Securities Firms Go On Hiring Spree For Brokers Despite Online Trading
By Randall Smith, Staff Reporter of The Wall Street Journal
November 24, 1999
Dow Jones Business News (Copyright ©1999, Dow Jones & Company, Inc.)
Online stock trading poses a threat to the livelihood of full-service stockbrokers. So what are some big securities firms doing?
Hiring even more brokers.
Among the more aggressive firms is Morgan Stanley Dean Witter & Co., which in recent years has been expanding its army of U.S. brokers more than twice as quickly as Merrill Lynch & Co. The result: Morgan Stanley has vaulted over the Salomon Smith Barney unit of Citigroup Inc. as the nation’s second-largest brokerage firm. The move comes as the number of brokers has jumped 28% over the past five years.
What gives? Despite the explosion in online trading — it now represents more than 15% of all U.S. stock trading — it hasn’t quite caught on with the well-heeled set. Many online traders have less than $50,000 in their brokerage accounts. So Wall Street giants are betting that investors — particularly affluent ones — will continue to seek them out for financial advice. This could spell fat profits because securities firms typically earn steeper fees from larger accounts.
The notion that “the broker is obsolete” is hogwash, says James Higgins, president of Morgan Stanley’s brokerage operation. Though some online brokers’ ads have tried to suggest that brokers are dinosaurs, he says that when customers’ assets hit about $100,000, “over 80% of them look for some guidance in terms of financial advice.”
Merrill’s long-term growth goals haven’t changed over the past decade or more, a spokeswoman says, even as the firm is poised to roll out discount online trading on Dec. 1. As online trading reduces transactions “to the click of a mouse,” she says, “service will become an even more demanding part of what we do. Service takes human beings.”
OK, but what difference does it make to be the top dog? “There’s some cachet in being able to say you’re the biggest brokerage force in the U.S.,” says Rick Peterson, an independent recruiter in Houston. “Even though Merrill would deny it, we all know they love to say it.”
With 15,600 U.S. brokers and 17,800 world-wide, Merrill is currently adding just 300 to 500 brokers each year, the spokeswoman says. John “Launny” Steffens, head of Merrill’s U.S. brokerage operation, projects the U.S. total will grow to 17,000 by 2005.
By comparison, Morgan Stanley, with 12,300 U.S. brokers, is adding roughly 1,000 brokers annually. At that rate, Morgan Stanley would hit 18,000 sometime in the year 2005. At this rate, Morgan Stanley could overtake Merrill as No. 1 in the U.S. within the next several years. (The U.S. total for No. 3 Salomon Smith Barney, now 11,100, has been relatively stable since 1994.)
Although PaineWebber Group Inc. and the Prudential Securities unit of Prudential Insurance Co. of America are both bidding aggressively for talent as well, their recent growth rates don’t match that of, say, Morgan Stanley. Since 1994, PaineWebber’s U.S. broker force has grown by 33% to 7,200, and Prudential’s has grown by 11% to 6,000.
Merrill’s crown, Mr. Peterson asserts, “is in jeopardy.” Another recruiter, Daniel Sarch of White Plains, N.Y., says Morgan Stanley has been making offers “bigger than any other firm.”
Morgan Stanley officials, though they won’t concede an effort to overtake Merrill, are trumpeting the faster growth. As he unveiled a plan for the firm’s brokers to offer online trading last month, Morgan Stanley President John Mack said the firm’s “size and scale . . . makes a huge difference in financial services.”
Before the mid-1997 merger of Morgan Stanley & Co. and Dean Witter Discover & Co., he notes, its brokerage force was growing by 500 a year. In 1998, he says, the firm added 1,000 brokers, and will this year too.
Mr. Higgins contends that the faster growth isn’t a Morgan Stanley-Merrill issue. Rather, he says, it’s a sign that “we want to grow market share.” He adds: “We’re not targeting any one competitor . . . but we’re not going to take a back seat to any of our peer competitors, or the e-brokers or the discounters.”
Meanwhile, Salomon Smith Barney has grown largely through acquisition, notes Scotland King, head of recruiting and training. “While we are not aggressively going out there with big checks, I think the combination of extraordinary retention with selective recruiting is pretty significant,” she says.
Merrill executives, for their part, have said publicly the firm doesn’t want to compete for talent as aggressively as other firms by offering upfront bonus packages to lure top producers away from other firms.
One new Merrill recruit has built his book of business partly by offering advice to clients who used to trade aggressively online. “They were trading more because they weren’t getting advice,” says David Furmanski of Tucson, Ariz. A 25-year-old former car salesman who joined Merrill in April, Mr. Furmanski says: “People have a much higher comfort level when they have a friend, someone they respect, helping them make decisions.”
Still, Merrill doesn’t intend to “cede leadership” in its brokerage crown, says Merrill’s Mr. Steffens. He notes that Merrill brokers are more productive than the industry average.
Merrill brokers generate an average of $410,000 in annual commissions, well above the $325,000 average for Morgan Stanley Dean Witter brokers, according to analyst Joan Solotar of Donaldson Lufkin & Jenrette Inc. And Merrill’s assets per broker of $84.5 million are nearly double those of Morgan Stanley at $43 million.
Noting that some firms are bidding 1.5 times top brokers’ past 12 months’ production to recruit new hires, Merrill’s Mr. Steffans says: “Our attitude is this would be an uneconomic deal for us.” What’s more, he says, brokers “who jump ship have a predisposition to jump again” and thus may not be as loyal to the firm.
For Wall Street’s biggest firms, growth in number of brokers “has always been a measure of growing your retail business” catering to individual investors, says Richard Strauss, who follows securities firms at Goldman Sachs Group Inc.
The combined broker growth rate at Merrill and Morgan Stanley - which together employ 4.5% of all U.S. retail brokers - has been 30% over the past five years, not much different than that of all U.S. brokers, according to statistics from the Securities Industry Association.
While adding a large number of junior-level trainee brokers can reduce a securities firm’s profitability in the short run, DLJ’s Ms. Solotar says it boosts profitability two years later as the trainees gain experience.
When Merrill announced in May that it would introduce online trading, the industry “saw them as vulnerable,” says DLJ’s Ms. Solotar. Ironically, she says it was that announcement that “really stepped up (the industry’s) recruiting of experienced brokers.”
Copyright (c) 1999 Dow Jones & Company, Inc.