Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, July 2, 1995 TAG: 9506300022
SECTION: BUSINESS PAGE: G-1 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
Hubbard, manager of the Roanoke office of Merrill Lynch, said deregulation of both industries has led to lower fares and fees to customers. But the turbulence has brought about mergers and disappearance of some major firms such as Hutton, Drexel Burnham and Shearson Lehman just as the airlines have dropped in numbers.
Full-service brokers have traditionally competed with each other, Hubbard said, but pending deregulation of the banking industry is what will make for major changes for securities brokers and investment bankers.
That deregulation will come through the expected repeal of the Glass-Steagall Act and it will change the landscape of the entire financial services industry. The act, passed in 1933 during the worst of the Great Depression, prohibits banks from nontraditional financial activities although regulators have allowed breaches in that wall in recent years. The act was intended to create a legal wall between the security of federally insured bank deposits and the more risky business of Wall Street.
In the next five to 10 years, he predicted, large banks such as NationsBank and Citibank will turn into financial planning institutions and only the largest and strongest brokerage houses will survive.
When Glass-Steagall is repealed in two years, Hubbard forecast, "regional firms will evaporate. They will get a deal they can't refuse. Look at the airlines."
He's not alone in that opinion. "If Glass-Steagall goes out," said Richard Wertz, assistant manager of A.G. Edwards & Sons, "banks will buy brokers. I can't see brokers merging."
Suzn Head, manager of the Roanoke office of Dean Witter Reynolds, believes that the industry will shrink through mergers. She's "doubtful" that banks will acquire brokerage houses, basing her opinion on her own firm having sold its investment in NationsSecurities with NationsBank after a brief one-year investment trial.
|n n| As the financial center of Southwest Virginia, Roanoke is home to 11 brokerage houses of various sizes, all competing with each other for our investment dollars. Most of them opened in the 1970s, generally buying out smaller brokerage houses that were here for many years, and prospered in a generally rising market.
Others, like Richmond's Branch, Cabell & Co. and Hilliard-Lyons of Louisville, have come to Roanoke in more recent years and failed, just as local industry observers have in the last few months watched the withering of Ferguson, Andrews & Associates. The firm, which touted itself as Roanoke's hometown brker over the past several months has closed or sold its six offices, last week turning over its Roanoke headquarters to Davenport & Co. of Richmond. Several local brokers, who would not have spoken if their names were used, said the Roanoke office of Ferguson-Andrews was not performing well.
Undaunted, James P. Kern, a founder of Ferguson, Andrews who left that company in the spring, is working to launch in Roanoke an office of Charlotte, N.C.-based Interstate/Johnson Lane. Kern said he wants to hold off discussing his plans until "a little bit closer to the actual date." But other brokers in Roanoke said he has been calling around trying to recruit people for the new firm.
Indeed, the secret of success in starting a brokerage house seems to be luring experienced brokers - who will bring along their clients - away from a competitor's office.
PaineWebber, for instance, bought out Richmond's Abbott, Proctor & Paine while A.G. Edwards purchased Frances I. DuPont. Brokers from two other firms joined forces to open the Roanoke office of Merrill Lynch, while three Merrill Lynch executives later defected to start the local office of Dean Witter Reynolds. The list of such launches is as long as the number of brokerage houses doing business in the valley.
The founders of Ferguson, Andrews, on the other hand, came from the former Dominion Bank rather than from a brokerage house.
"It was tough sledding in Roanoke," said Jeffrey Roberts, who headed the short-lived office of Branch, Cabell & Co. It was hard, he said, to come into the Roanoke market as an "outsider" without established contacts, then try to develop business.
Roberts, who now works as a money manager for Trendline Research and Management in Richmond, said Branch, Cabell "was never able to get a foothold in that market." Dean Witter, on the other hand, was started about the same time by brokers with an established client base.
Peter Milward, manager of the Roanoke office of J.C. Bradford & Co., decries the constant head-hunting of established brokers with their client base: "That's the aspect of our industry I despise."
He said head-hunting for brokers with an established list of clients is relatively rare in Roanoke, and some other brokers here agreed with him. Yet, Head of Dean Witter Reynolds said that "we've recruited more [brokers] than we've trained." That practice - along with a suburban location on Electric Road near her clients and with convenient parking, Head said - have made Dean Witter the largest Roanoke firm in just nine years.
But Head said the Securities and Exchange Commission wants to put a stop to the practice of paying a bonus to brokers willing to defect from another firm. She said the SEC believes the bonus may put clients that the broker carries with him or her to the new firm at a disadvantage because they go through "an upsetting transfer process."
Clients are free to remain with the former brokerage house, of course, but most of them follow their broker by merely signing a single form.
|n n| Competition comes from sources in addition to other local brokers, though.
J. Tyler Pugh, senior vice president and manager of the Roanoke branch of Wheat First Butcher Singer, said banks already have moved in on a variety of financial products offered by brokers. These include, in some cases, discount brokerage, mutual funds and annuities.
"Banks look at what we do with some envy," Pugh said. Banks have a built-in base of potential customers, but Pugh said some of these customers may be put off: "It's hard for one institution to be all things to all people ... People would rather diversify."
Then there are the discount brokerages, which came on the scene after commissions were deregulated in the late 1970s. They have taken some clients who don't need advice about what to buy and sell, Pugh conceded, but many customers need help choosing among 4,000 securities and 7,000 mutual funds.
Customers of brokerage houses usually also receive phone calls from out-of-town brokers, usually from New York, trying through "cold calls" to build a long-distance client list.
Pugh said some customers resent those semi-anonymous calls, but Wertz said many people are impressed at receiving a call from a broker in New York.
In any case, Milward said, cold calls are "the traditional way to start" for a new broker; even those in Roanoke usually call local people. Milward said most clients prefer to deal with a broker they can come in to see, even if most buy-and-sell orders are executed by telephone.
Indeed, Milward said, people like to drop in on their brokers despite the image of a telephone-based business. "We're one of the few professions that encourage drop-ins. If a client drops in, we're delighted to see them."
Milward said insurance agents, who sell mutual funds and annuities, also compete for local business.
High on his list of competitors are the media.
A whole phalanx of magazines - Money, Forbes, Kiplinger's, Fortune, Business Week and even Time and Newsweek - tell their readers how they should handle their money. All of the major mutual fund companies, especially those that sell directly to customers, have large advertisements in those magazines.
Milward said these magazines rank mutual funds and recommend various no-load funds, those sold directly by the company without a fee to a broker.
"Nowhere is there a free lunch," he said, because no-load funds charge for their services. Yet the magazines, Milward said, are indirectly endorsing funds that bypass brokers.
The large regional firms, such as J.C. Bradford, A.G. Edwards, Wheat First and Scott & Stringfellow, plus the nationals like PaineWebber, Merrill Lynch and Dean Witter, all have large research departments to feed recommendations to their brokers.
Several brokers cited these research efforts as the reason for using a large brokerage house, but Wertz is not so sure. He said it's possible to buy research from research specialists, thus allowing single-broker firms to survive.
Some of the firms have special niches that give them a corner on certain markets. For example, Pugh said Wheat First is known for its research work on Virginia companies, which is done at its Richmond headquarters. William Nash, head of the Roanoke office of Scott & Stringfellow, said his company is known for its expertise in (and good supply of) Virginia municipal bonds, which are free from both federal and state taxes.
Stephen Williams, division vice president for PaineWebber, said brokerage houses are "more and more a fee-based business," which "tends to level out the revenue stream" compared to more sporadic commissions in good markets and bad. And they sell an ever-increasing variety of products such as unit investment trusts and treasuries so people can invest regardless of the condition of the stock market.
Williams said a popular feature is the so-called "wrap account" or money management account, which is based on fees for asset management services rather than on a commission for sales.
Hubbard of Merrill Lynch said a fee might be 2 percent of the portfolio under management. But if the account has a market value of $100,000 and the person trades 55 times a year, he said, the average cost would be $36. That's lower than most commissions which are based on the dollar amount bought or sold.
In addition, his company boasts Merrill Lynch Bank, Merrill Lynch Trust Co. and Merrill Lynch Mortgage company. Customers can get their auto loans and home mortgages through the broker.
"That's what we have to do," Hubbard said.
Most brokers see some golden years ahead, with a rising base of customers, despite the stringent competition.
The so-called baby-boom generation is approaching the age of 50, Wertz of A.G. Edwards pointed out. Their children are finally getting through college and the boomers are worrying about their own retirement. And they are at the peak of their earning years with money to invest.
Pugh of Wheat First said the baby boomers, who are looking for growth in assets, should swell the fortunes of brokerage houses for the next 10 to 15 years.
by CNB