THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Sunday, November 20, 1994 TAG: 9411190347
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
TYPE: Interview
LENGTH: Long : 145 lines
When members of the Securities Industry Association gather in Boca Raton, Fla., on Nov. 30 for their annual meeting, John L. Steffens will take over as chairman of the trade group for securities brokerage firms and investment banking companies.
Steffens becomes head of the 750-firm organization at a time when the industry's profitability has been hurt by rising interest rates and competition from other financial-service providers. The Cleveland native joined Merrill Lynch & Co.'s junior-executive training program in 1963 and became a broker after earning an undergraduate degree in economics at Dartmouth College.
Two years ago, Steffens was named executive vice president responsible for the Merrill Lynch unit providing investment products to individuals, partnerships and small corporations.
During a recent visit to the firm's Williamsburg office, Steffens talked about developments in the securities industry and at Merrill Lynch with staff writer Tom Shean.
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Q: What issues will be on your agenda when you take over as chairman of the Securities Industry Association?
A: One is, how do we improve the public image of the industry? Also, we will be lobbying very hard for increasing the incentives to save.
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Q: Under Chairman Arthur Levitt, the Securities and Exchange Commission has been much tougher at policing the sales practices of securities firms. What is your reaction to this increased scrutiny of your business?
A: I think it's terrific anytime we can do something to provide investors with greater confidence. Hiding things beneath the rug is not a good business approach. Our clients need to understand a product and its costs and risks before buying it.
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Q: The earnings of several securities firms have been battered by the slump in underwriting of new stock and bond issues. Some firms are laying off employees. Is Merrill Lynch reducing its work force?
A: We've seen some attrition in trading and investment banking, but we have a number of businesses that are growing.
There have been job reductions in our fixed-income trading in New York but expansions in our fixed-income trading in London and Hong Kong. At the end of this year, we will have more employees than we had at the end of last year.
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Q: Commercial banks have stepped up their efforts to sell investment products and money-management services. How is Merrill Lynch responding to this competition?
A: NationsBank, Banc One, Citicorp, Bank of America are clearly looking at financial services more broadly, and I think that trend is going to continue.
We recognized the trend 15 years ago, and we've built basically from scratch an insurance company that ranks in the top 25 in the United States. We've also built a very successful mortgage-origination business.
We have given greater attention to another major business - financial planning - because people are asking, ``How am I going to send kids to college? How am I going to prepare for retirement?''
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Q: One source of irritation for brokerage firms is the continued erosion of the Glass-Steagall Act, which separated commercial banks from investment banks and brokerage firms. Do you have any concerns about proposals to expand the securities powers of commercial banks?
A: We're happy to compete as long as the rules are the same. But I don't think the piecemeal evolution that has happened over the past seven or eight years makes sense from a regulatory standpoint. If you're going to change an industry as significant as the banking industry or the securities industry, it has to be done more thoughtfully.
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Q: Throughout the 1980s, several giant corporations tried to build integrated financial-service companies through acquisitions. But in recent years, American Express Co. has unloaded its Shearson and Lehman brokerage and investment banking operations.
More recently, General Electric Co. disclosed heavy losses at its Kidder, Peabody & Co. brokerage firm and announced an agreement to sell the firm. Why did these attempts to build broad financial-service companies turn out so badly?
A: While some companies have talked about building integrated companies, there are instances where they were not very serious about it. They bought companies and left them as stand-alone operations.
The acquiring companies didn't integrate all of the products and services into the organization that has to deliver them, so there's been turf-fighting and other reasons why their attempts have not worked.
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Q: Is the goal of building an integrated financial-services company attainable?
A: We've attained it. Now all we have to do is make it better. We've worked diligently to have a long-term vision and a long-term strategy so we knew where we were going. Since 1983, the assets that clients have entrusted to us have grown from $100 billion to $550 billion. Our expectation is that by the year 2000 we will have a trillion dollars under management.
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Q: Home computers have become much more powerful, and the software for personal investing is increasingly sophisticated. Will these developments eliminate the need for brokers among individuals who are comfortable using desktop computers?
A: That's a distinct possibility. But the world today is pretty complex, and it's very difficult for one person to understand what's going on in Indonesia or the implications of recent tax-law changes or the implications of changes in estate taxes.
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Q: Are there any areas of personal investing that you think offer unusually good returns?
A: I think the prospects for international investing are spectacular. In 1970, the U.S. market was approximately 70 percent of the market capitalization worldwide. Today it's 37 percent, so we have seen a fairly major change over the last 20 years.
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Q: What about the risks of investing in less developed parts of the world?
A: There are three critical factors for investing internationally. First, you have to be diversified. Picking one particular country is a mistake. Secondly, you have to take a longer view. Also, you have to accept the higher volatility of international markets. There are going to be some ups and downs.
Over the next 10 years, the U.S. market probably will grow 212 to 3 percent. The Latin American market is expected to grow 4 to 6 percent, and the Asian market 7 to 10 percent.
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Q: How is the Republican sweep of congressional elections earlier this month likely to affect the securities industry?
A: There are a lot of things in the Republicans' Contract with America legislative program that make a great deal of sense. One of those is the expanded tax advantages of individual retirement accounts. I would hope that in the first hundred days next year the individual retirement account gets higher focus. In the past, it has had a high levels of bipartisan support.
I would also like to see indexing of capital gains. Indexing is an appropriate incentive for long-term investing, whether for small-business people or for the typical purchaser of securities.
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Q: Past efforts to index the taxes that investors pay on their capital gains have been shot down. Are the chances of indexing becoming law better with a Republican-controlled Congress?
A: I think so. Republicans are probably going to have to achieve a balance. If they go too far, we are going to be back in a logjam, and something is likely to be vetoed. But we have a savings crisis in this country. We have got to provide incentives to invest capital. by CNB