Wirehouse squeeze

I have a few guys in my office who are going to fall into the penalty box.  If the one guy had spent as much time working before this happened as he has now spent trying to figure out a way to work around the penalty box this would never have happened.

The article begs the question:

Hey, with the market down 40% $300,000 is the new $500,000.

[quote=Sell High]Hey, with the market down 40% $300,000 is the new $500,000.

[quote=burtonfinancial1] [quote=Sell High]Hey, with the market down 40% $300,000 is the new $500,000.

[quote=Broker Fee]The article begs the question:

Regionals are going to continue to flourish in the next couple of years. If the current trends continue, banks won’t be able to AFFORD to buy a regional. What’s interesting is that the talent building Stifel, expanding Ray Jay and others is virtually all coming from the big 5. 

[quote=burtonfinancial1]Regionals are going to continue to flourish in the next couple of years. If the current trends continue, banks won’t be able to AFFORD to buy a regional. What’s interesting is that the talent building Stifel, expanding Ray Jay and others is virtually all coming from the big 5. 
[/quote]
You nailed it Burton!

 I friend of mine at SB has thousands of accounts and he has been with the firm for 25 plus years.  THe problem is he gets a lot of gross from small tranactional accounts that he is now being cut off from.  Just like that… no warning.  This also applies keep in mind to persons who converted small account to C shares.  They wont get paid on those any long either.  Now that I am indy, I would not go back to SB if someone offered me millions free to do so.    

The assets that Schwab and Fidelity are drawing are absolutely staggering in comparision to the big wirehouses.  Schwab alone gathered more assets in 2007 than the big 5 COMBINED.

The <$500k FA at Smith Barney and Morgan Stanley is not going to be retained. I’ve heard from multiple sources that retention will be handled within weeks and the game plan will be set into motion with few delays. The new firm will whittle down to 15k-18k advisors and continue to recruit top advisors. Solid <$500k guys have plenty of options now at the regionals and indys. I stress now because there will be a herd in the coming months and the flow could change the game quickly.

We’re already seeing the squeeze play out at ML. The lower quintile FAs at ML with any desire to stay in the biz are already looking at their options.  Those who are not are simply ignorant in my opinion.  Flame me if you want but it’s the reality.

Watch the Wells/Wachovia drama continue to drag out for weeks still.  In the end, Wells does not want $300k producers either and the retention, IF one even happens will reflect that as well.

I live in a non New York/LA zip code and work for a wire. This floors me. These companies throw away people who generate 300k in revenue for them. They only want $1 million accounts and $1 million producers. A guy who does 300k pays taxes on $100k of income. This puts him in the top 10% of wage earners in the country…that’s not freaking good enough…A guy who does 250k in production pays taxes on $75k…this is a good living in most parts of the country…what is wrong? Where is the outrage? Is too much greed a good thing?

A guy who does 250k in production pays taxes on $75k…this is a good living in most parts of the country…what is wrong? Where is the outrage? Is too much greed a good thing?

I live in a non New York/LA zip code and work for a wire. This floors me. These companies throw away people who generate 300k in revenue for them. They only want $1 million accounts and $1 million producers. A guy who does 300k pays taxes on $100k of income. This puts him in the top 10% of wage earners in the country…that’s not freaking good enough…A guy who does 250k in production pays taxes on $75k…this is a good living in most parts of the country…what is wrong? Where is the outrage? Is too much greed a good thing?

Some bean counter forgot that if you keep squeezing the producers, they will eventually hit the bricks.  Mother Merrill and others brainwashed employees into believing they would fail in life without a name behind them.  Lately, that name on the door forces reps to spend more time defending their company than helping people manage their assets.  The independent firms have more products, more flexibility with individual marketing, and they keep you at the same payout percentages even if the market tumbles 35%.  There is a reason so many reps are leaving wirehouse, yet you almost never hear of anyone returning to the trenches once they go independent.  It works and producers are much happier with their life!!!

All the 1 million dollar producers I know got there buy hard work, good timing and inherited accounts.  Without the 150k, 200k, 300k or so guys that hustle to bring in new accounts there won't be any more inherited accounts to dish out to the top guys. When a broker gets canned, I have actually seen fights break out among top guys to get there hands on their accounts.  In general, without the bottom half there is no 1 million dollar producer top half.<?: prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Wolfgang, interesting take on it.  Makes sense.  I would also suggest that this is one of the other reasons wires are pushing teams.  You get lower producers to bring in new accounts, and ultimately leave (and the assets stay) or keep producing, and then take over the retiring $1mm producers book (and stay at the firm).  The process then repeats itself.

The <$500k FA at Smith Barney and Morgan Stanley is not going to be retained. I’ve heard from multiple sources that retention will be handled within weeks and the game plan will be set into motion with few delays. The new firm will whittle down to 15k-18k advisors and continue to recruit top advisors. Solid <$500k guys have plenty of options now at the regionals and indys. I stress now because there will be a herd in the coming months and the flow could change the game quickly.

It wasn’t that many years ago that industry insiders and magazines like Registered Rep were predicting an end to the independents and everyone would work for super majors.  In a few years they’ll be predicting an end to the super majors.  Sorry but with all the continued bad publicity the super majors have brought upon themselves, what is the allure of working for them?  

I think until the “major turning point”, the majors were (and maybe still are) the most viable option for starting new in this business.  Most indy firms are not large enough to afford (or need) to hire new FA’s.  Now, I think this may start to change as time goes on.  Before you know it, you will have indy firms (not the indy B/D’s themself) that will rival the majors in terms of size.  It just seems like the natural progression.  I think in the not-too-distant future, you will also see former wirehouse execs starting indy firms (i.e. Ben Edwards).  It would be quite simple for them…a group of well-respected wirehouse execs gets buy-in from a few dozen top producers to go indy.  Think about it, you only need a dozen or so top-producing teams to go indy, and you have a powerhouse indy firm, without the need for all the overhead.  Get a back-office exec to run the firm.  Sweet gig.

So, first they overload the company with so much middle management you wonder what half these people do anyway, then they destroy the reputation of the firm and finally you tick off your sales force…no wonder clients are lining up around the block to sign up!!!

I have posted this before, but I will post it again.  This is the answer to why the wirerehouses cannot make money off 300k producers:

Diseconomies of scale are the forces that cause larger firms to produce goods and services at increased per-unit costs. They are less well known than what economists have long understood as "economies of scale", the forces which enable larger firms to produce goods and services at reduced per-unit costs.

Research that focused explicitly on the forces behind corporate diseconomies of scale is Canbäck (2002).

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Some of the forces which cause a diseconomy of scale are listed below:

Ideally, all employees of a firm would have one-on-one communication with each other so they know exactly what the other workers are doing. A firm with a single worker does not require any communication between employees. A firm with two workers requires one communication channel, directly between those two workers. A firm with three workers requires three communication channels (between employees A & B, B & C, and A & C). Here is a chart of one-on-one communication channels required:

The one-on-one channels of communication grow more rapidly than the number of workers, thus increasing the time, and therefore costs, of communication. At some point one-on-one communications between all workers becomes impractical; therefore only certain groups of employees will communicate with one another (salespeople with salespeople, production workers with production workers, etc.). This reduced communication slows, but doesn't stop, the increase in time and money with firm growth, but also costs additional money, due to duplication of effort, owing to this reduced level of communication.

A firm with only one employee can't have any duplication of effort between employees. A firm with two employees could have duplication of efforts, but this is improbable, as the two are likely to know what each other is working on at all times. When firms grow to thousands of workers, it is inevitable that someone, or even a team, will take on a project that is already being handled by another person or team. General Motors, for example, developed two in-house CAD/CAM systems: CADANCE was designed by the GM Design Staff, while Fisher Graphics was created by the former Fisher Body division. These similar systems later needed to be combined into a single Corporate Graphics System, CGS, at great expense. A smaller firm would neither have had the money to allow such expensive parallel developments, or the lack of communication and cooperation which precipitated this event. In addition to CGS, GM also used CADAM, UNIGRAPHICS, CATIA and other off-the-shelf CAD/CAM systems, thus increasing the cost of translating designs from one system to another. This endeavor eventually became so unmanageable that they acquired Electronic Data Systems (EDS) in an effort to control the situation. A smaller firm would have chosen a single off-the shelf CAD/CAM system, with no need to combine or translate between systems.

The more employees a firm has, the larger percentage of the workforce will be "management". A company with a single worker doesn't need any managers (this refers to managers of people, as opposed to managers of other resources). A firm with five employees might employ one as a manager and the other four as workers. If that manager does nothing other than manage the workers under them, then the productivity of the firm has been reduced by 20%. A firm with 21 employees might have 16 workers, 4 supervisors, and 1 manager. If neither the manager nor supervisors do anything but manage the people under them, then we now have reduced productivity by 5/21 or 23.8%. Thus, the larger the firm, the lower the percentage of "line workers". To be sure, companies with higher worker-to-manager ratios and that have "working managers" (who perform other important tasks in addition to managing the people under them) will have their productivity less negatively impacted by growth, but the effect is still there. Managers are necessary to manage a large, complex company, but should be considered a "necessary evil" as they also reduce overall productivity. Also note that higher level managers get higher level pay, often despite poor performance, and thus cost the company more than their numbers would indicate. For example, a company with 16 workers at $10/hr, 4 supervisors at $20/hr and 1 manager at $30/hr is spending $270/hr, $110/hr (41%) of which is on management.

"Office politics" is management behavior which a manager knows is counter to the best interest of the company, but is in her/his personal best interest. For example, a manager might intentionally promote an incompetent worker knowing that that worker will never be able to compete for the manager's job. This type of behavior only makes sense in a company with multiple levels of management. The more levels there are, the more opportunity for this behavior. At a small company, such behavior would likely cause the company to go bankrupt, and thus cost the manager his job, so he would not make such a decision. At a large company, one bad manager would not have much effect on the overall health of the company, so such "office politics" are in the interest of individual managers.

If a single person makes and sells donuts, and decides to try jalapeño flavoring, they would likely know that day whether their decision was good or not, based on the reaction of customers. A person at a huge company that makes donuts may not know for many months if such a decision worked out or not. By that time, they may very well have moved on to another division or company, and thus see no consequences from their decision. This lack of consequences can lead to poor decisions. This causes an upward facing marginal cost curve.

In a reverse example, the single worker donut firm will know immediately if people begin to request healthier offerings, like whole grain bagels, and be able to respond the next day. A large company would need to do research, create an assembly line, determine which distribution chains to use, plan an advertising campaign, etc., before any change could be made. By this time smaller competitors may well have grabbed that market niche.

This will be defined as the "we've always done it that way, so there's no need to ever change" attitude (see appeal to tradition). An old, successful company is far more likely to have this attitude than a new, struggling one. While "change for change's sake" is counter-productive, refusal to consider change, even when indicated, is toxic to any company, as inevitably changes in the industry and market conditions will demand changes in the firm, in order to remain successful. A recent example is Polaroid Corporation's refusal to move into digital imaging until after this lag adversely affected the company, ultimately leading to bankruptcy.

A small firm only competes with other firms, but larger firms frequently find their own products are competing with each other. A Buick is just as likely to steal customers from another GM make, such as an Oldsmobile, as it is to steal customers from other companies. This may help to explain why Oldsmobiles were discontinued after 2004. This self-competition wastes resources that should be used to compete with other firms.

A small company with only 1% of the market share could easily double revenues in a year. A larger company with 90% market share will find it difficult to do so well.

A small investment fund can potentially return a larger percentage because it can concentrate its investments in a small number of good opportunities without driving up the price of the investment securities.[1] Conversely, a large investment fund like Fidelity Magellan must spread its investments among so many securities that its results tend to track those of the market as a whole.[2]

Such opposition is largely a function of the size of the firm. Behavior from Microsoft, which would have been ignored from a smaller firm, was seen as an anti-competitive and monopolistic threat, due to Microsoft's size, thus bringing about public opposition and government lawsuits.

Large firms also tend to be old and in mature markets. Both of these have negative implications for future growth, as well. Old firms tend to have a large retiree base, with high associated pension and health costs, and also tend to be unionized, with associated higher labor costs and lower productivity (due to inability to fire incompetent employees). Mature markets tend to only offer the potential for small, incremental growth. Everybody might go out and buy a new invention next year, but it is unlikely they will all buy cars next year, since most people already have them.

Solutions to the diseconomy of scale for large firms involve changing the company into one or more small firms. This can either happen by default when the company, in bankruptcy, sells off its profitable divisions and shuts down the rest, or can happen proactively, if the management is willing. Returning to the example of the donut firm, each retail location could be allowed to operate relatively autonomously from the company headquarters, with employee decisions (hiring, firing, promotions, wage scales, etc.) made by local management, not dictated by the corporation. Purchasing decisions could also be made independently, with each location allowed to choose its own suppliers, which may or may not be owned by the corporation (wherever they find the best quality and prices). Each locale would also have the option of either choosing their own recipes and doing their own marketing, or they may continue to rely on the corporation for those services. If the employees own a portion of the local business, they will also have more invested in its success. Note that all these changes will likely result in a substantial reduction in corporate headquarters staff and other support staff. For this reason, many businesses delay such a reorganization until it is too late to be effective.

The independently controlled donut firm locations may choose to offer higher wages and charge higher prices if they are in an affluent area. In October, when fresh apple cider is available at bargain prices from local farmers, they may choose to market a cinnamon donut/hot apple cider combo promotion. A single large, centrally controlled firm may lack the flexibility to offer such customizations.

That’s nuts…

The further the distance between sales and the head of the company, the worse managed the company is.

Your graph looks like a big smile.  So why are so many managers, producers, and stockholders of the big firms so miserable?

B24----you have hit the nail on the head.  That is what is going to happen.  Not only former execs, but alot of firms will be created by big brokers, and big broker teams going indy. They don’t need or want an overpaid middle manager flying around with an expense account, staff, and fat salary, producing no revenue.  I was always amazed at how many of these guys there were at the big firms.