Concerns Abound for Industry Growth

Is a 61 percent decrease in profits from one year to the next a reversion to the mean or an ominous sign of cloudy skies ahead? This is a question the soggy middle of 2004 has raised for some reps. Profits for brokerage firms dropped 61.2 percent from the second quarter of 2003, from $7.7 billion to $2.98 billion. That's also a staggering 60.7 percent below the first quarter of 2004, which notched

Is a 61 percent decrease in profits from one year to the next a “reversion to the mean” or an ominous sign of cloudy skies ahead? This is a question the soggy middle of 2004 has raised for some reps.

Profits for brokerage firms dropped 61.2 percent from the second quarter of 2003, from $7.7 billion to $2.98 billion. That's also a staggering 60.7 percent below the first quarter of 2004, which notched $7.6 billion, according to the SIA.

Part of this is attributable to the rampant cost cutting of 2003 — revenues are only down 5 percent, from $56.8 billion in second-quarter 2003 to $53.93 billion — but some believe this could be a sign that things aren't as rosy as everyone had believed.

“I think everyone slimmed down as much as they could a year ago,” says one analyst who requested not to be named. “It's only natural that costs would go up a bit. Even the slightest downturn in revenue can lead to dramatic results.”

SIA chief economist Frank Fernandez attributes the lowering of profits to “mean reversion” after what he terms “a period of extraordinary growth.”

The numbers, however, paint a scarier picture. Perhaps most ominous was a distinct drop in commission and fee income; it dropped 12.7 percent from the first quarter of 2004, to $11.48 billion. Trading gains were down to $4.66 billion.

Still, if there's a sense of alarm, it hasn't bubbled to the surface yet. “I would have thought everything was fine, because that's what it feels like,” says Chip Roame, head of Tiburon Strategic Advisors, a Tiburon, Calif.-based consultancy.

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