Insights & Advice

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Will stock brokers follow the ticker tape

Given that the stock market has almost doubled since its low in March, 2009, one would expect that an entirely new crop of youngsters would be clamoring to become the next generation of America’s stock brokers. So far the evidence points to the opposite conclusion.

Are brokers a dying breed?

Last month the Wall Street Journal featured an article entitled “Dangerous Stockbroker Shortage Threatens America”. The gist of the story was that less than 25% of all financial advisers are under 40 years of age while 5.6% are under 30. The writer quoted research from a Boston-based research firm, Cerullie Associates, that claimed the average age of a financial advisor is just under 49 years old with 14% of them over 60.
What I fail to understand is why this supposed shortage is dangerous?

I was a stock broker once upon a time. My clients, however, were not individual investors. My customers were the large institutions with multi billions of dollars that invested worldwide and their famed fund managers who you see quoted on television or in the top tier investment periodicals. It was a lucrative business.

In exchange for stock ideas and access I provided to company managements, my clients paid handsomely in commission dollars. I often ferried my investors to various countries and regions where I arranged private meetings between them and company officials, finance ministers and even presidents. All-in-all it was a gentleman’s business. But things have changed.

Institutions discovered the internet. Electronic trading evolved and became so cost effective that paying commissions for the services of people like me made no economic sense. Besides, what I could do, so could my clients. A phone call or e-mail from the chief investment officer of a huge U.S. pension fund to company X could accomplish the same objective as in my efforts.

In addition, the commoditization of equities overwhelmed all other methods of investment. The sheer weight of money under institutional management forced large institutions to abandon investing in individual equities. Instead, millions every day are bought and sold in baskets of stocks representing sectors, styles, regional and country indexes. It made stock picking superfluous and brokers like me a dying breed.

The same trend that convinced me to jump ship, abandon the brokerage business and manage money has been steadily chipping away at the retail broker’s business over the last decade. The advent of discount brokers, automation, passive investing and instantaneous information via the internet has evened out the playing field for individual investors. Investors are now capable of doing for themselves what brokers have traditionally charged them to do.

Today, you and I receive the same information our brokers do and we get it faster. The popularity of mutual funds and exchange traded funds as preferred investment tools have also impaired the utility of brokers and stock picking.

The big brokers realized this years ago and stopped recruiting and training new brokers. At one time, Merrill Lynch, for example, operated a huge campus in Southern New Jersey for the training of their retail brokers, complete with classrooms, dorms and cafeteria. As commissions declined and profits were squeezed, the brokers cut back on hiring and instead gave more and more accounts to the top producers. These producers are now retiring.

Remember that stock broking is a “people” business. Traditionally, you needed to trust and rely on your broker and if you couldn’t, you switched. However, 2008-2009 changed that. During the financial crisis, many brokers, young and old, advised their clients to remain invested only to panic and sell out their clients at the bottom. Lawsuits followed, animosity built and trust declined across the industry.

As an example, two individual investors were recently awarded $54 million in a securities arbitration case against Smith Barney. The case was over the sale of conservative municipal bond investments that turned out to be less than safe, losing between half and three quarters of their value during the financial crisis.
Given the performance and reputation of brokers and the financial services sector in general over the last few years, is it any wonder that the last thing the new crop of college grads wants to do is become stock brokers?

Even the name “broker” no longer exists. Thanks to millions spent in marketing, the brokerage houses have successfully confused the investing public in exactly who they are dealing with. The broker has gone the way of the ticker tape, the typewriter and the transistor radio. New names such as “wealth manager,” “financial consultant” and “financial advisor” have replaced the old title and I for one am not so sure the change is for the better.

Posted in A Few Dollars More, Portfolio Advice