Weighing the pros and cons of offering full-service versus discount brokerage is a fundamental task for banks as they develop into providers of investment services, experts say.
A growing number of mostly large banks - 156 at the last count by American Brokerage Consultants, St. Petersburg, Fla. - offer full-service brokerage exclusively, citing growing demand among their customers for investment advice. Banks see commission income as a lucrative revenue source.
But a larger group of banks - 650 - has discount operations only, meaning that they help customers trade stocks, bonds, and other securities but offer no investment advice.
And the largest group of all - 1,923 banks - has taken a hybrid approach, operating discount brokerages while adding full-service investment representatives who advise buyers on mutual funds and annuities. These banks stop short, however, of advising customers on stock and bond purchases.
Experts say each strategy has distinct advantages. But Richard Ayotte, managing director of American Brokerage Consultants, said banks are clearly moving toward full-service brokerage.
That's because a growing number of investors "need advice, and they're not going to go to companies that don't provide it," said Mr. Ayotte, who has surveyed 4,113 banks with more than $50 million of assets about their brokerage activities.
Many factors come into play for banks choosing which brokerage strategy to adopt. Among them: customer demand for services and the bank's financial resources.
"There are many banks that just offer discount service, but their customers want more. They want advice," said Joy P. Montgomery, president of Money Marketing Initiatives, Morristown, N.J. "Many larger banks are finding they have to step up to the plate and offer full service, but the smaller ones can't afford it."
But even some small banks have taken the plunge into full-service brokerage.
Take Sidell State Bank Corp., a $12 million-asset Illinois bank with a chief executive officer who doesn't think the bank is too small for full service.
The bank charges full price for investment advice because its chairman and CEO, Thomas Butler, acts as the lone investment rep.
"Every bank I'm aware of has a discount brokerage but doesn't use it because there's no incentive," Mr. Butler said. "They're concerned about losing deposits, so they don't even let their customers know it's available."
Still other banks are straddling the line, offering both full-service and discount brokerage. Mr. Ayotte did not have figures on how many banks fall into this category.
One example is People's Bank, Bridgeport, Conn., which juggles a discount brokerage with a full-service operation employing brokers who are expected to drum up business for the bank. Stocks and bonds are on the full-service brokerage's product menu, along with mutual funds and annuities.
The $6.9 billion-asset bank's brokerage subsidiary generates 65% of its revenues from discount operations, the rest from full-service activities.
Then there are the banks that have stepped into full-service brokerage on a hybrid basis. They keep their discount brokerages intact while offering investment advice on mutual funds and annuities but not stocks or bonds.
Primevest Financial Services Inc., a St. Cloud, Minn., firm, converted 62 bank clients' discount operations into "something akin to full-service" last year, Mr. Ayotte said.
Finally, there's discount brokerage only - generally a less profitable business than full-service brokerage but with some pluses.
"Discount brokerage operations are a relatively painless way for a bank to make some additional revenues and deepen a relationship with customers who don't want investment advice," said consultant Geoffrey Bobroff, East Greenwich, R.I.
The advantages can go beyond cost savings. Many community banks don't want to take the responsibility of giving investment advice to customers who may sue over investment choices gone sour.
"Most smaller community banks don't feel comfortable having someone sitting in their lobby selling investment products," said Peggy LaBelle, director of bank services at U.S. Clearing Corp., New York.
