What's Going to Happen to the Rock?

It's been a good year for Michael Rice, president of retail brokerage at Prudential Securities. According to Rice, Prudential's beleaguered brokerage unit has seen improvements in productivity, advisor attrition and market share. In early December, Rice was promoted from second in command of Pru's Private Client Group to first. And as a Christmas bonus, Rice got to ring the bell to close a day's trading

It's been a good year for Michael Rice, president of retail brokerage at Prudential Securities. According to Rice, Prudential's beleaguered brokerage unit has seen improvements in productivity, advisor attrition and market share. In early December, Rice was promoted from second in command of Pru's Private Client Group to first. And as a Christmas bonus, Rice got to ring the bell to close a day's trading on the NYSE along with other Prudential executives.

But will Rice be the last Pru employee to run the brokerage unit? Does he, in fact, have a mandate to find a buyer or partner for the business? That's the scuttlebutt — that it could be his charge to gussy up the brokerage unit only to dispose of it, perhaps via a joint venture or even a sale to Wachovia Securities. In an interview on Dec. 13, Rice was mum on the subject. But with the industry struggling and more consolidation expected, a deal wouldn't surprise anyone. In fact, industry observers say the main reason a deal with Wachovia didn't happen last fall was that the firms' leaders — Prudential Financial's Art Ryan and Wachovia's Ken Thompson — were unable to hash out which firm would secure majority control of the unit.

Ryan has said in the past that Prudential Financial would look to sell the brokerage arm if financial results did not improve dramatically. Despite the unit's measurable improvement in performance, the Wachovia rumors have resurfaced. “If it's purely an acquisition of retail distribution, I think it's a 90 percent probability that it happens,” says Stephen Winks, a Richmond, Va.-based consultant. “To the extent that Prudential's management has to be plugged in, I think it's a zero percent probability.” In other words, another financial services firm would probably want the brokers — and that's about it.

Rice, a Georgetown and Wharton graduate, is known as a bright, driven performer. Now he's running the show, at the age of 36. “This guy is sharp. This [Wachovia deal] is his brainchild,” says one industry observer. “He's the one who thought this up. And he even had the financing lined up.”

The Prudential unit seems like a serious candidate for a sale. It has been losing money and been a perennial under-performer. In the last couple of years, however, the firm has cut expenses, consolidated offices and reduced headcount through attrition and by pink-slipping brokers who weren't getting the job done. Currently, the firm has around 4,500 brokers, down from roughly 6,500 two years ago, and $251 billion in customer assets.

For the third quarter, the financial advisor division of Prudential Financial lost $16 million — an improvement from the year-ago loss of $48 million. Edward Spehar, an analyst at Merrill Lynch, however, wrote in a Dec. 9 research note, “We remain skeptical that the Financial Advisory segment [retail brokerage and securities sales and trading] will be profitable during the second half of next year. We remain concerned that Prudential Securities will disappoint even with a better market environment.”

Rice says the firm is currently a turnaround story, and that, “As 2003 goes on, the story around us will be very different from years past.” In the second quarter of 2002, Pru's brokers increased productivity and market share, and, Rice added, they held those gains in the third quarter, although he didn't provide specific figures. Rice added that annual core financial advisor attrition has dropped to 13 percent from more than 21 percent two years ago. (Core is defined as $300,000 in annual production or being in the first, second or third quintile of producers.)

Rice acknowledges that the firm had a retention issue a couple of years ago and says his aim is to get the attrition figures into single digits. But, he says, “I like the size of our firm now.”

While it might be improving, Prudential Securities still needs some help — and Wachovia still needs “a real securities firm,” one industry consultant says. Wachovia has cobbled together 8,000 reps and $270.4 billion in brokerage customer assets through several acquisitions. A Wachovia spokesman wouldn't comment on the Pru rumor but did say, “It's no secret we have growth aspirations, so rumors like this are bound to come up from time to time.”

Some observers believe that Prudential Securities, having significantly cut back its expenses, might not have to be sold. Rice, for his part, says the unit is important to its parent: “We are the primary distributor for Prudential's annuities and mutual funds.”

Eric Berg of Lehman Brothers is quite bullish about Prudential overall and the brokerage unit in particular. “Pru Securities has been relentless about cutting costs,” Berg wrote in a recent report. “That retail brokerage business currently is unprofitable but the trend is clearly in the right direction.” Berg expects the retail brokerage unit to be profitable in 2003.

The possibility of a sale, however, looms large. “If the market still looks dismal, [a sale] becomes more of a possibility,” says Rick Peterson, a Houston-based recruiter.

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