IS BIGGER ALWAYS BETTER? BROKERAGES TALK TOUGH, BUT WORRY

Brokerages may be crying all the way to the banks.

The latest bank mega-mergers have humbled the major securities houses, which often boast that banks as we have known them are becoming obsolete.

After all, brokerage execs argue, they offer many of the same services to retail investors and some of the same to commercial clients: checking accounts, debit cards, credit cards, certificates of deposit, trust services, mortgages. Why use a bank?

But the nearly $80 billion merger of Citicorp with insurer Travelers Group Inc., the $60 billion coast-to-coast combine of NationsBank Corp. and BankAmerica Corp. and the $30 billion purchase of First Chicago NBD Corp. by Banc One Corp. has propelled the banking industry to a new level of respect — and clout.

“Two years from now I can’t believe PaineWebber Inc. will be a stand-alone entity; I don’t think Merrill Lynch & Co. will, either,” says Burton Greenwald, a brokerage and mutual fund consultant in Philadelphia.

The brokerage houses may have the investment brains, but banks have the financial brawn. Merrill Lynch, the nation’s biggest brokerage, has a market capitalization of $22.7 billion — less than half the size of Chase Manhattan Corp. (long rumored to be in merger talks with Merrill). Travelers and Citicorp (to be rechristened Citigroup) have a combined $170 billion market cap, BankAmerica-NationsBank will be worth $133 billion and Banc One-First Chicago $72 billion.

The name of the game is to grab earlier control over a consumer’s assets — ideally from the moment a paycheck is cashed. Brokerages may have only two competitive responses: expand their bank-like businesses or sell out.

Experts say the latter seems more likely, given the legal and regulatory restraints on brokerages behaving like federally insured banks and the costs of processing checks, automated teller machines and other basic banking services.

Most of the big brokerages insist they’re not for sale. Merrill Lynch & Co.’s chairman and chief executive officer, David Komansky told shareholders at the company’s annual meeting last week: “We do not plan on surrendering our independence.”

And PaineWebber’s chairman, Donald B. Marron, has consistently insisted he wants to remain independent.

Prudential Insurance Co. of America, which owns Prudential Securities Inc., is trying to change from being a mutual company to a stock company so that it can become an acquirer, a spokesman says.

Morgan Stanley Dean Witter & Co. — often the subject of speculation about selling out to an international bank — won’t comment as policy.

Mr. Greenwald, the Philadelphia consultant, agrees that no bank has proven a true commitment to retail brokerage. Still, he says, the NationsBank-BankAmerica deal “would really be the first to have the potential, and I say the potential, to give competition to the Merrills of the world.”

The NationsBank-BankAmerica empire’s combined mutual fund business manages $56.8 billion, ranking a respectable 20th in mutual fund size, according to Financial Research Corp. of Boston. That’s not counting $125 billion in trust assets. Furthermore, the combined entities have 4,800 branches where they can park investment salespeople.

“The bank brokerage business has not by and large proven to be a problem for traditional brokerage firms to contend with; now that may change,” says Geoffrey Bobroff, a mutual fund consultant in East Greenwich, R.I.

It’s hard to tell how brokerages have fared with their banking services, because public data are limited. But there are indications they’re doing well.

Merrill Lynch originated $2.26 billion in mortgage loans in 1996. Its consumer credit line balances reached an all-time high of $6.79 billion that year, while its trust companies managed $3.6 billion in assets and its small company banking service business reached $199 billion in assets.

The brokerage industry has “tried to carve out their niche in the market becoming more like banks without incurring the costs of a real bank,” explains Dennis Dolego, research director with Fairfield, Conn., consulting firm Optima Group Inc. “(But) that’s clearly not going to defend them from being acquired.”

Executives at brokerages beg to differ. Raymond “Chip” Mason, chairman of Legg Mason Inc., a regional brokerage in Baltimore, agrees the latest mergers create tremendous financial clout, but he insists that brokerages compete with banks merely by adding products their advisers can sell, while banks must transform their entire cultures if they are to compete with brokerages.

it’s advice they want

“Most investors are looking for the best advice they can get,” Mr. Mason says. “They’ll ultimately move towards a business like ours or Merrill Lynch.”

PaineWebber’s William Bruett, a senior vice president who oversees the firm’s asset-gathering group, says his brokerage isn’t interested in getting into the costly check-processing business, so it doesn’t care that customers keep their basic checking and savings accounts in a bank to pay bills. But PaineWebber does offer a Resource Management Account, in which an investor with at least $15,000 gets a checking account that earns 5% interest, higher than what banks offer.

“There’s only a few things our clients cannot get from PaineWebber that are bank-like,” Mr. Bruett says, adding that the average account size is $400,000. (He declined to disclose the total money PaineWebber managed in these accounts.)

even has thrift charter

In addition, PaineWebber has followed the lead of other brokerages in getting a thrift charter, currently pending, so it can provide trust services.

“I worked at a bank for 25 years,” says Mr. Bruett, a veteran of Chittenden Corp. in Burlington, Vt. “There’s no comparable person at a bank to an investment executive.”

Jeffrey Applegate, chief investment officer at Lehman Brothers, says brokerage firms’ balance sheets are big enough to compete with the larger banks. Merrill Lynch, for instance, is already prominent overseas, and doesn’t necessarily need to sell out to fund global growth as much as other firms.

“The bigger-is-better theory works for banks,” Mr. Applegate says. “But it’s not clear cut for brokerages.”

Furthermore, a brokerage might turn around and buy a smaller bank.

“Here’s a deal for you: Merrill Lynch buys State Street Corp.,” offers Charles Gulden, a managing director at Fort Lauderdale, Fla., money manager Hansberger Global Investors Inc.

Such a deal, probably worth about $12 billion, would offer Merrill Lynch custody of $3.9 trillion in assets in retirement plans around the world.