From the January 2007 issue of Research Magazine • Subscribe!

January 1, 2007

Big Firms Had Good 2006; Set for More Growth in 2007

The stocks of the largest brokerage firms (Merrill, Morgan and UBS) have outperformed the S&P 500 in 2006, thanks to some key performance issues, experts say. Furthermore, the large firms are expected to continue the strategies they've put in place recently in the year ahead, which should mean more good news for the wirehouse broker-dealers.

Research asked Chip Roame, head of Tiburon Strategic Advisors, to look into the crystal ball and share what he expects in 2007, drawing largely from lessons learned in 2006.

o Merrill Lynch: The wirehouse sold its asset-management operations to BlackRock and took a nearly 50 percent stake in the money manager in '06. This new relationship, says Roame, gives Merrill some distance from its products and "helps their [product] positioning. BlackRock is one of the best partners they could have found."

What's ahead? "They've been aggressively pushing advisors down the fee-account path, and they'll likely do more of this," he explains. "They have the best set of holistic services, which forms the basis of Total Merrill, and they will likely seek to continue to position their advisors as broader wealth managers. They will also use their newfound quasi-independence to sell their investment products through third-party channels."

o Morgan Stanley: "They've done a great job cleaning up their brokerage ranks," Roame shares. And the brokerage "will make more big efforts to increase the productivity per advisor, which generally lags that of Merrill and Smith Barney."

Also, the firm may buy up more money-management firms to create additional proprietary products. "They likely bid in the BlackRock sweepstakes, and I would not be surprised to see them do a similar deal with State Street or some other firm." On the flipside, he predicts that the former Dean Witter share of the brokerage could be sold over the next few years, but not the high-net-worth business.

o Smith Barney: "They've already been moving advisors along the fee-account path," Roame notes, after unbundling the money-management side of the business -- through the sale of the company's funds to Legg Mason in order to grab that firm's brokerage business in 2005.

Next comes the leveraging of more Citigroup/Citibank capabilities to "get financial advisors to be more holistic service providers for their clients," he says. This means working on deposits, loans and trust accounts -- three traditional bank-delivered products.

The brokerage and bank operations are being combined in some locations, such as Boston, and the computer systems are also reportedly set to come together in the coming months.

o Wachovia: "They've also done a great job at managing the brokerage and banking channels," Roame says. "They've got good symbiosis, and have also done well at creating and growing their multi-channel brokerage model."

Wachovia has been a confident and focused "bidder at the table" when it comes to potential money-management acquisitions, he points out. The company is staying in this business and has been aggressively looking at deals, possibly including big names like Putnam and MFS.

"And they could buy more brokerage firms, too. There are a handful of regional firms left -- and I would not even be surprised if they make a bid for Morgan Stanley's retail business," shares Roame.

Where is Wachovia headed? "They may be creating more advisor channels, and they see the RIA model as something that could be good for them. This builds on the success they've had in building the bank-broker model, which has attracted some good advisors," the consultant says.

o UBS: The Swiss-based firm had a busy 2006, when it bought Minneapolis-based Piper Jaffray's retail brokerage operations and then those of Cleveland-centered McDonald Investments. And, in both deals, UBS managed to keep a substantial number of advisors.

"You've got to give them credit. Everyone loves to throw stones, and change leads to some turnover. But they did about as well as you can do at this," shares Roame. Like Wachovia, UBS is also staying in the money-management business, he adds.

"I expect them to continue to be a buyer of brokerage firms and money managers" in the next year or so, the consultant explains.

In terms of which firms may come on the market in '07, Roame doesn't anticipate that will happen to Raymond James. "They have been steadfastly independent. They are building out and growing their multiple advisor channels quite well as an independent and regional firm. But it is clearly a prize property, so if and when it does become available, it will demand a premium."

Send comments to jlevaux@researchmag.com.

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