regional firms have been pushed out of the IPO market because there [are] no deals of a size they can handle. With municipal finance, it’s the same thing. The deals are being done by big firms in New York.”

Indeed, almost half of the top 50 municipal bond underwriters from 1996 to 2000 have closed, been taken over or merged with a rival, according to an InvestmentNews analysis of data provided by Thomson Reuters. Those include such regional stalwarts as Morgan Keegan & Co., which was acquired by Raymond James in 2012, and Stone & Youngberg, which Stifel Financial bought in 2011.

“There are three reasons for the demise of the regional firm,” said Tom Halloran, president of Voya Financial Advisors Inc., an independent broker-dealer. “Remember Y2K? At the time a lot of us were being held hostage to technology changes and technology costs. The tech people owned budgets they never had before.”

Rising technology costs, still a source of pain for many small or midsize securities firms, pushed many regional broker-dealers to merge, said Mr. Halloran, who during the 1990s worked in the wholesaling division of Putnam Investments. He was based in Cleveland and worked regularly with regional firms such as McDonald and Roney & Co., which also was acquired by Raymond James.

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“In addition, compliance at firms was raising more issues,” he said. “After the Internet bubble burst, the second wave of regionals went out because of a wave of investor lawsuits.”

“And finally, the regional firms’ capital markets couldn’t compete anymore,” Mr. Halloran said. “In the “90s, you had IPO millionaires coming to fruition from companies that made no money. After that, regional firms couldn’t get allocations to shares of an IPO.”

One industry observer noted that although many regional firms are no longer in business, the spirit of such securities house lives on.

“In my mind, the definition of a regional firm has changed,” said Frank Campanale, an industry consultant who most recently was the chief executive of Lebenthal Wealth Advisors. “As big as it is, Raymond James operates like a regional firm; it has the look and feel and general operational structure of a regional. It’s not a big wirehouse or bank, and that’s a compliment. It doesn’t impose a bank culture on its advisers. Baird is a fabulous company, too.”

And rising from the ashes is Benjamin F. Edwards & Co., led by Tad Edwards, scion of the family that started A.G. Edwards more than a century ago, Mr. Campanale noted. “It’s becoming a new regional firm, like the old A.G. Edwards,” he said.

“The culture of a regional firm is not something you can create at a brokerage firm by throwing money at it or buying it,” he said. “It doesn’t work that way. Culture is the function of a shared ideology and a physical manifestation of it because the advisers have some equity, some stake in the company as well. It makes a difference.”