Bank Run
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But not the bad kind. Now that the wirehouse model is kaput, working for a bank has new appeal. The bank brokerage space has come a long way from its free toaster days.
When I told one of my advisor friends I was writing about bank brokerages, he responded, somewhat confusedly, “Why the hell are you doing that?” To most advisors, “bank brokers”—the registered reps commonly referred to as “bank investment consultants” working inside bank branches—well, they are on the absolute bottom rung. On average, they don’t have nearly as much in assets, production or sophistication as, say, their wirehouse or RIA colleagues. To them, a bank rep is a flunky who needs to be spoonfed banking customers—and modest ones at that. Toasters are no longer given out for opening an account (see the Fed’s Regulation Q, better known as “the Toaster Rule”), but the stereotype lingers. (Consider that Goldman Sachs’s CEO Lloyd Blankfein, as a gag, gave former Goldman CEO Jon Corzine, now governor of New Jersey, a toaster with a Goldman emblem on it after Goldman had filed to become a bank holding company.)
It might be time to reconsider that stereotype. “Ten years ago bank brokers were perceived as failed wirehouse reps, but this has changed,” says Chip Roame, managing partner of consulting firm Tiburon Strategic Advisors.
After all, as a result of the credit crunch and ensuing transformation of wirehouses into banks, you’re all bank brokers now. Okay, I’m exaggerating, but those of you who aren’t bank brokers probably tensed up there for a second. You were annoyed at that barb—admit it. While bank reps still trail FAs at other institutions, the gap is narrowing, if ever so slightly, and, with Merrill—and in some form or another, Morgan Stanley and Goldman—being folded into a Citigroup-like universal banking model, a lot of big brains are going to be focusing on how to make the one-stop financial shop work.
In truth, combining broker/dealers with banks is a trend that began in the early 1990s, culminating with the big bang merger that created the Citi/Travelers Group/Smith Barney colossus in 1998. Congress repealed Glass-Steagall, the Depression-era law separating insurance, securities and depository institutions, in 1999. That bit of deregulation allowed Wachovia to launch into a b/d acquisition spree (Prudential, Metropolitan West Securities, A.G. Edwards)—only to be snapped up by West Coast lender Wells Fargo in October. And, of course, the money center banks, such as Bank of America and JPMorgan Chase, have been busy. These firms will be working to blend their traditional private bankers with their financial advisory ranks to create a more seamless experience for banking clients—thereby capturing more client assets.
Indeed, the trend is reaching its logical conclusion—to the point where there aren’t that many stand-alone securities firms anymore. Even the old regional stand-alone b/ds have been mostly acquired over the years (Dain Bosworth, JC Bradford, Wheat First Securities, IJL, Everen Securities, to name a few). Raymond James, Robert W. Baird and Edward Jones are the obvious exceptions, of course.
The attraction of being attached to a depository institution is obvious: Client deposits create a large pool of assets that can theoretically be tapped if capital is tight. Of course, the downside is that commercial banks aren’t as profitable as investment banks, since they can’t legally leverage themselves as much as a Goldman or a Morgan could. (In some ways, Goldman, Merrill and the other investment banks were much like hedge funds, not just brokering trades but risking their own capital—and with leverage, as we have come to fully appreciate. Merrill, for example, had a 30-to-one ratio of debt to assets. Tighter leverage restrictions might be a good thing.)
Depending on how well Bank of America digests brokerage giant Merrill Lynch, the marriage—however hasty—could provide a golden example of how to successfully build a progressive financial wealth management institution. In other words, an increasingly lucrative yet challenging strategy for traditional bank branch networks (see chart above). Not every bank is doing it right, but some seem to be heading in the right direction, and their reps are reaping the rewards.
Stellar—By Comparison
Meet, Patrick Varney, a bank rep and employee of the Bank of Colorado. What’s interesting about Bank of Colorado is its partnership with Raymond James Financial, which allows its 500-plus financial advisors to hang their Series 7s with the b/d and do commission-based business. (Raymond James has a special division that caters to bank brokers called the Financial Institutional Division.) Varney is a walking contradiction to the bank broker stigma. He’s mostly fee-based (over 60 percent), uses actively managed mutual funds and SMAs, enjoys a 40 percent payout (more like a wirehouse than a bank) and employs two part-time sales assistants who help him stay in frequent contact with clients (semi-annual reviews, newsletters and market update letters).
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