In a business that's traditionally been feast or famine, broker-dealers are facing lean times as the stock market takes back years of gains, and trading volumes stagnate.
But the growing practice of charging fees rather than commissions is keeping some firms from starving, brokerage executives maintain.
Fee revenue is steady or dropping slightly in this bear market, but revenue from commissions, which are trade driven, is falling faster and farther.
steady revenue
Executives say revenue from fee-based groups during the current quarter and trailing 12 months has been flat to down in the single digits. Commission-based revenue, however, is down by as much as 25% at some firms this quarter.
"We're anticipating another three to four months of this," says Tony Greene, chairman and CEO of Raymond James Financial Services Inc. in Atlanta. "Profits will be down, no question."
Executives with wirehouses and smaller broker-dealers regularly tout the advantages of fee-based business. Revenue is steady, and brokers act as financial consultants rather than as salespeople.
But fee-based business, while growing, accounts for only a slice of many companies' revenue, says Dennis Gallant, a consultant with Cerulli Associates in Boston. About 20% of wirehouse brokers do fee-based business, he says.
Over the past several years, Merrill Lynch & Co. Inc. has been one of the most aggressive companies in pushing brokers to convert accounts to fees. It saw its fee-based revenue rise to $6.8 billion in 1999 compared with $3.2 billion in 1995. Figures for 2000 were unavailable.
At this time last year, some broker-dealers were issuing reports that showed record revenues and profits. Merrill Lynch,
Charles Schwab Corp. and Dain Rauscher Corp. each announced highs in sales and earnings for the first quarter last year.
lost confidence
But a return to posting rosy returns is unlikely in a market that has retail investors running scared, says one analyst.
"February appears to have been a significantly less favorable environment for brokerage firms than was January," Mark Constant, an analyst with Lehman Brothers in New York, writes in a recent note on Merrill Lynch.
"Furthermore, we believe that many retail investors have lost confidence in placing individual equity trades."
And that weighs heavily in the earnings of such companies as Charles Schwab, he adds. But he adds that Merrill Lynch is "much better diversified, with a more constant and recurring retail earnings stream."
Merrill's stock traded at between $42.50 and $80 a share over the 12 months through last Wednesday, when it closed at $54.90.
Online trading companies, in contrast, have taken a beating.
Ameritrade's stock hit a 52-week low of $6.13 on Wednesday, less than a quarter of its $25.17 high. Last month,the company warned that declining revenue would cause it to post a much bigger first-quarter loss than analysts' estimates.
Schwab's stock, although less volatile, has also taken a hit. Its 52-week high of $44.75 compares with a low of $15.90 reached Wednesday.
Datek Online Brokerage Services LLC, a subsidiary of Datek Online Holdings Corp., reported a sharp decline in trading in February compared with last winter's surge.
Datek recorded an average of 91,541 trades per day last month compared with an average of 117,362 in February 2000.
Dain Rauscher likewise has felt the hit. "Assets are up year-to-year, but only slightly," says Ian MacEachern, managing director of investment consulting services for fee-based brokers with the Minneapolis brokerage house.
Dain Rauscher's fee-based business is holding up, he says. "Sales and revenue are flat to last year," he says. "I'm thrilled, quite frankly."
fee business less volatile
The Nasdaq Composite Index started last week at 1901.45, more than 60% off its record highs of just over a year ago.
But executives with broker-dealers say that their rich clients, many of whom pay fees, have less exposure to the volatile, technology-heavy Nasdaq.
Last month, 1.9 billion shares traded on an average day on the Nasdaq compared with 1.81 billion shares last year.
When the market peaked last March, average volume on the Nasdaq hit 1.9 billion shares, with the Big Board trading 1.14 billion shares.
"Fee revenue drops when the market declines," says Mark Goldberg, executive vice president with SunAmerica Financial Network in Los Angeles. "But we seem to be picking up more accounts."
