Experts Predict the Death of the Broker (Yeah, that old chestnut)

“Bill Singer foresees stock brokers not existing after this generation and instead the market will have commission-paid telephone operators who dole out information.”

Forbes, August 2009

Another era, another article discussing the Death of the Broker.  My friend/buddy/pal Bill Singer, a maven on all subjects pertaining to the broker/dealer and regulatory world, is quoted in the misguided piece from Forbes I’m about to demolish, so I’ll be somewhat gentle in my criticism of this new iteration of the same old song.

When Morgan Stanley was bleeding red ink, probably in danger of failure and basically regarded as the biggest punching bag on the New York Stock Exchange this past fall, what division did CEO John Mack choose to showcase and brag about in an interview with Maria Bartiromo?  If you guessed prop traders, you’d be wrong.  Investment bankers?  Nope.  Fixed income?  Market making?  Merchant banking?  Nah, John Mack was most proud of Morgan Stanley’s crown jewel, the one division that didn’t melt down during the crisis – The Financial Advisors.

And in case you didn’t believe Mack when he mentioned how proud he was of his FA and asset management business, he went out and doubled down, acquiring a 51% controlling stake in Citigroup’s Smith Barney.  This brought the total number of brokers and advisors ostensibly under Morgan Stanley’s control to about 18,500.

What does Mack know that everyone else, including those quoted in this Forbes article don’t?  He knows that since the beginning of recorded history, whenever people have had money, there’s been a need for advice on what they should do with that money…oh yeah, and that most wealthy people will gladly pay for that advice provided they feel comfortable and like who they are dealing with.

That simple, guys.

The Financial Industry Regulatory Authority, the industry watchdog for registered securities representatives, oversees 4,805 brokerage firms with 646,878 registered securities representatives. While this may sound like a lot, registered reps have in fact seen their job numbers dwindle. In 2007 the industry employed 672,688 reps, meaning 25,810 reps have lost their jobs, a decrease of 4%.

As far as the number of brokers shrinking by 4% from 2007 to 2008?  First of all, is that even statistically relevant?  Compare a 4% drop to the fact that unemployment grew across the country from around 4% to almost 10% in the same timeframe and you could make the argument that broker employment has actually held up better than that of most professions.  What percentage of positions would you guess have been lost in, say, advertising or broadcasting or real estate?  More like 12% than the 4% number being cited here for brokers.

In fact, it’s almost shocking that there hasn’t been more blood spilled in an industry where Wells Fargo and Wachovia have combined, as have Bank of America and Merrill Lynch, as have JPMorgan and Bear Stearns in addition to the Morgan Stanley Smith Barney combo.  Had any other industry you could think of had this much massive consolidation amongst it’s top 8 firms, the layoffs would be multiples of the 25,000 or so registered reps we’re talking about.  This article had the numbers, but it drew the exact opposite conclusion that it should have.

Oh yeah, and every time a broker or advisor leaves one of the big firms, an angel gets his wings…er, I meant, that doesnt mean it’s a broker leaving the industry entirely.  These people are not all leaving the business.  In many cases, they are letting their Series 7 licenses lapse and going into the independent advisory/ manage-for-a-fee business.  These are still brokers, they just have a different compensation set-up.  Dually-registered Brokers/Advisors are probably the future of the business anyway, at least that’s where I’m placing my strategic bets.

Why are brokers and advisors so tenacious then, and why is this Forbes article so completely upside down?  That’s an easy one:  Brokers have been the most starved and neglected professional group within the financial services industry for a long time in terms of marketing, support, prestige and c-level representation.  We’re the workhorses of The Street in many cases; never on the receiving end of the glitz and glamor but always plugging away.  We’re used to being more self-reliant and as a result, we’re tougher than the rest of the verticals at your typical bulge bracket firm.  An investment banker would wet his pants if ever faced with the prospect of what the typical broker starts off each day with: Rough phone calls, intangible products, over-zealous regulation, declining industry margins, ugly media perceptions, and of course, very little, if any, guaranteed compensation.

Yet despite the Sisyphean nature of these inherent headwinds, each morning, roughly 600,000 of us get up, put on our pants, and get to our desks.  Do you think even the most successful of us felt like being in the office the morning after Lehman was vaporized, with the S&P futures down 6% after a 700 point Dow Jones sell-off the day before?  There were days this past winter that I had to slap myself in the face just to get out of bed.

But we do it because people count on us and it’s what we do.

Let me also tackle the article’s claim that most investors will just do it themselves.  We were told that online brokerages would be the death of the full-service broker in 1999.  Most of those online brokerages have since disappeared or have been swallowed up and the ones remaining now charge zero dollars or so for trade execution.  Nice business model.

Oh, and E*Trade‘s (ETFC) lookin’ good lately!  E*Trade’s stock looks like Mickey Rourke‘s face, currently hovering around a buck, with flies buzzing around it’s sunken eye sockets.  Running trades for free was apparently a profitless business, so they got involved with sub prime lending at the top of the bubble.  The baby commercials are cute, but the company itself has become a joke.  And when I look at the client accounts that transfer in to me, I’d say about half of them are discount online accounts that were either blown up with amateurish trading or neglected to the point where a pro needed to be brought in.  Not all investors have the time or knowledge to trade or invest on their own and sometimes cheap is expensive, although I have no doubt that my colleague Bill Singer is certainly holding his own!

I’ll also comment on the notion that ETF’s are preferable to individual stocks.  Give me a flat or range-bound market, and we’ll see if anyone still wants sector baskets instead of top performers within industries.

If the Fiduciary Standard is applied to brokers as well as financial advisors as has been discussed, there will for sure be lots of change, but to announce the death knell of the advice business is as ludicrous as saying there will no longer be a demand for teachers or doctors.  Are educational or medical websites robust and helpful enough for us to do away with those professions?  Will we all become autodidacts? How about self-diagnosing and self-medicating in times of illness?  Nonsense.

And I don’t quite think the mention of Martha Stewart or Bernie Madoff has any logical connection with this discussion.  Martha’s broker was more of a socialite than a professional and he was just an order taker, not a real conspirator in her insider trading case.  Madoff committed his legendary fraud in his capacity as an unregulated Investment Advisor.  The brokerage itself was squeaky clean and not a factor.  There were no advisors making any recommendations, Bernie just pretended to place trades.  The mentions of Martha and Madoff in an article about brokers is more like an exercise in free association; not all Wall Street scandals have anything to do with brokers or advisors.

Of course there are bad eggs, just as there are in every profession, but the advisor who truly cares for his clients and is there in both up and down markets is the most noble creature working on Wall Street, and in many cases, the steadiest earner.  John Mack knows that and Forbes Magazine ought to as well.

Sources:

The Case for Brokers (Forbes)

and of course, check out Bill Singer’s excellent blog:  BrokeAndBroker.com

Editor’s Note:  I have since clarified my mention of Bill Singer in this piece and what I beleieve to be a misrepresentation of his views.  My clarification appears here:

Setting the Record Straight re: Bill Singer