Bean-Counting In Beantown
For a minute or two at a recent SIA conference in Boston, Morgan
Stanley’s John Schaefer sounded optimistic, saying he envisioned
a time when "advice can once again be a growth business."
He then proceeded to list a fistful of reasons why no one in the
brokerage industry would have any cause for celebration any time soon.
Schaefer, head of Morgan Stanley’s private client group and
keynote speaker at the SIA’s retail management conference in
Boston, said that while the need for advisors was increasing in the
marketplace, the regulatory environment, retail climate, need to lower
costs and ongoing bad news in the industry would continue to hurt
business for some time.
At one point, Schaefer pointed out that the recovery in retail business
usually takes "about two to three times the length of time it takes the
market to get back to the top." By his estimation, then, assuming the
S&P 500 reaches highs not seen since 2000, the retail market would
not recover fully until 2011. Not a pretty picture. And so a massive
build-up in spending isn’t something to expect anytime soon, he
said.
"We were always investing…Now, we cannot spend money hoping the
revenues will be there, and we have to avoid the temptation to build
costs before the revenues are obvious."
Attendees at the SIA’s annual gathering of regional executives
felt similarly. Michael Kostoff, executive director of the VIP Forum in
Washington, a consulting group to the financial services business, said
that broker/dealers need to be aware that spreads are likely to
continue to decline as costs of doing business continue to rise.
Total annual fees from advisory assets in 1990 were about 1.03 percent;
in 2000, they were 0.98 percent. But his model estimates a decline to
about 76 basis points, or 0.76 percent, by 2010. Meanwhile, the median
compensation for a "relationship manager" rose to $92,000 in 2000-2001
from $65,500 in 1994-1995, a 40 percent increase.
"We continue to expect pricing to collapse," Kostoff told the audience.
"As we continue to shift to fee-based products, they’re becoming
more commoditized. Get ready for life at 75 basis points."
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