Banks that pay luxe prices for brokerage firms may find they have to keep doling out the dough if they are serious about competing in the securities business.
Many of the regional firms looking for a buyer need an infusion of capital to update technology and retain top producers, according to several people attending a Securities Industry Association conference here this week.
"Rapid changes in capital markets technology is certainly one of the reasons that regional firms are willing to sell now," said Richard G. Ketchum, president of the National Association of Securities Dealers Inc., in an interview.
In addition, the securities industry's culture of hefty compensation packages is starting to creep into banks that have acquired brokerage firms in recent years.
Some senior banking executives said they are restructuring incentives for loan officers so they will be more inclined to refer business to the bank's capital markets unit. Because the lenders are not registered broker- dealers, the incentives cannot be based on the outcome of deals but on referrals only.
William B. Summers Jr., chairman of Cleveland-based KeyCorp's capital markets unit, told people at the conference Tuesday that this is one of the many ways banks have begun "to dance around issues of compensation."
Executive recruiter George V. McGough said that even the generous retirement packages for top producers in the securities industry need to be rethought.
Because of the hot competition for talent, managers often compensate new recruits with signing bonuses and other front-end incentives to make up for the generous retirement packages they may be leaving behind at their former employers.
Banks and brokerages are in a bidding war for investment bankers and certain kinds of research analysts. For example, analysts with as little as three years of experience who follow Internet companies are commanding six- figure signing packages.
But any mid-tier regional firm that wants to build a significant investment banking presence needs to invest in Internet research coverage, several bankers here said.
A trickier question is the debate among managers over whether to take their retail brokerage on-line.
Though on-line investing is becoming increasingly popular, some in the securities industry are not eager to encourage their customers to buy stocks on the Web.
Kenneth D. Jones, an investment banker at San Francisco-based Thomas Weisel Partners LLC, said the rise of Internet trading will lead to further spread compression for broker-dealers.
But even if a bank did not plan to get into the on-line brokerage business when it bought a retail firm, Mr. Jones said, that is something it will need to do soon to remain competitive.
This can be a tough sell for chief executive officers.
"It's difficult to say to your shareholders that we are going to spend this money" without a return on investment, said Richard R. Lindsey, a senior managing director in Bear Stearns' correspondent clearing and prime brokerage operations. But "the application of technology to markets has gone further than anyone would have thought as recently as two years ago.
"We are spending this money just to stay in the game," he added.