Wednesday, January 14, 2009

Is a Super-Brokerage What Consumers Want?

Citigroup, who is becoming a symbol of the Wall Street buildup of the past 20 years, is now fittingly breaking apart. The joint venture of their brokerage unit Smith Barney with Morgan Stanley will create the largest firm of financial advisers. But is this "super-brokerage" really what consumers want right now? While the strength of conglomerates has often been praised for their synergies and the amount of services they can provide, the model hasn't been that successful. This joint venture probably isn't being done for the sake of creating a big brokerage, but necessity. Citigroup needs capital, and they are looking to re-shuffle the organization.

The venture, which New York-based Morgan Stanley will control with a 51 percent stake, would employ 20,390 brokers in more than 1,000 branches. The new entity would surpass the 16,000-strong “thundering herd” of brokers at Merrill Lynch & Co., which was acquired by Bank of America Corp. on Jan. 2.

“Brokerage is such a personal, intimate business that it’s defied by the ‘thundering herd’ concept,” said Arthur Levitt, a senior adviser to the Carlyle Group and former chairman of the U.S. Securities and Exchange Commission who serves on the board of Bloomberg LP. “What we’re going to see in the brokerage business is breakaways from these managed institutions and the beginnings once more of boutique brokerage firms.”

But in a time when people are not happy with their portfolio performance, this might be an opportunity for people to leave their current broker.

Morgan Stanley Chief Executive Officer John Mack may face hurdles in retaining brokers and their clients after the worst financial crisis since the Great Depression undermined faith in the biggest brokerages. A poll of millionaires in November by Spectrem Group found that more of them had a negative opinion of banks and brokers than of independent financial planners.

Spectrem Group, a Chicago-based consultant and research company for financial companies, conducted focus groups of people worth more than $1 million and did an online poll of more than 750 millionaires in November. The research found that the millionaires had lost 30 percent to 40 percent of their net worth since September and that they had lost faith in their advisers, especially those at bigger firms.

“Full-service brokerage firms were the firms whose investors were the most angry and had the lowest performance levels, they were the most likely to say they’re unhappy with their adviser,” said Catherine McBreen, a managing director at Spectrem. “They feel that the full-service brokerage firms, as opposed to the independent financial planning firms, are more in it for the commissions, for the stock selection, for pushing product.”

I've felt for some time that this trend will continue. I think companies like Charles Schwab are going to gain immensely during this trend. They are a company with a great range of products, and much lower fees than their full-service counterparts. Schwab's stock typically carries a premium, but I'd look to pick up some shares if they dip a bit lower.

Bloomberg Article: Morgan Stanley-Citi Venture May See Challenge From "Breakaways"

Disclosure: No Positions in the stocks mentioned

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