Money in the Bank

Bill Gates once famously referred to retail-banking companies as dinosaurs; they attracted his scorn for failing to adapt (by his reckoning) to the rapid technological advancements that characterized the early 1990s. In brokerage circles, banks are similarly tarred as sleepy, anachronistic organizations that cannot meet the needs of an ambitious rep. For years this characterization might have been

Bill Gates once famously referred to retail-banking companies as dinosaurs; they attracted his scorn for failing to adapt (by his reckoning) to the rapid technological advancements that characterized the early 1990s.

In brokerage circles, banks are similarly tarred as sleepy, anachronistic organizations that cannot meet the needs of an ambitious rep. For years this characterization might have been fairly applied, but no more. Bank-owned brokerage companies have awakened to the changes they need to make to attract top-shelf talent — changes that start with narrowing the compensation gap between themselves and wirehouses — and brokers are taking notice.

“The environment is shifting from one where a bank rep was generally considered ‘second-string’ to one where banks are increasingly a comfortable place for top producers,” says Sam Campbell, analyst at Boston-based Financial Research Corp., a financial services research and consulting firm, in a recent report.

Indeed, bank-brokerage operations are among the fastest growing brokerages in the business. Banc of America (BofA) is hiring aggressively, as are Wells Fargo, Wachovia and National City. BofA Investment Services expanded its brokerage workforce by 20 percent, to 1,150 over about two years. That was just before it nearly doubled its size, to 2,150, when it absorbed Quick & Reilly's operations, according to Mike Santo, president of BofA's brokerage arm. Santo would also like to expand the brokerage workforce by another 5 percent to 10 percent. Wachovia expects to continue to expand by 10 percent per year for the next several years. Perhaps most surprising is the source of these new recruits: 70 percent to 75 percent hail from wirehouses, according to Wachovia and BofA.

Why would wirehouse reps jump ship to a bank? It helps that the banks want them, a fact that often translates into advantageous employment arrangements. But there are other reasons as well.

Data, Very Much

Retail banks own reams of customer data — information about primary residences, purchasing, savings habits and credit scores. At the time of Mr. Gates' “dinosaur” comment, banks did not make particularly good use of this data, in part because it was stored in disconnected computer “silos.” In the intervening years, though, they have made a mission of building complex data warehouses and installing customer relationship management systems to make sense of it all. The result is that banks are able to deliver the warmest of warm leads to the brokers who work for them.

A rep at a bank-owned brokerage is in an “enviable” position, says Andre Cappon, president and founding partner of CBM Group, a New York-based consulting firm, and an occasional contributor to Registered Rep. “The guy in the wirehouse has to hunt, and he eats what he catches, but at a bank, you're fishing in a barrel,” he says. “A guy at UBS or Merrill Lynch would give his eye-teeth to have that kind of situation.”

Indeed, there are plenty of stories starting to leak out about reps that flourish upon arriving at a bank. One broker left Merrill Lynch for Banc of America Securities last year and saw his assets under management double. Another saw production double when he made the same move. A third left Edward Jones for BofA and is on track to see his production increase by 40 percent in his first year.

To be sure, the marriage of banking and brokerage is not always a happy one. Several mergers between banks and brokerage firms have not panned out as the participants had hoped. U.S. Bancorp's 1998 purchase of Piper Jaffray, for instance, was aimed at creating a one-stop financial supermarket, but the two split in 2003 when the merger failed to produce the expected synergies.

Then there are the cultural issues. When Wachovia acquired Prudential Securities in 2003, many expressed concerns that the employees of the staid southern banking company would clash with the hard-nosed New York types at Pru. Those concerns have been borne out: Former Pru reps continually grouse about the way Wachovia's relative sleepiness keeps them from realizing their potential. Still, the negative voices are growing fainter as the Pru reps adjust to the style of their new firm.

The trend of banks absorbing brokerage firms has attracted plenty of commentary, of course, and much of it has been skeptical of such combinations. “There's been a lot of talk that it hasn't worked out as well as people thought,” Campbell says. “But it still feels like a lot of opportunities exist for synergies between banks and brokerage units.”

Shooting the Gap

Realizing those synergies depends in no small part on banks' ability to lure the best producers — a task that is getting easier for a number of reasons.

First, the production gap separating bank-based firms and wirehouses has reached its narrowest point in seven years. According to a study by Kenneth Kehrer Associates, a research and consulting firm specializing in bank distribution of investments and insurance, the gap fell from $192,000 in 2000, when bank brokers produced 61 percent as much as their counterparts, to $92,000 in 2002, with the percentage rising to 74 percent. The average nonbank broker now produces $356,000 a year, vs. $267,000 for bank brokers. Anecdotal information shows that production of some bank-based brokers is even higher. New York-based bank brokers average about $500,000 a year, Cappon says. Meanwhile, National City's brokers average about $385,000 a year, says Betty Moon, executive vice president of retail investments at National City.

The second reason banks are having more recruiting success is that they're paying more. Nonbank broker/dealers were still ponying up more than banks as of 2002, according to Kehrer's most recent data. But the gap is narrowing all the time; it was $93,000, in 2000, when bank brokers made 53 percent of their nonbank counterparts' pay and it narrowed to $50,000 by 2002, when bank brokers made 67 percent as much as other brokers. Significantly, bank payouts have risen while traditional brokers' payouts have declined, Ken Kehrer says. Still, wirehouse payouts are typically about 42 percent to 45 percent, Cappon says. Bank-owned brokerages, he says, are more likely to fork over 30 percent or so, with high-end producers making it to 40 percent. The reason for the disparity is that a bank “recognizes it's giving them clients on a platter,” Cappon says.

Still, as compliance hassles and scandals make life at the wirehouses tougher every day, the narrowing of the payout gap is grabbing the attention of an increasing number of hotshot reps, says Mindy Diamond, a recruiter (and columnist for this magazine) who is president of Diamond Consultants.

“More and more, the large national banks are trying to look exactly like the wirehouses,” she says, and their payouts are getting ever more competitive. Payouts at regional banks also are trending upward, though not as quickly as at the largest institutions.

Still, Moon says National City brokers can make as much or more than wirehouse brokers and she sees pay evening out between banks and wirehouses. “I can't remember losing a broker because of compensation,” she says. “Ten years ago, you wouldn't have gotten that answer from me.”

Settling Down

If average turnover figures are any indication, bank brokers tend to be more content than their wirehouse counterparts. A Kehrer survey placed bank brokerage turnover at 19 percent in 2003 compared to 21 percent at nonbank firms.

Bank-based brokers tend to stay put in part because the bank model appeals to a more staid type of broker, Cappon says. Many of those who go to work for a bank do so to get warm leads, and these people are in no rush to join the ranks of the cold callers.

One of the reasons banks have not had more success in hiring the hard-charging types is that they do not typically pay transition packages. At banks like National City, there's a reason for this: It does not ask much of its new employees. They do not have to bring their books of business with them, for instance, Moon says. The bank already has the necessary customer base; it's simply looking for brokers who can service them.

It's a different story at the national banks, which are competing head-to-head with the wirehouses for heavy hitters, Diamond says. They typically bring in brokers with average annual production of $400,000 or so, $40 million in assets under management and less than 10 years of experience. “It's the exact same profile that wirehouses are looking for,” she notes.

Another disappearing difference between banks and wirehouses: the relative sophistication of their customers. “That difference has narrowed as banks have moved upscale,” Kehrer says.

The emergence of Series 6-licensed bank personnel to support the bank brokers by selling variable annuities and mutual funds has helped. Bank brokers are freed up to do more planning and advising. Bank brokers are often expected to mentor and coach those Series 6 bank workers, Kehrer says. It's typical for them to work with five to 10 bank employees and share commissions with them. “That's a change for the broker whose personality tends to be that of a lone wolf,” Kehrer says.

Fee Information

Banks remain behind the curve in offering fee-based business, such as wrap and separately managed accounts, Kehrer says. Fee businesses make up just 3 percent of a typical bank broker's production; the figure is about 20 percent for a nonbank broker.

Still, banks offer more services than they used to, brokers say. One veteran rep recently left a Midwestern regional brokerage firm to join Wachovia Securities. He had looked at seven other brokerages before choosing Wachovia.

“I felt they had the best research,” says the broker, who asked not to be named. “Their technology was far more advanced than any other firm that I saw. And they allow you to be an entrepreneur, if you want.” The stigma regarding working for a bank is quickly vanishing, this broker said.

Diamond has noticed the same thing. Virtually any resistance brokers had in the past to joining a bank has vanished, she says. Brokers used to feel they were on their way out of the industry when they turned to banks, but “that's just not true anymore,” she says. “The large national banks are very selective in who they hire. They're requiring a minimum book of business.”

True, some of the negative reputation of banks is hard to shake. “There is the image that you're not quite a superbroker,” Cappon says. One broker at a Midwest office of a wirehouse had left a firm that was acquired by a bank, saying he didn't see the services being as good under the bank's ownership.

A bank environment is not one that appeals to every wirehouse employee. Bank offices often lack the camaraderie and energy of a typical wirehouse office. “You have a small team sitting in a bank branch,” Cappon says. “It's not a true brokerage environment. There aren't as many people to emulate or compete with.”

But the banks clearly have something on the ball because more brokers are considering the jump, says Diamond. But that does not mean the wirehouses are sitting by idly. “Transition packages at wirehouses are probably more lucrative than they've ever been,” Diamond said. “I think it's a direct response to the banks.”

Some wirehouses have also started operating more like banks in recent years. Merrill Lynch's “Total Merrill” program goes after all of a client's financial business, including brokerage, loan, deposit and mortgage accounts.

But banks' historical position as the trusted name in a wide array of financial services often gives them a leg up in the competition for a client's whole wallet, Campbell says. “It's tougher for the brokerage business to encroach on the banking business than for banks to encroach on wirehouses,” Campbell says.

In the end, are the perceived benefits of working at bank really there? “The serious earners at wirehouses, if they go to the right bank brokerage, truly can grow their business,” Campbell says. “But then the question is, can I move it again?”

Steve Watkins is a freelance writer based in Cincinnati.

In the Brokerage Family

National City expands its brokerage operation.

National City Bank is proving itself one of the more aggressive of bank-brokerage firms.

The Cleveland-based company started overhauling its brokerage business two years ago by moving brokers into the bank branches and by creating two delivery channels: wealth management and retail brokerage. Since then, National City has added about 95 licensed brokers, bringing its total to 200, says Betty Moon, executive vice president of retail investments at National City. National City also has about 1,300 bankers licensed to sell insurance and annuities through the bank's 1,100 banking branches.

Brokers are responsible for mentoring bank employees in addition to managing their books of business. Their pay is linked to their own book of business, but it is also tied to how much business the branch as a whole generates. Moon says National City broker payouts top out at 28 percent, but the bank supplements that pay with incentives — especially for the best brokers. “If I didn't pay my brokers well, I wouldn't keep them,” Moon says. “And I haven't lost any I want to keep.”

Attracting brokers from wirehouses hasn't been a problem, Moon says. She's worked in the bank brokerage business for 20 years and has seen a huge change. “Brokers in a bank used to almost feel embarrassed,” she says. “That's completely changed in the last 10 years. I have a stack of resumes from wirehouse brokers.”

She only hires experienced people, and she looks for brokers who will thrive in a situation where they'll spend time mentoring other bank employees.

The problems other firms have had in merging banks with brokerage firms often stem from the different cultures, she adds. National City has just gotten to the point of overcoming that.

“We don't want to be guests of the house, we want to be part of the family,” she says. “It took two years, but we're members of the family now.”
Steve Watkins

Mine, Mine, All Mine!

One drawback of working for a bank: They're even more possessive about customers than wirehouses.

Brokers who move their practice to another firm are accustomed to taking some portion of their books with them, but this is not so easy to do when leaving a bank. “Typically, business generated as a result of referrals from the bank is not very portable,” says Mindy Diamond, a headhunter who is president of Diamond Consultants. “It's usually pretty sticky.”

At National City, for instance, brokers are not expected to bring their books with them when they come on board, and they must leave their business behind when they leave. National City requires brokers to sign a nonsolicitation agreement, which it enforces vigorously.

“I feel very strongly about that — these are the bank's clients,” National City's Betty Moon says. “We're very aggressive in maintaining those client relationships…We will and we have gone after brokers.”

There is one exception to this rule: If a broker brought his own book with him to his bank position, the business usually is as movable from a bank as from any other brokerage firm, Diamond says.

The reason for a bank's fierce protection is obvious: Customers whose brokerage accounts depart might also take their deposits with them as well.
Steve Watkins

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