Banking Crisis
US Brokerage Model Called Into Question After Wall St Panic

Fear has advisors at the large US brokerage firms switching places, desperation has investors cashing out at the bottom of the market, and hopelessness has the government grasping at straws. Matthew Smith reports from New York where wealth management is in the eye of the storm.
Fear has advisors at the large US brokerage firms switching
places, desperation has investors cashing out at the bottom of
the market, and hopelessness has the government grasping at
straws. We report from New York where wealth management is in the
eye of the storm.
The Dow has tanked more than 20 per cent in 10 days of trading
but advisors at the large brokerage firms have more to worry
about than their clients’ assets.
They are changing places now more than ever – even more than
before the crisis when the so called “war for talent” during all
of last year had the big firms dangling hefty sign on
bonuses to attract big producing advisors.
The rationale for the talent war back then (let’s call it
pre-Armageddon) was for a different reason: before the crisis
took hold, heads of these businesses were using any means
necessary to add revenue-producing advisors from a talent pool
that was disappearing into the ranks of Registered Investment
Advisory firms.
The often-touted Cerulli Associates estimates of 20 per cent
growth in the number of RIAs entering the fray in recent years
versus the stagnant (but still larger) number of advisers
employed under the brokerage model points to this on going
trend.
While this trend is no doubt continuing, the flurry of trading
places among advisers between the brokerage firms happening right
now is for a different reason – it is borne out of a sudden need
for advisors to bolster their own financial positions.
In the US, wire house advisors have compensation structures
highly leveraged to their companies’ stock. With the rapid
deterioration of financials in recent weeks, advisors have seen
their own financial positions whittled away, and they are looking
around to make up for the money they have lost on paper.
And the wire houses – despite their own precarious financial
positions – are still offering large sign-on bonuses to attract
advisors.
According to compensation consultant Andy Tasnady of Tasnady &
Associates, brokerage advisors can still get as much as 200 per
cent of annual sales up front if they sign on with some firms
now.
Even though Morgan Stanley appeared to be on the brink of
collapse just last week before its Japanese tie-up, Mr Tasnady
says the firm is currently offering the highest sign on bonuses
on The Street.
And it seems to be working – at least it’s allowed the firm to
maintain advisor numbers. According to Morgan’s most recent
quarterly report, at the end of August this year, the firm
employed 8,500 financial advisors, an increase of around 150 on
the same time last year.
For an advisor with $1 million in yearly sales and falling stock
options, a $2 million payment on top of regular commission splits
has lead to more short term chopping and changing between
firms.
However the fates of US's big-name brokerage firms are likely to
be decided on some other long-term considerations that are
swirling in advisors’ heads at the moment.
Firstly, the trend in the US for advisors to start their own fee
only advice practice in an RIA structure will continue – it’s not
surprising that third party administrators Pershing, Schwab
Institutional, Fidelity and Raymond James are seeing record
numbers of “breakaway” advisors and advice teams plugging into
their systems and seeking consulting services to start their own
advice practices.
Possibly more immediately relevant to the impact of the financial
crisis is the new leadership structure of wealth management
businesses following the recent spate of consolidation.
Brokerage advisors have traditionally rejected bank ownership and
leadership, says Robert Ellis, a wealth management specialist for
New York consulting company Celent.
In a very short space of time a lot has happened: Bear Stearns
was bought in a fire sale by JPMorgan Chase & Co; Lehman Brothers
filed for bankruptcy protection and most of the US business went
to Barclays; Merrill Lynch is in the process of being bought by
Bank of America; Citi tried, and failed to buy Wachovia; and
Morgan Stanley has tied up with Japanese Bank, Mitsubishi.
“Every major American brokerage firm is now currently either
buying a bank, being bought by a bank, or in the process of
integrating with a bank,” Mr Ellis points out.
All of the above mentioned transactions (apart from the
Bear/JPMorgan deal) are still yet to be consummated, and requests
made by WealthBriefing to discuss the strategic direction of the
wealth management businesses of the respective firms were
generally met with the same response: “It’s too early”.
The leadership jostle currently being played out between BoA and
Merrills will be of utmost interest to the 17,000-odd advisors
who are wondering if they will be governed by bank oversight or
the Wall Street brokerage mentality they are accustomed to.
Says Mr Tasnady: “Brokerage advisors think if they are owned by a
bank they will be treated like bank advisors, and they don’t want
that.”
Merrill advisors were given a glimmer of hope when Merrill chief
John Thain accepted the position as president of the combined
company's global banking, securities, and wealth management
business following the completion of the acquisition.
However there is still no insight into how the brokerage business
will be run under Bank of America chief executive Kenneth Lewis
and where Keith Banks, BoA’s current head of the Global Wealth
and Investment Management, fits within the new structure.
Foreign-owned wealth management operations that have avoided the
shotgun marriages of their American counterparts are beginning to
look like a safe option for US brokers – a spokesman at Credit
Suisse said the US private bank has almost doubled its close to
300 advisor force in the last year.
Even the brand damage that UBS suffered earlier in the year seems
to be forgotten, with the firm appearing to have quelled the
unrest of its more than 8,000 brokerage advisors.
However the events of the past couple of weeks have shown
anything can happen and the wealth management industry here
remains firmly on tenterhooks until the market has
stabilised.
Once the dust settles Mr Ellis suggests a new paradigm will be
born.
“The transaction model in the US is dead. Small firms will handle
ultra wealthy clients, technology will allow the mass market to
do it themselves,” he says.
It might be too early at this stage to call the death of the
brokerage model, although the crisis has highlighted gaps in the
transactional nature of the US advice market.
A study in September by Prince Associates surveyed 351 people
with more than $1 million of investable assets with brokerage
firms and found almost 90 per cent were planning to withdraw at
least some of their money, and 70 per cent say they want to fire
their brokers.
Reports over the past week have shown American investors have
panicked, withdrawing their assets right as the markets have
dipped.
Adding to, or possibly a reflection of the panicked mood, the
usually bullish Jim Cramer, the host of CNBC’s stock picking
programme “Mad Money” appeared on an American morning show amid
the share market collapse imploring people to take any money they
might need during the next five years out of the market
immediately.
News reports quoted TrimTabs data measuring $43.3 billion in
withdrawals from stock funds and $8.8 billion from bond funds
during one of the most volatile weeks in history ending 8
October.
“What you’re getting is total panic among investors, even
institutional investors who should know better are taking their
money out at the bottom of the market,” says George Feiger, chief
executive of RIA firm Contango Capital Advisors.
“The short term activities of brokerage accounts don’t work in an
atmosphere of panic.”
At least investors now know not to look to Wall Street for a
calming voice during a crisis.