Brokers wait for economy to turn

After two disastrous years in a row, brokerage industry observers say something akin to normalcy may return this year.

“We’re cautiously optimistic,” said Chet Helck, president of Raymond James Financial Inc.

“I don’t think anyone is expecting a barnburner year, but we see a much-improved tone over 2008 and 2009,” he said.

“Money will flow into the markets to a greater degree,” said Richard Bove, an analyst with Rochdale Securities LLC. “Retail will be a heckuva lot better than the last couple years.”

But few predict a quick turnaround for investor confidence.

“I don’t anticipate retail picking up quickly,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. LLC. “The retail investor has been very, very cautious about embracing the equity market.”

It’s not clear whether the recovery can sustain itself without government stimulus, said Ron Kruszewski, chief executive of Stifel Financial Corp. “So I’m cautious. Our business obviously is highly correlated with the economy and the market.”

Longer term, though, the “advice business is going strong,” Mr. Kruszewski added.

Historically, a recovery in retail activity correlates to the unemployment rate, Mr. Hintz said, so until employment figures improve, “retail will just chug along.”

Economists surveyed by Bloomberg News last month expected the jobless rate to remain high — falling only one-tenth of a percentage point, from 10% to 9.9%, in the third quarter of this year. The predicted average for 2011 was 9.2%.

The one bright spot last year, at least for some of the smaller industry players, was the flood of recruits coming from firms that were forced to consolidate.

“We should see the emergence of new [regional] players” such as Raymond James, Stifel and Robert W. Baird & Co. Inc., Mr. Helck said.

“There was pretty big movement to all of those firms — it shows a real need for that [smaller firm] environment,” he said.

Over the past 12 months, through recruiting and the acquisition of some branches from UBS Financial Services Inc., Stifel added about 800 brokers, bringing its total to 2,000, Mr. Kruszewski said.

But that large influx won’t happen again, he said. “I think the [recruiting] environment is settling down a little bit.”

However, the big brokerage firms will face continued challenges, and observers expect some brokers will seek out greener pastures.

Merging Smith Barney and Morgan Stanley, for example, will “be a slow slog,” Mr. Hintz said.

Brokers at the combined firm, as well as other observers, say the key test will be how well the technology systems can be merged, a process that is expected to take more than a year.

At the same time, competitive pressures should keep recruiting packages at their current high levels.

While some firms have benefited from the troubles of the big firms, the Federal Reserve’s zero-interest-rate policy is hurting everyone.

Margins on money market mutual funds have vanished, and lower leverage is cutting into profits on securities firms’ banking activities, Mr. Hintz said.

The Charles Schwab Corp. warned last month that it continues to struggle with low yields on money funds.

The firm, like others, was forced to waive fees on such funds after the Fed cut rates a year ago.

Broker-dealers sweep cash into bank deposit programs to generate low-cost funds for lending, but the industry is “being much too conservative” in making loans, Mr. Hintz said.

Uncertainty over potential new regulations is “making it difficult to manage a balance sheet,” Mr. Hintz said.

Instead of making higher-margin loans or buying riskier paper, firms are putting bank deposits into shorter-term, quality bonds, “and that squeezes the spread,” he said.

Industry executives are hopeful that the Fed will have some room to raise rates this year. But that won’t happen until it is clear that the economic recovery is sustainable.

E-mail Dan Jamieson at [email protected].