Pool Of Independent Brokers Grows As Wall Street's Falls

Dow Jones Newswires | April 16, 2003 | Lynn Cowan and Cheryl Winokur Munk

[Starwind]

Pool Of Independent Brokers Grows As Wall Street's Falls

By Lynn Cowan and Cheryl Winokur Munk of DOW JONES NEWSWIRES

WASHINGTON--(Dow Jones)--They're not affiliated with well-known names such as Merrill Lynch & Co. (MER) or Citigroup Inc.'s (C) Smith Barney, but the ranks of independent stockbrokers have continued to grow in the past three years even as major Wall Street firms have consistently been cutting their sales forces.

The number of independent brokers - who shoulder all the costs of doing business but get to keep a greater portion of their output - increased 37% from 1999 to an estimated 95,764 in 2002, according to Dennis Gallant of Boston consulting firm Cerulli Associates, who cautions that the numbers are rough estimates, given the lack of public data available. During that period, the number of brokers registered with the National Association of Securities Dealers rose 7% to 662,311.

At the same time, the number of stockbrokers employed by the top four major Wall Street firms dropped by 6% from 1999 to 48,093 in 2002. The top four firms are Merrill, Smith Barney, Morgan Stanley (MWD) and UBS AG's (UBS) UBS PaineWebber unit. Although all the major firms are down from their peak numbers of brokers in 2000 and 2001, the ones that traditionally had the largest sales forces - Merrill Lynch and Morgan Stanley - account for the greatest decline, down 31% and 10% respectively. Smith Barney is down less than 2% and PaineWebber is down less than 1%.

(Wachovia Corp. (WB), which operates both an independent service arm and its own broker team, wasn't included in the tally because its merger with First Union's large fleet of brokers didn't occur until 2001, and 40% of its current 8,109 brokers ahead of the impending joint venture with Prudential Securities aren't full-service Series 7 licensed.)

Independents' numbers have increased despite the bear market due both to the migration of insurance broker-dealers to independent shops and to the defection of stockbrokers from wirehouses, Gallant said. Since it is rare for a newcomer to the industry to start out as an independent stockbroker, experienced brokers are the primary labor force turning independent.

Although independent brokers steer their own course, there is an entire industry devoted to providing them with back-office services, such as trading and statement processing. Major firms include privately held LPL Financial Services in Boston and San Diego, which caters exclusively to 4,400 independent brokers; San Francisco-based Charles Schwab & Co. (SCH), which provides back-office services to 5,900 financial advisors; and Raymond James Financial Services, a division of Raymond James Financial Inc. (RJF), with 4,300 independent brokers.

"Last year was the best recruiting year we've ever had in the history of our company. We've seen an eight to nine percent increase in the number of new branch offices and gross revenue dollars," said Bill McGovern, senior vice president of business development for Raymond James Financial Services. "About two-thirds of our new branch offices come to us from wirehouses. The other third is from people who are already independent."

The reason for the increase among Wall Street defections varies. Some brokers who aren't meeting production quotas at major firms may be forced out or are sick of being penalized on commissions because they have lower levels of assets than their peers. They're often welcomed with open arms by firms like Investors Capital Corp. (ICH) and SWS Financial Services, a unit of SWS Group Inc. (SWS), which provide back-office services like trading and clearing to independents. Because an independent broker is responsible for his or her own costs, there is little overhead risk for the back-office service providers.

Other, higher-producing brokers may be going independent to help their personal bottom line - with fewer new investors keen on entering the market or doing trades, it helps that an independent broker can earn a 70% to 90% commission payout on his sales, compared to 25% to 45% at a major Wall Street firm. Because wirehouses shoulder the burden of office overhead, brokers that produce less than $1 million a year aren't guaranteed the same support staff or access to services as the over-$1 million crowd.

"When the markets turn bad, they fall on the (payout) grid, their payouts get cut, the firms assign more costs, so their net is getting hurt even more," said Bill Dwyer, executive director of branch development for LPL, which saw an 11% net increase from last year in the number of independent brokers using the firm's services.

Meanwhile, some firms that cater to independent brokers are raising their sights on higher producers who are disenchanted with their current firms. LPL said the production level of the brokers it is recruiting has risen 21% from last year. Round Hill Securities Inc., an Alamo, Calif. firm that services 150 brokers, is now advertising for reps who can generate gross commissions of $250,000 a year. SWS Financial Services is also raising its minimums, said Bob Gioia, president of the unit.

"I truly believe this is the only growth segment of the industry," said Gioia, whose firm has reduced the number of independent brokers it serves by eliminating brokers who don't produce, but plans to add more higher producers to its stable.

Industry watchers are divided on whether the increase in the number of independents will continue. "It's taking a lot more effort to get new recruits in the door, but they're still doing it," Cerulli's Gallant said.

Cerulli expects the number of independent brokers to peak in 2004 and then pull back a bit as more people retire from the industry and the pool of possible candidates shrinks.

After all, many of the brokers who want to be independent have already made the jump, Gallant said. What's more, he said, wirehouses are aware that they have been losing talent and won't give up without a fight.

Nonetheless, independent firms still view traditional brokerages as prime pickings for recruitment. Mutual Service Corp., a unit of Pacific Life Insurance Co., for example, plans to target wirehouse brokers for the first time later this year. The company will offer free consultations to help brokers determine whether independence is right for them, said Jay Vinson, first vice president and new business development manager.

Of course, independent brokerages haven't been immune from the recruiting slowdown that occurred in the wake of Sept. 11. Indeed, while a number of them have attracted more brokers, at some shops their overall ranks aren't up, given that others have retired or left for other reasons.

Peter Grifo, vice president and head of recruiting at Cadaret, Grant & Co. in Syracuse, N.Y., said the first half of last year "stunk for recruiting," but has improved. The firm offers its services to 950 brokers, about the same as it had a year earlier. Nonetheless, it hopes to attract 10% to 15% more each year, compared with an attrition rate in the 5% to 10% range.

One advantage independent service providers have in attracting new brokers is that they still generally have lower production thresholds than major Wall Street firms or regional brokerages, some of which require at least $300,000 of trailing 12-month production.

Investors Capital of Lynnfield, Mass., for example, has been fielding more calls from brokers displaced from Wall Street and those concerned their job is at risk, said President Tim Murphy. His firm, which has about 1,000 brokers, hopes to grow its ranks by a net of about 300 during the current fiscal year that ends in March 2004.

John Peluso, president of Wachovia Securities Financial Network, the independent brokerage arm of Wachovia, said the firm has also received more calls from interested Wall Street brokers and doesn't see interest waning. "It is clearly on the increase," he said.

--By Lynn Cowan, Dow Jones Newswires; 202-628-9783; lynn.cowan@dowjones.com

--By Cheryl Winokur Munk, Dow Jones Newswires; 201-938-2123; cheryl.munk@dowjones.com .

(END) Dow Jones Newswires

04-16-03 1215ET- - 12 15 PM EDT 04-16-03

[Starwind]

I'd like to think this will improve the industry as competition dilutes the 'bias' viewpoints and recommendations among the prevailing major brokerages.