In the late 1970s, other business majors at the College of the Holy Cross in Worcester, Mass., dreamed of becoming Wall Street investment bankers. Not Donald Froude. After graduating in 1981, Froude set his sights on what his peers considered the déclassé side of the street: retail brokerage.
Froude didn't mind. “I loved the way the brokerage business can afford you a way to work with people, and directly help them achieve a goal,” he says. “Most businesses don't offer that opportunity. That turns me on more than numbers.” One of his first clients was a parent with a developmentally disabled child who wanted a guaranteed income to keep the boy from going to an institution after the parent's death. “That's exactly what I envisioned what the brokerage business should be,” Froude says.
Froude launched his brokerage career in Boston at Bache Halsey Stuart. He later went on to Prudential Securities and eventually became a managing director of the private client group and a consultant to the vice chairman of Deutsche Banc Alex. Brown.
In May 2000, Froude was given a new, high-profile challenge. He was named president of Quick & Reilly, the no-frills discounter that is now a unit of FleetBoston Financial, the nation's seventh-largest bank. The mission: To remake the discount broker into a full-service firm providing complete financial services and advice to its 1.8 million clients. Froude's job is to create the perfectly integrated bank and brokerage, in which every customer's financial need is catered to, from investments to mortgages. It's an awesome challenge: Building a smaller version of Citigroup and keeping it regional, mainly in the Northeast.
The biggest change is coming within Quick & Reilly, the 28-year-old firm that spent most of those years in the shadow of Charles Schwab & Co. Froude brought in bank-based reps from Fleet, recruited brokers from top wirehouses, spent $25 million training them to sell a variety of financial service products and even began paying reps in Quick & Reilly storefronts commissions for executing trades. “Everything's been turned upside down,” says Dan Burke, director of brokerage services at Gomez, a Waltham, Mass., investment advisory company. “Quick is changing their whole business model. It's no longer a brokerage firm. If you opened an account at Quick, the discount broker, now you've been assigned an advisor.”
But it's not yet a success. In interviews with a dozen current and former reps at Quick & Reilly, Registered Rep. has heard a tale of confusing signals from headquarters, unpopular compensation plans and allegations of ignoring client suitability to push product. Reps who were hired for their full-service experience have quit, driving turnover rates to 33 percent for brokers and 27 percent for managers in 2001. “The industry turnover rate average is about 10 percent to 15 percent,” says Deutsche Banc Alex. Brown's brokerage analyst Glenn Schorr. “Anything in the 30s would indicate a problem to me.” By Froude's own count, 230 of 690 brokers and 30 percent of the firm's managers have left the company for a variety of reasons.
What's greasing the revolving door? Compensation policies, say former reps and managers. When Quick reinvented itself as a full-service brokerage, it adopted a full-service firm compensation plan, effective Jan. 1, 2001, with “a payout grid higher than the average Wall Street firm,” says Froude.
But there was a catch: Unlike other full-service brokerages, the new plan had no commission for equity trades. Basically, brokers were told to sell customers mutual funds, wrap accounts, managed accounts and other products, but to send them to the online brokerage for individual equity trades. “We were trying to drive customers to the most efficient channel available. It was a better deal for the client,” says Froude.
Then, in December 2001, the firm switched gears. As of Jan. 1, 2002, the annual draw was lowered to $18,000 from $40,000 with a commission of 14 percent added for equity transactions. “Merrill Lynch and Smith Barney don't have draws of $40,000 or $50,000,” Froude says. “Often, there's no draw at all.”
This fix does not help, says Anthony Failla, former manager of Quick's Southeast region and now a broker for Morgan Stanley in Alpharetta, Ga. “The new commission structure is confusing,” he says. “If the reps were effective in migrating the traffic away from the branches [to online], how are they now expected to generate commissions, especially after the commission rates were nearly doubled?” he asks. “I found it very difficult to continue recruiting brokers under a plan that didn't fairly compensate them.”
Overall, Failla says, the attempt to remake Quick into a full-service contender has been a bust — at least on his former turf. “Only five managers of the original 12 and less than 10 of the original 50 brokers remain following the implementation of the new business model,” he says. “We expected that we'd lose the lower tier reps and keep the higher-producing guys, but the opposite occurred. With the new compensation plan and a terrible product development team, many top producers walked out the door.”
Turnover was severe in Chicago, too. In his downtown office, according to one former broker, “seven out of eight people there weren't making their quotas.” The broker, Andrew McGivney, came to Quick after 17 years in the business, but lasted only four months before being fired for low production. “It took me seven weeks to get a rep number. It takes about seven different passwords to access the operating system,” says McGivney. “We were asked to sell products to clients that weren't suitable and that they didn't want. Quick has no concept or clue as to what they're attempting to do.” McGivney says he is considering filing suit against Quick to remove the “unfair” dismissal notice from his registration.
Another Chicago-area broker, Jay L. Porter, came to Quick's Evanston office after working as a rep at Merrill. He too was fired, and says he has filed a complaint with the NASD, alleging that Quick management misrepresented his duties, putting him on a regimen of cold-calling, a chore he was told he would not have to endure. Porter was fired five months after being hired in 2001 for not making his monthly quota of about $13,000. He too complained about having to pitch unsuitable investments to clients.
All these allegations are “categorically false,” says Froude. “There's no pressure from the top of the house to do a particular product. We're not an investment bank underwriting a stock or bond issue that we then have to move out to the retail market. As to cold calling, if someone has done business with Quick & Reilly for years, and one of our brokers calls to explain our new services, to ascertain client needs and to offer to develop an investment plan, is that a cold call or a call to someone who's made a contact with us in the past?”
The goal, he says, is to integrate the banking side and the brokerage side, so that Quick reps coordinate the delivery of banking and brokerage services to clients with investable assets of $100,000 to $1 million. Froude revamped Quick's order taking and pricing, providing customers with a choice of ways to do broker-assisted trades. He also increased online stock-trade commissions from $14.95 to between $19.95 and $23.95 a trade depending upon the size of the client's account.
“I can't think of another firm undergoing as much change as Quick & Reilly,” says Nancy Bush, bank analyst at Ryan, Beck & Co. in Livingston, N.J. “It's been a tough transition in the midst of a tough environment. But, then, how many existing brokers would be able to transition from a transaction to advisory model?”
Indeed, what's happening within Quick parallels what is happening at the major wirehouses and regionals, where the emphasis is on gathering assets for managed accounts, not on generating commissions (see cover story beginning on page 30). “Quick is no longer a firm for stock jockeys or jockettes,” says Paul Richardson, president of Richardson Recruiting Services, a nationwide brokerage recruitment firm in Richardson, Texas. “It's for people who understand packaged products and managed money.”
And at this point, there is no going back. The formula concocted by former Forbes executive Leslie C. Quick, Jr., in 1974 — offering trades at two-thirds off the wirehouse rates — was already running out of steam when Froude arrived. The task of simply executing investors' orders, the centerpiece of Quick's discount brokerage operation, was moving away from broker-assisted trades at $70 to the Internet where commissions were $25 or less.”
Things only got worse in 2001. “Decimalization and narrower spreads meant that Nasdaq market-makers stopped making payment to brokerage firms for order flow, thus increasing the cost of processing a trade,” Froude says. And trading volume plunged as individual investors retreated. Quick dipped into the red, losing $51 million on revenues of $607 million last year. This was only Quick's second loss in the company's 27-year history.
That places additional pressure on Froude to make his makeover succeed. “We realized that if we didn't change substantially, revenues and profits would erode,” he says. “So, we went looking for products beyond plain-vanilla equity trades.
“The whole reason I was hired was because of my experience in full-service firms,” says Froude. “Fleet wanted me to build them a sales force that was able to develop customer relationships and gain a greater share of the client's total assets. But, it's never been successfully done with a bank and brokerage firm.” The big target remains the 6 million households with $100,000 to $1 million in investable assets in Fleet's home territory, ranging from New England to southern New Jersey. As of Jan. 2003, Quick will have primary responsibility for this group of clients, says Froude. Quick will coordinate and deliver the full range of Fleet and Quick products and services to these clients. Included are checking accounts, CDs, credit cards, mortgages and home equity loans, as well as brokerage and portfolio management.
“This is my dream,” says Froude. “I want to be one of the first in the U.S. to serve clients through a totally comprehensive relationship.”
Among the yardsticks being used by company officials to evaluate Quick's progress are change in product mix, increase in cross-selling revenues and improvement in customer favorability ratings. Before the changes were initiated, 79 percent of Quick's revenues were tied to equity trading, 7 percent from money market fees and 13 percent from products such as mutual funds and annuities. Today, only 27 percent of revenues are from routine equity trades.
Customer favorability rankings are another key indicator. A recent survey conducted by Regional Market Monitor shows 71 percent of its customers said they would recommend the firm to a friend, says a Quick spokesperson. That figure is up from 58 percent in 2000.
Froude acknowledges that he still has a ways to go and that high turnover in the sales force doesn't help. “We knew we would have turnover. I'm not apologizing for it,” he says. “The role of brokers has changed. Instead of being equity order takers, we now need people who have the ability to sit face-to-face with clients and understand their needs. We knew this would involve a significant amount of retraining and hiring of brokers who had experience with this approach. The marketplace has helped us. Merrill Lynch and Morgan Stanley were letting got a significant number of their new hires with one-to-three years' experience.”
According to Burke of Gomez, the real price of a high turnover rate is the difficulty of hiring, integrating and training a significant number of replacements quickly. “You can't pick and choose,” he says. “You're poking your head out the door saying, ‘Have you got a Series 7 license? Do you have a ding on your U4? If not, you're hired.’ Integrating this number of employees into Quick is going to be a big challenge.”
And there are questions about the overall strategy of creating an integrated bank/brokerage financial supermarket — a concept that many companies have tried, few with great success. “You've got to question whether Quick has built up enough customer lines to compete effectively with much larger rivals,” says Craig Woker, a brokerage analyst at Chicago-based Morningstar. “Quick is a distant player compared with Schwab, E*Trade or Ameritrade. Fleet's broad problem is it's never built up enough critical mass in any of its businesses to compete effectively.”
“Quick & Reilly had better get its act together quickly,” warns Burke, the Gomez brokerage services director. “They thought they were going to pocket the middle market. Merrill Lynch has created its Financial Advisory Center appealing to smaller accounts. Brokers are pushing those accounts to a toll-free phone number and a Web site. If Merrill is successful, look for other wirehouses to fall in line in an instant. Schwab and Fidelity are trying to swim further upstream by targeting accounts over $100,000. That little window is closing fast.”