The Third Way

For the inveterate stock jockey, there is a home.

Mel Loeser is a 53-year-old stockbroker

Not a financial advisor, not a consultant, or a solutions provider. A broker. A commission-collecting broker, who is paid when he buys or sells a security for his clients. And proud of it, thank you very much.

Three-and-a-half-years-ago, Loeser, a 30-year veteran and former wirehouse broker, found a home at a small ($600 million under management) Manhattan brokerage, Bishop Rosen & Co. An independent brokerage since its founding in 1964, Bishop Rosen is something of a safehouse for brokers who want to keep selling the old way and earning commissions.

“I'm used to it. My clients are used to it. It's who I am. Could I change? Absolutely. But why should I?” Loeser asks.

Unlike most of Wall Street these days, Bishop reps are free to be who they want to be. “We got guys here who want to trade, guys who do nothing but options,” Loeser says. “We've got one guy who does 98 percent municipals, other guys only do things with yields. Our feeling is if you are good at something, you have a specialty, you shouldn't be asked to change.”

Not that Loeser is against the managed account world. “It's terrific,” he says. “It's just wrong to shove it down someone's throat.”

As most big brokerage firms are marching their rank and file to individually managed account land (see the cover story beginning on page 30), it is clear that some brokers are holding out, and have absolutely no interest in managed accounts.

Brokers who don't want to join the parade don't have to head for tiny boutiques like Bishop Rosen, however. They can find a welcoming environment at regional, second-tier firms and small independents, which are actively pursuing stock jockeys. So are some bigger Street names, notably Bear Stearns. Also known for embracing brokers who do it the old-fashioned way: Stephens Inc., and the St. Louis-based rivals, A.G. Edwards and Edward Jones.

Bear, in particular, is very open to old-fashioned brokers. “As other firms become [more fee-based], it becomes easier for Bear to attract more entrepreneurial brokers,” says Steve Dantus, head of Bear's private client services. A Bear spokesman adds, “Our job is to service our customers. If they prefer to pay commissions over fees, we are not going to discourage them from doing so. We are not going to incentivize the collection of fees one way or the other.”

Last year, Bear hired 12 multimillion dollar producers at the senior management level and plans to double that number in 2002, Dantus says.

It's understandable. In general, transaction-based brokers are older, experienced, have more money under management and are strong producers with a loyal clientele, industry consultants say.

Indeed, after years of driving the great majority of their clients to managed-account sales, the big firms have made concessions to keep their top producers in house. Call it the Third Way: Brokers who have clout (read: big books) can still flourish at the top wirehouses and can, in fact, qualify to trade securities on a discretionary basis, making these brokers virtually indistinguishable from money managers. But unlike old-style brokering, a wrap fee is charged on assets managed.

All the big firms do it. Qualifying reps are typically big producers, who the firm deems too valuable to lose. Often, the rep has to take portfolio management training courses that the firm sponsors and pass an exam. The training programs, says one recruiter who asks not to be named, aren't really rigorous: “They are bull___. You can earn your way into the designation. You just have to have enough assets and longevity.”

Prudential offers two programs that allow brokers to trade for clients on a discretionary basis for a wrap fee. Just under 10 percent of its brokers have achieved the Prudential Securities Portfolio Manager (PSPM) designation, a Pru spokesman says.

“To be a PSPM, you need to reach a certain amount of gross commissions annualized over three years, a certain amount in assets under management, five years experience and no material violations on U-4 — and, you need to pass your Series 65,” says spokesman Jim Gorman. The second program, Quantum, allows reps discretion — up to a point: They can't go beyond where Prudential research coverage ends. About 20 percent of advisors are qualified to trade under the Quantum program. “We recruit for this and people are coming over because they like our program,” Gorman says.

UBS PaineWebber has what it calls its Portfolio Management Program. “I find people really like dealing with the portfolio manager, getting to know how you work, what you're thinking,” says one broker. “It's a far more stable asset base.”

Becoming a money manager, in fact, has some advantage over selling money management. “Clients will stay with you if you do good,” says the PaineWebber broker. “But even if you don't [for a period], it's easier to explain than why some lousy manager who you do not know performed so badly.” Also, unlike dealing with an outside manager, the do-it-yourself broker can customize portfolios for each client and develop new portfolios when needed — to take advantage, say, of a new turn in energy prices.

The downside? It is tough to raise money from clients while managing dozens, or even hundreds of customized portfolios. Which is why the individually managed account is probably the way most brokers will go.

Bob Mulholland, head of the Merrill Lynch Client Relationship Group, sees the changes to IMAs as inevitable. He argues that the changes upsetting some brokers are being made in the best interest of the client. “The strategy is to go after a higher-net-worth client. The market is moving away from the term broker,” Mulholland says. “We'd like our people to be solution providers.”

Loeser, the Bishop Rosen broker, says he understands why firms prefer the IMA model for most brokers. But he questions the wisdom of treating all transaction-oriented brokers the same way. “It's OK to change, but how do you separate the guy with 30 years in the business from the young turk? It's just harder for that guy.”

Increasingly, however, the brokers who cling to the old-fashioned way (unless they have a $100-million book) are going to feel out of place. “When you talk about the old style of doing business, the operative word is ‘old,’” says a wirehouse exec.

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