According to Chinese astrology, 2005 is the Year of the Wood Rooster — a year marked by prosperity, both spiritually and materially. Under this zodiac animal system, much of the world's population should have experienced a surge of optimism and adventurousness — in addition to prudent money management (seriously) — brought forth by the rooster, considered an honest, intelligent and brave bird.
How has the Year of the Wood Rooster played out for the seven largest brokerage houses and their employees? Let's just say that most of the advisors we polled in our 15th Annual Broker Report Card seem to have been taken their cue from the wood rooster. They're not crowing, necessarily, but they're certainly expressing confidence and optimism about the firms for which they toil. (One big exception: Reps from Morgan Stanley registered the down assessment you would expect from that firm's annus horribilus.)
Unlike last year — a year marked by cost cutting and declining fees for products and services — 2005 was more kind to reps (2004 was the Year of the Wood Monkey, marked by “clashing and antagonisms.”)
Pressure on fees for products and services has not gone away, nor has the commoditization of financial services, as the Securities Industry Association (SIA) reports. But this year, “A lot of good things are happening in the industry — orders are picking up, valuations are looking better, we're making more money and firms are adding headcount,” says SIA economist Frank Fernandez. “I think everyone is in a pretty good mood.”
Surprisingly good. Industry profits, initially forecasted to be ho-hum, have been revised upward. In October, Fernandez predicted that securities industry profits in 2005 would reach $21.2 billion, 2.6 percent better than last year. By November, he had changed his tune, predicting profits to jump by more than 14 percent, to $23.7 billion, this year, just shy of 2003's $24.05 billion (Year of the Water Sheep).
Most reps who responded to this year's Broker Report Card Survey reported improvements in their views of their firms. The average overall score of the seven surveyed firms — despite low scores by troubled Morgan Stanley — inched up to 7.8 (out of 10), from 7.58 last year, reversing a three-year slide. “Payout” and “support” levels, always bellwethers for broker happiness, went up for the majority of reps this year. And while top management didn't get kudos for “strategy” and “public image” at every firm, branch management got unanimously higher marks from reps this year. Firm management is also upbeat about brokers, the SIA says. “The retail model is getting more cost-effective,” says Fernandez. “As you can see in some of their margins in the third quarter — firms are getting better at serving clients more efficiently, with better segmentation for instance.”
One of the great things about a general upturn for retail brokerages: Reps — if they don't like their firms — can jump ship. In fact, migrating has rarely been more attractive than it is now. Because of the tough overall market conditions (commoditization, margin pressure), many firms want to build scale, and they seek veteran financial advisors to serve the coming wave of retirees who will have more complex planning issues than the simple accumulation of assets.
Recruiters are reporting banner years both for movement among reps and pay packages — 120 percent, and sometimes higher, upfront deals. Not the gaudy packages enjoyed during the dot-com buying panic, but close. “I'm getting more calls from our competitors these days than I ever have,” says one veteran UBS broker with $105 million in assets under management.
The average overall score for “hiring and recruiting practices” inched up to 7.3 from 7.2 last year. Morgan Stanley — where reps have been getting fired or scared off — had the lowest mark on the chart (4.7), while reps at UBS rated it a half-point lower this year (7.0). “Life for Morgan Stanley brokers has been very tough this year,” says Dick Bové, a former registered rep and an analyst who covers Morgan for Punk Ziegel. “People are getting fired or leaving every day, reps don't know who their next boss will be and every time they pick up the paper, the firm's name is in there,” he says.
Still, Bové is long on Morgan's chances for revival. “If you can turn around the morale at Merrill, where [Stanley] O'Neal fired 26,000 people after coming in, you can certainly return Morgan Stanley to its past glory amid this,” he says.
In a year of acquisitions (Smith Barney and Merrill Lynch) and management reshuffling (Merrill, UBS, Morgan Stanley), the assessment of “management” for all firms improved (7.9) marginally over last year (7.8). Branch managers in particular can take a bow — reps at every firm, including Morgan Stanley, were considerably more impressed with their branch management this year (8.0, up from 7.5 last year).
Cost cutting has slowed as well, according to analysts. Of course, reps still groan about the scarcity of sales assistants and the level of sales support (see table, p. 32). Still, nearly all “support” categories showed improvement from last year: The overall average among firms for “support,” of which sales assistant and sales support are a part, increased slightly this year to 7.5, up from 7.3 last year.
One Smith Barney rep voiced the common complaint that production levels too often determine support: “There's a lot of focus on the top with training and support — perhaps rightly so from a business standpoint,” he says. “But there are good people in the bottom half that just need to be cultivated.”
According to the SIA, the bar is definitely being raised for reps: Average rep gross production increased to $418,003, or by 12.1 percent, in 2004 from $372,963 in 2003. And reps in our survey reported getting a little something more for their efforts this year: “Payout” received a 7.3 rating this year, a small increase from last year (7.0). But reps at five of the seven firms surveyed reported similar or improved payouts. A.G. Edwards and Ed Jones reps were happiest about their payout (and, as usual, about everything else at their firms); Wachovia and Merrill Lynch had the most improved payout scores; and Morgan Stanley was the only firm whose reps rated payout worse than last year. UBS had a slight uptick, and Smith Barney was flat.
Solid payouts usually trump most complaints. “If you share one sales assistant with a bunch of reps, and the firm is providing you fewer resources in general, but you're making money, you're not going to complain about support,” says Bové. “Happiness is a direct result of what they get paid — the stock market improved a lot in the second half, and that means commission income goes up.” Sure enough, the firms with the lowest scores for support — UBS and Morgan Stanley — also scored significantly lower than the other firms for payout: UBS scored 5.9 and Morgan scored 5.3.
Keeping with tradition, the best ratings from reps came in the category for “freedom from pressure to sell certain products” (surveyed firm average: 9.0). Even at the wirehouses, where proprietary product isn't completely dead, most reps say they are free to build a business using asset managers and products of their choosing. Yet, many reps still report being “encouraged” by managers to sell certain products, especially when it comes to mortgages or loans, for instance. Others say it's restrictions — not being able to sell securities the firm doesn't cover — that impede business.
Blame the Regulators
In most cases, however, reps blame regulators, or more specifically, the compliance regimes they've spawned at firms, for cramping their style. More than 55 percent of reps believe compliance is “too stringent.” (The exceptions to this were Merrill Lynch and Edward Jones FAs, most of whom found compliance measures to be “appropriate.”) A common refrain at several of the firms was that the legal department was running the business. “Nothing is smooth when legal is involved — which is always, or when your CEO is an attorney,” says one Smith Barney rep referring to Citigroup CEO Chuck Prince. The rep groused it took more than a month to get approval for his new marketing campaign. And one UBS rep said in the write-in portion of the survey that because of “perceived threats of litigation, it seems there are almost as many people making sure we're compliant as there are people trying to do business.”
It's an understandable perception. According to the SIA, the compliance sector is the fastest-growing section of the securities industry again this year.
But help could be on the way. At the SIA's annual conference in Boca Raton, Fla., in early November, industry leaders roundly criticized the multiple, and sometimes-overlapping, regulatory regimes. Incoming SIA Chairman James Gorman said it created a “huge tax on the business.” John Thain, CEO of the NYSE, said he'd work with the NASD and SEC to reduce duplicative exams, rules and regulations. SEC Chairman Christopher Cox was more coy in his presentation to the assembled SIA membership, saying only that the SEC staff was, in general, “listening” to complaints from the industry. Congress is also examining the self-regulatory organization structure to see if it needs to be revamped.
In the meantime, the SIA is conducting a study on the affects of current compliance regulations to see just what the costs are, and have been, to firms. “Oh, there's no doubt it's still getting more intense,” says Nancy Lininger, owner of The Consortium, a compliance consultancy. “The regulators have been saying for more than a year that they recognize the burden on the industry, that they'll slow down the pace of rulemaking etc., but we haven't seem them act on it yet,” she says.
Again, as one rep puts it: “It hurts less when you're making money — this was a good year, both clients and reps made money.” And if 2006 — the Year of the Fire Dog for the Chinese — lives up to expectations of a more peaceful world and even more profitable financial markets (seriously), reps and clients will again have reason to smile. Unless, of course, you're a Dragon, an Ox or a Goat — in which case the Fire Dog will make life more difficult for you.
See the comprehensive chart:
Registered Rep.'s Broker Report Cards for 2005
Read the individual report cards:
Merrill Lynch: Still Wirehouse Queen
Smith Barney: New Focus On the Horizon
Morgan Stanley: Tomorrow Is Another Day
UBS: You Against Us?
Edward Jones: Whistle While You Work
Wachovia: Back on Track
A.G. Edwards: Quietly, the Leader of the Pack