Academic journal article ABA Banking Journal

Taking Brokerage to a Higher Level: Banks Are Starting to Shift from Managed Programs to Full-Service Brokerage, and Some Are Seeking Help from Brokerage Firms

Academic journal article ABA Banking Journal

Taking Brokerage to a Higher Level: Banks Are Starting to Shift from Managed Programs to Full-Service Brokerage, and Some Are Seeking Help from Brokerage Firms

Article excerpt

Banks are starting to shift from managed programs to full-service brokerage, and some are seeking help from brokerage firms

If imitation is the sincerest form of flattery, brokerage firms are getting a compliment from banks these days. After four years of offering mostly select mutual funds and annuities to their customers, many banks are entering a new phase, full-service brokerage, in which they sell every product a consumer might see in a wire house.

"True brokerage doesn't just focus on mutual funds and annuities, it takes more of a stock and bond orientation to the sales program," says Jeb Britton, senior consultant at the Spectrem Group, Virginia Beach. "A lot of us believe that's the next evolution."

The spectacular performance of the stock market last year and the increasing interest of investors, particularly baby boomers, in stocks and bonds, are forcing banks to broaden their product mix to satisfy younger customers.

Less-than-perfect alliances

A logical way to become more like a broker is to team up with one. In the past, some of banks' efforts to ally themselves with brokerage firms have been well-publicized fiascoes, including the NationsBank/Dean Witter joint venture, the Chemical Bank/Liberty Financial joint venture, and the First Bank/IDS agreement (IDS is a financial planning firm).

"NationsBank said they got out of the joint venture what they wanted and Dean Witter said they got out of it what they wanted," comments Britton at Spectrem. "That sounds like my first marriage--we both went away happy, but was it the going away that made us happy or what?"

In each of these arrangements, representatives of the brokerage or financial planning firm set up shop in the bank's lobby and both sides were to share in the profits.

"A lot of times there's a great difficulty when you try to marry the culture of a brokerage firm and the culture of a bank," says Ellen Landry, consultant with Cerulli Associates, Boston. "Particularly in the joint ventures that dissolved, where they put brokers in bank sales environments, the disparate culture contributed to the unwinding of these alliances."

We may never see a NationsBank/Dean Witter style alliance again, she believes. "A lot of larger banks have grown in confidence and think they can do it themselves, or if they feel the technology and expertise are too expensive, they cut a deal more like the Banc One [Dean Witter] deal."

Both brokerage firms and banks are still trying to figure out the best way to work together, says Ruchi Madan, senior regional bank analyst at Prudential Securities, New York. "NationsBank tried one thing with Dean Witter, Banc One seems to be trying something else. Everyone's still struggling to find the best strategy."

Banc One in February announced that it had formed an alliance with Dean Witter. At first glance, this was astonishing considering that NationsBank is still settling lawsuits from brokerage customers and former Dean Witter brokers from its joint venture with the firm. At second glance, it made sense because Dean Witter reps will not work out of bank branches. The New York brokerage firm will be paid to train Banc One investment reps and provide technical support, much like a typical third-party marketer agreement.

"The Dean Witter/Banc One alliance has more promise than alliances of the past," says Landry at Cerulli Associates. "They learned the lessons from some of these more painful first stabs at joint ventures earlier on. The alliance is not trying to impose a brokerage culture on the bank or vice versa and the lines are very clearly delineated, whereas before there was too much blurring going on."

Multiple growth strategies

Forming a joint venture with a broker isn't the only way to take an investment sales program from packaged products to full-service. A few banks have bought a brokerage firm--National City Corp. in Cleveland bought Raffensperger, Hughes & Co. …

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