They may not be making it ‘the old fashioned way’ with commissions on stock transactions, but in spite of reports of representatives fleeing wirehouses to affiliate with independent broker/dealers, controversy over Rule 202, and questions about who may be best suited to work with the investing public, wirehouses seem to be thriving in their retail businesses by using innovative strategies and very sophisticated products to solve problems for the wealthy.

Revenues are up, year over year, for the retail brokerage businesses of Merrill Lynch and Wachovia, two wirehouses that had reported third-quarter earnings as of mid-October. Merrill cited “higher fee-based revenues and net interest profit” in its announcement, and Wachovia similarly attributed its revenue growth to “retail brokerage managed account fees, wider deposit spreads,” and the impact of two acquisitions.

The big four, Merrill Lynch, Morgan Stanley, Citigroup, and Wachovia, are all hiring high-end, very seasoned brokers. One thing that is “surprising and confusing” to Richard X. Bove, financial institutions analyst at New York-based Punk, Ziegel & Company, is that he’s hearing “that Morgan Stanley is now willing to pay 200% of trailing 12-month commissions as a sign-on bonus,” although he hears from others that the figure is overstated, “that it is really 140% to 160%, but that strikes me as being outrageously high also.

“Morgan Stanley is down about 5,000 brokers–mostly because they’ve made a decision to disassociate with them. It also appears that Morgan Stanley has been a fertile field for its competitors to pick up individuals.” Bove adds that the firm “has publicly stated that they are going after the competition wherever the competition has hurt them; presumably they’re going after Merrill Lynch because Merrill has had a great deal of success in hiring Morgan Stanley brokers.” Of course, it was Morgan Stanley that in August 2005 hired James P. Gorman away from Merrill Lynch where he had been president of Merrill’s global private client group, including some 14,000 brokers, to be president and COO of its individual investor group, and later brought in Merrill veterans Jerry Miller and Richard Skae as regional directors to report to Gorman. Wachovia has also had some degree of success hiring Morgan Stanley brokers, Bove says. What is “most important in the industry at the moment is attracting and stabilizing a workforce.”

With equity trades on TDAmeritrade priced at $9.95, and Bank of America offering 30 free equity trades a month to customers with $25,000 in their accounts, selling stocks on commission can’t earn most high-end brokers a living. According to Bove: “You’re going to put people into wrap accounts where you say ‘You can trade forever for nothing but we’re going to charge you 1% or 2% of the assets which we have in-house in your account.’”

“You can’t simply sell stock, you want to sell mutual funds, interest in hedge funds, structured financial products, bank deposits, mortgages, business loans, anything that you can sell because all of those products have much higher margins than simply selling stocks. The bond market, particularly the municipal bond market, gives you an opportunity to make some money because in the municipal bond market you have unique products all the time. Microsoft is not a unique product–it’s a product anyone can buy. It’s a commodity, and [customers] can buy it at low price. However, Tampa Florida Water District III–that’s a unique product and you can wrap a pretty big commission around that product,” Bove explains. “For the guy in Tampa” who doesn’t want to pay taxes on the income, he notes, “that’s something they desire.”

What stands out to Bove is a growing need to provide custom solutions for wealthy clients. “If you step away from the wirehouses and look at Lehman Brothers and Bear Stearns,” these firms have “moved out on the risk spectrum to products which are more structured finance in nature because the margins are much higher.” For example, take a client who has accumulated wealth in the form of a large, highly appreciated position in their employer’s stock. Lehman Brothers would, he says, short that stock against the client’s position, hand them the money–”for a fee, obviously”–and then the client can go and invest that wherever he wants. They’ve effectively sold the stock position, have the money–so they’ve diversified, and deferred their taxes on the capital gain. “It’s doing innovative things like that to solve specific problems for high-wealth individuals, which is allowing these firms to make pretty good profits.”

When he asked Merrill Lynch if they’re willing to do the same thing, “they claim that they are, but they certainly haven’t done it, in my view, to the extent that Lehman or Bear Stearns has done it,” says Bove. “But then, when the guy gets his money, you don’t put him into Fidelity Magellan, you put him into a collateralized debt obligation, or a collateralized loan obligation, or one of these new esoteric products which are so popular, [like a] commercial mortgage-backed security, and in that fashion you can charge him a commission which is well above normal, so you’ve hit him twice. You get an ongoing fee, which you’re charging as long as the firm has the short outstanding; then you’re putting him onto a product that has a higher level of commission.”

Why not take that expertise to an independent B/D and get a higher payout? If an advisor is a big producer at an independent B/D, they can get a 90% payout, but they have to pay all of their expenses, and Bove says an independent B/D “cannot give me the range of products that I can get at Merrill Lynch or Wachovia. If I’m constantly searching for those product lines which are unique relative to the mass” products out there, the wirehouse has got them. “If I want to focus on just the high-margin products, Bear Stearns and Lehman has them.

“I’m making two cents a share trading Microsoft,” he continues, “but if a new company goes public–Bank of China–the biggest IPO this year–I’m going to probably make 30 cents on that, so I’m going to want to be with the company that does the most new issues or the most follow-on issues.”


Unsatisfied Women

A new study by Spectrem Group–Affluent Women–found that a majority of wealthy U.S. females are not satisfied when it comes to dealing with financial advisors. Lauryn Keenan, senior consultant for Spectrem, believes advisors, broadly defined as anyone from an accountant to an RIA to an attorney, are missing out on a large number of affluent female clients because they are not catering to the needs of these women.

So how can advisors accommodate these women? According to Keenan, communication is essential. “Women don’t need coddling, which is a common misconception; it’s more of a personal attention need, such as face-to-face meetings, which was one of the higher-ranking communication tools.”

Among the poorest rated tools in the survey, which was conducted last year with more than 1,000 households with $500,000 or more of investable assets, are seminars, “mostly because advisors use them to push products and have been known to talk down to women,” Keenan points out.–Kara P. Stapleton