After a decade of quiet growth and evolution, brokerages have become an undisputed fact of life in the world of banking.
What started at many banks as half-hearted efforts to keep depositors from leaving the branch office in search of better investment returns has grown into committed, profit-seeking ventures.
Many discount brokerages launched in the early and mid-1980s have evolved into full-service shops, offering a vast array of mutual funds, fixed and variable annuities, stocks and bonds, and the financial advice needed to allocate assets properly.
So far, brokerages have contributed little to banking's bottom line, and it remains to be seen whether they ever will. But bankers say that, at a minimum, brokerage is a business they must be in to avoid losing customers. And some view it as an engine for expanding banking beyond its lending and deposit-taking origins.
Things can get perplexing, however, when banks start pondering how they should enter and build this business.
Is it best to start a brokerage from scratch, relying perhaps on an outside marketing firm for help in the early years?
Or should a bank simply bite the bullet and buy a small nonbank unit across town?
What about partnering with a big-name retail brokerage in an effort to capitalize on its brand name?
Naturally, the questions outnumber clear answers. "You have to determine what works best within the culture of your own bank," says Wayne Wilson, president of U.S. Bancorp Securities, brokerage unit of the Portland, Ore.- based banking company.
This supplement tells the stories of several banks that have adopted different strategies for growth in brokerage.
First Union officials, for example, decided it was necessary to have complete control over their brokerage business' rapid expansion. Since 1983, the Charlotte, N.C.-based banking powerhouse has transformed an operation with eight sales representatives into one that boasts more than 3,000.
Bank executives believed this kind of rapid expansion, tailored to the company's ever-expanding branch network, ruled out an alliance with an outside investment marketing firm or an acquisition.
But many banks - particularly smaller ones - are willing to sacrifice control for the benefits of linking up with proven experts.
Indeed, most banks that have entered the brokerage business in recent years have felt a need to ally themselves with one of a small cadre of investment marketing specialty firms. These companies - known as third- party marketers - play a behind-the-scenes role, offering a bank everything from back-office assistance to trained sales reps.
But in recent years, a handful of banks have decided to find partners that have a larger public profile.
Last April, for example, executives of tiny Admiralty Bank in Palm Beach Gardens, Fla., teamed up with Quick & Reilly, a leading national discount brokerage firm. In doing so, they gained a new book of nonbank customers and benefits from the brokerage's advertising budget for their $40 million- asset bank.
Cleveland-based National City Corp. has the size to build a brokerage unit in-house. And it certainly could have allied itself with a nonbank brokerage. But instead, the $36 billion-asset banking company decided to double the size of its brokerage unit in one day with the purchase of Raffensperger, Hughes & Co., a small but respectable Indiana-based brokerage with securities underwriting capabilities.
In buying a securities firm, National City was taking a step consistent with its corporate goal of serving large corporate clients in both lending and investment banking.
While only a handful of banks have bought brokerages, the few that have taken the plunge seem to share core concerns. They want to expand quickly in the business with the benefit of outside expertise. But they don't want to give up the control often required for an alliance with an outside investment marketing firm.
"We didn't want to be at the mercy of some third-party provider," said Mark Ferguson, chairman and CEO of Firstbank of Illinois Co., explaining why his $1.9 billion-asset holding company bought a small brokerage in 1994.
"We wanted to take the business the way we wanted to go," Mr. Ferguson said. "But we also needed someone with the background that we didn't have. We didn't want to start from scratch."
Joseph Cooney, president of First Security Investment Services, brokerage arm of the Utah-based bank holding company, shares Mr. Ferguson's desire for independence of action. But his operation has made out well without outside help.
"There's no profit sharing like there would be" if the bank were in partnership with another firm, Mr. Cooney said. "We enjoy all the profits as well as the heartache."
But despite the fact that many banks have wrested control of their brokerage operations away from outside marketing firms, some continue to see the benefits of these companies.
A case in point is California Federal Bank. The $14.3 billion-asset thrift has an eight-year-old partnership with Invest Financial Corp., the Tampa-based investment marketing firm with banking clients nationwide.
While Cal Fed is clearly large enough to run its own broker-dealer, it prefers to farm out most brokerage functions to Invest.
As a result, the Florida firm hires the brokers, oversees training, compliance, and other back-office administrative functions, and it even acts as liaison with mutual fund providers. The role of Cal Fed Investment Services, the bank's brokerage, is simply to set an overall marketing direction through the bank branches.
The payoff for Cal Fed is the $14 million in fee revenues the unit earned for the bank last year.
"We rely on Invest to be the industry expert," said Jeffrey Rigsby, president of Cal Fed Investment Services.
Whether banks chose to build brokerages on their own or with help, it's critical that they are willing to compete hard against all comers, cautions Jeb Britton 3d, a senior consultant at San Francisco-based Spectrem Group.
"Some bankers still say, 'I don't really want to be in this business, but I'm doing it to accommodate my clients,'" Mr. Britton said. "But companies like Charles Schwab aren't in it to accommodate - they're in it to win."