Chip Off the Old Rock

In a tough market, the smallest wirehouse is having some of the biggest problems.

Things are grim in the brokerage business. Investors have more reasons to stay out of the market than jump back in–thanks to publicity surrounding the analyst and accounting scandals. All wirehouses are suffering–Merrill Lynch announced more layoffs and Morgan Stanley has had several down quarters in a row–but Prudential Securities may be hurting most.

Prudential Financial’s brokerage arm lost $19 million in the first quarter and is likely headed for at least two more down quarters as the company undergoes further cost cutting in an effort to make the unit profitable. It could ultimately end up with half as many brokers, according to sources close to the company.

Pru had 6,600 financial advisors as of March 2001, but was down to 5,800 as of March 2002 and that figure now is closer to 5,000. "They’re downsizing with the full intent of being a firm of about 2,500 to 3,000 brokers, max," says a recruiter. "And they’re trying to get everybody doing nothing but managed money."

But Pru brokers and other sources say it isn’t just the dregs leaving the firm, but talented producers–precisely the type of brokers it needs to handle those high-end clients.

"The firm is hurting drastically," says one veteran broker, who says hiring has slowed to a trickle. "We can’t continue without growth. Just through death, retirement and failures, you’re going to lose a certain amount anyway, and so it’s survival of bodies that you have to have."

However, Pru spokesman Jim Gorman says the attrition isn’t much different than any other year. He says the firm has seen a strong retention rate among its "core brokers," which he did not define, but likely someone who averages around a reported firm goal of $600,000 in annual production, with much of that coming from fee-based business. The firm is still recruiting, he says, although he says it’s a difficult time for firms to recruit brokers. "The opinion seems to be that we’re cutting more than anyone else, which isn’t true," Gorman says.

Art Ryan, CEO of the parent company, a $20 billion-plus financial services conglomerate, has made it clear that unless the unit can turn itself around by next year, it will be sold. First on that list is reducing expenses.

In an interview with Registered Rep. in January, brokerage head Jamie Price said the firm was concentrating on chopping off fifth quintile producers, in addition to other cutbacks. Equity analysts believe further cuts would come from back-office operations and outsourcing.

But brokers say cuts are hurting the front line.

In December, Prudential trimmed commission payouts on transaction business by 1 percent to push more brokers to do more fee-based business. However, in this market, the move seemed ill-timed, brokers say. Meanwhile, support staff has been cut back and training expenses have been pared, according to brokers. Large offices are being consolidated, including ones in Los Angeles and Houston.

To be sure, declining revenue and cutbacks aren’t just a Pru problem. "Prudential is no different than any other wirehouse," says one Midwest broker. "It’s a bad market, and you have to work harder to stay."

At the same time, however, many Pru brokers are struggling with increased production goals, and demands for more fee-based business and to jettison smaller accounts, amid expense cuts and the worst environment for brokers in 20 years.

"Certainly, the brokers’ loyalty to the firm is coming under extraordinary pressure," says Stephen Winks, consultant and former head of investment management consulting at Prudential. "I think if I were in the recruiting business, I would focus only on Prudential Securities, and I probably could get a thousand guys from that firm over six to eight months."

Brokers at several offices around the country say talent is being cherry-picked by other firms, and replacements aren’t being hired. "My office has gone from 43 to 22 brokers," says one West Coast broker. "Most of them went to other firms…people are afraid to come over."

An inability to recruit top talent would stymie any plans to move upmarket. "The theme is to really try to turn this thing into a retail financial planning firm," says Colin Devine, financial services analyst at Salomon Smith Barney.

Meantime, the rank and file have ideas of their own. Some reps say they’ve started agitating to have some kind of quasi-independent system, but that idea doesn’t have much groundswell–it hasn’t been presented to senior management, says Gorman–and it would be unlikely for a wirehouse to take that tack.

As for an outright sale, Gorman says that it’s a no-go–although Ryan, no doubt, sees it as a possibility down the road. "I don’t know that they’re going to make it," says analyst Devine. "I think they’re on the right track…but they’ve got to make money, and it’s not going to be now."

–With Alex McGrath, Betsy Riley and Rick Weinberg

TAGS: Archive News
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