Tide change for traditional retail-brokerage firms expected

The outlook for traditional retail-brokerage firms has never been so uncertain. Many observers think that both the major retail firms and large banking institutions are not yet out of the woods in terms of their solvency. Concerns persist about the level of toxic assets these major players still hold.

Even with the eventual return of stability, cultural change will certainly come for brokers at Merrill Lynch & Co. Inc. of New York, who will be working for Bank of America Corp. of Charlotte, N.C., as it will for reps working at Wachovia Securities LLC of St. Louis, who will become part of Wells Fargo & Co. of San Francisco.

“Show me a mega-merger in any industry [where] people look at it five years later and say, ‘Boy, this was a great idea.’ Nobody’s been able to come up with one,” said Danny Sarch, founder of Leitner Sarch Consultants Ltd., a White Plains, N.Y.-based recruitment firm.

Mr. Sarch was a participant in the November InvestmentNews round table on the outlook for traditional firms.

Banks and brokerage firms have had mixed results after they’ve merged, said Dennis Gallant, president of Gallant Distribution Consulting in Sherborn, Mass., another round-table participant.

At Citigroup Inc. of New York, for example, “you’ve got tons of Smith Barney brokers who are very un-happy with the conflict … between [the] bank and brokerage,” said round-table participant Mindy Diamond, president of Diamond Consultants, a Chester, N.J.-based recruiter.

What’s more, companies based outside of Wall Street, such as Bank of America and Wells Fargo, have “always thought that the New York folks were overpaid, and now … everyone’s going to be exposed to that,” said Larry Moy, an employment lawyer and partner at Outten & Golden LLP in New York, who represents brokers and also participated in the round table.

Morgan Stanley could end up benefiting most from the turmoil, Ms. Diamond said, because it is the last independent national retail firm with an investment culture. “That’s the [firm] with probably the least question mark[s] surrounding it,” she said.

Recruiters said New York-based Morgan Stanley has done well recruiting from other firms.

But “I think it’s a little hard to say really who the [ultimate] winners are” from the crisis on Wall Street, Mark Elzweig, president of an eponymous New York recruiting firm, said during the round-table discussion.

There is still “plenty of movement” among all firms, he said.

Regional firms, which never lost their focus on retail, have been one beneficiary of the turmoil. For wirehouse reps, the regionals look more attractive than ever, recruiters said.

At Milwaukee-based Robert W. Baird & Co. Inc., revenue will be off just slightly from last year, said John Mabee, director of branch development. The firm has been helped by new recruits and a mix of businesses, he said.

CONSIDERING OPTIONS

In a survey this year of wirehouse reps by Cerulli Associates Inc. of Boston, 65% of respondents said they would go independent if they were to change employers. Only 19% said their preferred firm would be another wirehouse.

Historically, 44% of wirehouse reps have moved to another wirehouse, Cerulli said, and 17% have gone to regionals.

Most advisers were surveyed this year before Lehman Brothers Holdings Inc. of New York filed for bankruptcy in September, said Scott Smith, a senior analyst at Cerulli, so the full effect of the meltdown may not yet be evident.

“Generally, you’re looking at a six- to nine-month lead time on those [adviser] transitions,” he said, so the turning point may come early next year.

Independent broker-dealers and custodians are reporting inquiries from advisers running 200% to 300% higher than normal, Mr. Smith added.

“We can sit back and be very selective” in hiring all types of professionals, said Chet Helck, president of St. Petersburg, Fla.-based Raymond James Financial Inc.

Last year, Baird brought in 35 recruits, Mr. Mabee said, and this year, the firm should land more than 70. Baird has about 600 brokers in total. Mr. Mabee and other observers said that a lot of reps with long tenures at wirehouses for the first time are having second thoughts about staying.

“Loyalty [has been] destroyed in terms of the loss of confidence that [wirehouse brokers] have in the leaders of their companies,” Mr. Sarch said.

Regionals are hampered in picking up wirehouse reps, though, because they’re not in all markets, he said.

But the smaller firms have been picking off select teams to establish new beachheads. Last month, for example, Baird opened its first retail office in California, and it plans to open more Northern California branches.

One danger is that as brokers change firms — especially when several employees move in harmony to a new firm — the firms they leave tend to enforce agreements not to solicit other employees, Mr. Moy said. For teams making a group move, “you can expect litigation,” he said.

However, while many fret about the big firms’ futures, one regional competitor isn’t too concerned. At Merrill, to take one example, “nothing’s changed except who owns the stock,” Mr. Helck said. “Merrill Lynch is still Merrill Lynch,” he said. “They will be a very strong competitor … in retail and investment banking — but just with a different owner.”

That doesn’t mean brokers won’t see changes, Mr. Helck and other observers said.

E-mail Dan Jamieson at [email protected].