Death of a Stock Salesman

With discount outfits eroding profit margins, only wealthy clients get face-to-face attention, making stockbrokers an almost extinct breed

By Amey Stone

SPECIAL REPORT FINANCIAL PLANNING

Here's a riddle for the 21st century investor: What is the difference between a stockbroker and a financial adviser? Answer: What's a stockbroker?

The Securities & Exchange Commission is currently wrestling with how to regulate stockbrokers in an era when they're becoming more like financial planners. Its ruling on the thorny issue is due Apr. 15 (see BW, 4/11/05, "Broker or Adviser?"). But apart from the long-awaited decision, regulators are missing a larger point in the marketplace: Stockbrokers are a dying breed.

As the job of giving financial advice enters a new era, the good news for individual investors is that the days of getting cold calls from stockbrokers urging you to buy the firm's latest top picks are fading -- just like the term "stockbroker" itself. The bad news is that you may need an account well into the six figures before the new breed of financial (or investment) adviser will find it worthwhile to provide you with investment advice. ().

There are still 661,000 "registered representatives" (down just 2% from 2001's figure), moving stocks, bonds, and mutual funds at firms like Merrill Lynch (MER ), Smith Barney, and A.G. Edwards (AGE ). But in an evolution that has occurred over the past two decades, their main job has changed from pitching investment ideas to implementing long-term financial plans for their clients. That means selling a lot more than just stocks -- life insurance, mortgages, hedge funds, and estate plans, for starters.

FIGHTING WORD.

  The job title "stockbroker" has practically disappeared from use. Merrill Lynch uses the term "financial adviser." Smith Barney and Charles Schwab (SCH ) call them "financial consultants." Morgan Stanley (MWD ) has a team of "financial planning specialists." Not even a trade magazine is called stockbroker. Trade titles go by Registered Rep, Investment Advisor, and Financial Planning on Wall Street.

"It's absolutely not a term you'll see on anybody's card anymore," says David Geracioti, editor of Registered Rep, "even though there are a lot of people still acting like stockbrokers." His magazine only occasionally uses the term "broker" in stories, usually just to tweak readers, he says. Most financial advisers detest being called stockbrokers. Geracioti once made the mistake of calling a financial adviser a broker, he says, "and she never recovered from the insult."

The change in job description is more than mere terminology. It's also part of a long-term trend that began back in 1975, when fixed commissions on selling stocks were eliminated (eventually leading to today's rock-bottom stock-trading fees), says Frank Fernandez, research director at the Securities Industry Assn. (SIA). The trend picked up speed in the 1990s, when financial-services firms started consolidating in their quests to have brokers cross-sell customers a broader range of products.

SCANDAL'S LEGACY.

  Just the same, think back to the bull market of five years ago, when still plenty of stock jockeys were still working the phones, hyped research reports in hand. What has changed in just the past few years -- thanks to the tech wreck and three-year bear market that followed, is that a lot of those salespeople are now wearing different hats or have changed careers.

"The bear market separated the wheat from the chaff -- a lot of marginal brokers left the business," says Ron Cordes, chairman of AssetMark Investment Services, a San Mateo (Calif.) firm that helps commission brokers make the transition to independent, fee-based financial advisers. And Wall Street's credibility is still smarting in the aftermath of New York State Attorney General Eliot Spitzer taking firms to task for issuing biased reports. That scandal deprived stockbrokers of their chief sales tool.

Financial advisers best able to survive the downturn were the ones who put clients in broadly diversified investments and built relationships around helping them meet a broad set of financial goals, like buying homes, saving for college, or planning for retirement, says James Barnash, managing director of Lincoln Financial Advisors in Chicago and president of the Financial Planning Assn.

ZERO PROFIT?

  People aren't getting into the business today because they want to pitch hot investment ideas. Rather, says Barnash, they want to help clients reach long-term financial goals. He estimates that from 75,000 to 100,000 financial planners are at work in the U.S. right now. Even though there are only 45,000 designated certified financial planners (CFP), about one-third of new CFPs come from big brokerage firms, he says.

Another long-term trend that has been unfolding simultaneously: improvements in technology and the rise of online discount brokerages continue to drive down commission rates. Earning a living from trading commissions is no longer a viable profession -- and, ultimately, it may not be a viable business model even for the discount brokerages. A Mar. 25 report from Forrester Research predicts that the likes of E*Trade (ET ), Charles Schwab, and TD Waterhouse will soon offer online trades at zero profit in hopes of cross-selling their other financial products.

For investment professionals (and the firms they represent), the solution to rock-bottom trading commissions has been to convert customers to paying annual fees for financial advice (typically 1% of assets), rather than charging for individual transactions. Regulators also favor this business model, since the brokers' incentive is to help customers build their investment portfolios, vs. encouraging clients to buy and sell without regard to the trades' benefit or cost. In 2004 the percentage of registered representatives' income from fee-based services reached roughly 33%, estimates the SIA's Fernandez, up from 31% in 2003. In 1995, the share of fee-based income was under 10%.

NO MORE FACE TIME.

  The switch to fee-based income streams has had two unanticipated side effects. First, it has put stockbrokers in direct competition with financial planners and money managers, confusing consumers, and getting the SEC into the act. Full-fledged financial advisers, who face a more onerous regulatory regime, want brokerage-firm representatives to meet the same requirements. That's where the SEC's upcoming ruling may provide some clarity.

And the second unintended effect of the move toward asset-management fees: Small investors are increasingly being shut out at large brokerage firms. After all, at 1% a year, that would mean just a $500 fee for handling a $50,000 account. Starting in 2005, Merrill Lynch stopped compensating brokers for serving client accounts of less than $50,000 -- a powerful incentive to have them move those assets to the firm's "financial advisory center," similar to a call center, where Merrill says small customers can be better served, albeit over the phone, rather than face-to-face.

Most successful financial advisers have much higher minimum-account requirements. Mellon Financial requires customers to have at least $1 million in assets to sign up for its fast-growing private-wealth-management service. That's about the minimum it takes for the business model to work, given the high-end investment, tax, and estate-planning services offered, and for clients' financial affairs to be sufficiently complex to make such management worthwhile, says David Lamere, president of that division, who adds: "We can't bring this kind of service to the mass market."

EXTINCT SPECIES.

  New services are cropping up to help independent advisers profitably serve small-account customers who do come seeking advice. For example, Accessor, a Seattle-based investment-management firm, has just started marketing a new family of asset-allocation funds, called SmartSolutions, to brokerages. Accessor says it will enable those firms to profitably serve accounts of less than $100,000. That addresses only investment allocation, however, not the in-person -- and often time-consuming -- hand-holding that most people expect from today's new breed of financial advisers.

Individuals with less than six figures to invest may have to change their expectations when it comes to obtaining professional advice. But they can take solace that the fabled stockbroker making money from churning customer accounts has all but gone the way of the dinosaur.

For more on the SEC's effort to clarify whether brokers who charge an annual fee qualify as investment advisers and must meet the requirements of the Investment Advisers Act of 1940, see Part II of this Special Report tomorrow.

Definitions:

Financial (or investment) adviser. An investment professional who provides investment advice to clients and is typically paid by annual fee.

Stockbroker. An investment professional who works for a brokerage firm and helps customers buy and sell securities.

Registered representative. The industry term for a stockbroker, so called because they must pass a test on securities law and products, meet continuing-education requirements, and register with regulators.

Financial planner. An investment professional who offers clients a comprehensive strategy for meeting their financial goals. That could include advice on investing, insurance, tax, and estate planning.

Certified financial planner. A specialist who has met CFP Board of Standards requirements, which include passing a test and undergoing continuing education.

Stone is a senior writer for BusinessWeek Online in New York

Edited by Beth Belton

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE