Shareholders always come first

You almost could hear the groans at A.G. Edwards & Sons Inc. when Wachovia Corp. chief executive G. Kennedy Thompson told analysts during a conference call that he expects to excise $650 million in expenses from the combined organization.

You almost could hear the groans at A.G. Edwards & Sons Inc. when Wachovia Corp. chief executive G. Kennedy Thompson told analysts during a conference call that he expects to excise $650 million in expenses from the combined organization.
Forget the talk about co-
synergistic benefits and one-stop-shopping strategies. The bottom line for brokerage mergers such as this is the savings that come from scale economies.
That’s good for shareholders, for sure. But for employees, brokers and clients, often it’s not.
Reps with St. Louis-based A.G. Edwards can expect to lose some of the homey support they’re used to. Charlotte, N.C.-based Wachovia said that its brokerage unit has about one staff member per rep; A.G. Edwards has about 1.25 per rep. And many reps at A.G. Edwards expect that fees charged to clients will rise.
As the company marches off to join Hutton, Shearson and other legendary giants on the field of brokerage firm dreams, the question on the minds of many wirehouse brokers is, “What options are left if I get fed up and want to leave?”
Raymond James Financial Inc. chief executive Tom James waved his hands and put out a public statement declaring that his company is committed to remaining independent. Merging the St. Petersburg, Fla.-based company’s 4,650 reps with another firm will not generate further scale, he said.
Of course, A.G. Edwards chief executive Bob Bagby used to say the same thing — until the deal with Wachovia was announced. Then he said that his firm needed more scale and additional products.
In the retail-securities business, scale clearly helps. Generally, the more reps a firm employs, the higher its profit margins.
Here’s how some of the retail units break down:
Scale is critical for discount firms, as well. Omaha, Neb.-based TD Ameritrade Holding Corp. is under pressure from some large shareholders to merge with San Francisco-based Charles Schwab & Co. Inc. or E*Trade Financial Corp. of New York. The pressure continues, despite a pretax profit margin of 44% — better than that of any large, full-service firm. But discounters are struggling to increase revenue.
Meanwhile, independent-contractor firms are under pressure to get big enough to extract revenue-sharing payments from product
vendors. Those payments are the difference between a profit and a loss at many of those firms, so it’s inevitable that we’ll see more mergers.
They are nothing new, and diversity in the brokerage industry still exists with a variety of local, boutique and regional firms mixing it up with their larger brethren.
But losing A.G. Edwards will hurt. It was unique: It had a family culture but was national in scope. It was a fallback option for wirehouse reps disgusted with how their firms were run.
But as brokers should know, shareholders always come first.
Dan Jamieson is a senior editor of InvestmentNews.