MS buyout, what effect?

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Jul 29, 2005 7:47 am

Why would a buyout of MS be bad? Was it bad for SB when citibank bought them?

Jul 29, 2005 8:06 am

The problem is culture.  The bank  and brokerage cultures are
so different, that it is difficult to merge them.  You see, you
have to be way up in a bank corp ladder, after long years of politicing
and performance to make mid to high 6 figures.  In the brokerage,
a hard working office recluse can do it in 1/10 of the time.  Bank
managers resent this.  They say, "as long as the bank gets a cut,
go make as much as you want."  But when a rep is making $700K
working 40 hrs a week and having fun with it, that tune changes. 
The bank see's no reason why this rep shouldn't be happy with less
income, becasue it is still 5X what most bankers make.  Hence, you
have brokerege management and bank management butting heads over their
reps, and the bank usually wins.



BTW- brokerages now do the exact oposite.  They grossly reward the
higher producers, giving incentive for smaller producerws to
increase...a recipe that works.



With all of that...I fear banks will own all of the brokerages eventually (even my beloved solo Merrill Lynch).

Jul 29, 2005 9:07 am
rightway:

The problem is culture.  The bank  and brokerage cultures are so different, that it is difficult to merge them.  You see, you have to be way up in a bank corp ladder, after long years of politicing and performance to make mid to high 6 figures.  In the brokerage, a hard working office recluse can do it in 1/10 of the time.  Bank managers resent this.  They say, "as long as the bank gets a cut, go make as much as you want."  But when a rep is making $700K working 40 hrs a week and having fun with it, that tune changes.  The bank see's no reason why this rep shouldn't be happy with less income, becasue it is still 5X what most bankers make.  Hence, you have brokerege management and bank management butting heads over their reps, and the bank usually wins.

BTW- brokerages now do the exact oposite.  They grossly reward the higher producers, giving incentive for smaller producerws to increase...a recipe that works.

With all of that...I fear banks will own all of the brokerages eventually (even my beloved solo Merrill Lynch).


Compensation issues are not the only thing.  Bankers also have real faith in their promote from within philosphy.  Bankers are often chosen to head up the securities side of the business and they, the bankers, cannot wrap their brains around the idea that what they're doing is not guaranteed.


There is also a fear that a strong brokerage effort will canibalize the deposit base of the bank, reducing the bank's ability to lend.

Jul 29, 2005 10:07 am
rightway:

But when a rep is making $700K working 40 hrs a week and having fun with it, that tune changes.  The bank see's no reason why this rep shouldn't be happy with less income, becasue it is still 5X what most bankers make.  Hence, you have brokerege management and bank management butting heads over their reps, and the bank usually wins.


The rep is making $700,000 by working 40 hours a week?  On what sphere?


Studies all over the industry would reveal that the average rep works sixty or more hours per week and that the average net income is less than $200,000 per year.


The mean income--half above, half below--is less than $150,000.


There are lots and lots and lots of new brokers who are earning less than $1,000 per week.  Lots of them.


Think about it.  Employers hope to break even on their rookies--without really considering things as the economic cost of the sqare footage they consume in a branch.


The hope is that over the first two years the rookie will recoup what was spent on them in the form of salary and fringe benefits--salary being the larger cost, by far.


Let's suppose a rookie is paid a salary of $50,000--plus benefits that might total another $10,000.  That would be an expense of $60,000--two years, $120,000.


If the employer is lucky the rookie will generate fees, commissions--you know, income--totalling $120,000 during those two years.  IF THE FIRM IS LUCKY.


Now let's say the rookie was not on a salary, and was instead on the grid--at a generous 35%.


If they had generated the $120,000 that it cost to keep them, but were not on a guarantee, their net pay would have been $42,000 or $21,000 per year.


Is it possible to earn $700,000 per year?  Sure.


Is somebody in your branch making that much?  Highly unlikely.


See that "big hitter" over in the corner office?  He or she is probably pulling down a quarter of a millon, maybe more but not a whole lot more--not bad, but nowhere near $700,000.