Need evidence that everything eventually comes back in style? Consider how commercial banks are sizing up discount securities brokerage Quick & Reilly Group.
The Palm Beach, Fla., company-the nation's third-largest provider of cut-rate investment services-went on the auction block last week with an asking price of about $1.5 billion. Several banks, including J.P. Morgan & Co., Mellon Bank Corp., KeyCorp, and First Union Corp., are said to be looking.
If a bank were to snare Quick & Reilly, a business that banks have downplayed for the past decade could suddenly be back in vogue.
Banks embraced discounting in a big way in the early 1980s, fighting a protracted legal battle that culminated in a 1983 Federal Reserve decision to let banks into the business. That year, BankAmerica Corp. bought Charles Schwab & Co.-then as now a leader in services for do-it-yourself investors. (The bank, in financial straits at the time, sold Schwab in 1987.)
But as regulators have expanded banks' full-service brokerage powers, the industry has shifted focus, convinced the future lay in providing a full range of investment services to advice-hungry customers.
Why would the pendulum swing back to discount brokerage? One reason is that discounting works better at banks than full-service operations, which require high levels of service and equally high compensation, according to Kenneth R. Hoffman, president of Optima Group, Fairfield, Conn.
"Historically, banks do not do well putting a highly compensated person at the point of sale," Mr. Hoffman said. The discount broker model allows banks to sell investments directly to customers without high commissions. Banks have direct sales experience through their credit card and telephone service operations, he said.
To be sure, banks offering discount brokerage services already outnumber those offering full service-2,500 versus 156 at yearend 1995, according to American Brokerage Consultants, St. Petersburg, Fla. But the fast-growing, lucrative full-service business is where the biggest banks have been putting their energies.
The discount brokerage operation at Frost National Bank, San Antonio, is no cash cow, but it does more trades than the bank's full-service arm, said Karen Banks, president of Frost Brokerage Services. "I don't want to discount the discount side, because while it is difficult to make money on it, it does bring people to us," she said.
Observers said a bank with national aspirations for its securities business could look to Quick & Reilly for a jump-start.
One appealing element, these sources said, is Quick & Reilly's no- transaction fee mutual fund mart, launched five months ago. The yet-unnamed fund mart could help a bank program quickly gain steam, and could also help a bank's proprietary mutual fund family boost distribution.
Much of the business at discount brokerages is coming from the growing community of fee-based financial planners, said Kenneth Kehrer, a Princeton, N.J. brokerage consultant. These investment counselors are highly price-sensitive, and they frequent the fund marts run by Quick & Reilly and rivals such as Schwab.
Quick & Reilly also has a securities clearing business and a specialist firm that makes markets on the New York Stock Exchange and on the Nasdaq exchange.
While more banks investigate boosting their discount business, some are skeptical.
The already-low cost of trades at discounters will be pushed even lower over time, said Richard H. Jones, chief asset management executive at Barnett Banks, Jacksonville, Fla. And as it is, only the largest discounters generate significant returns for a diversified parent company, like a bank. He declined to comment on speculation that Barnett is among the final bidders for Quick & Reilly.
Banks aren't the only companies being mentioned as possible bidders for Quick & Reilly. Donaldson Lufkin & Jenrette and PaineWebber are also said to be looking. Quick & Reilly's stock closed Friday at $33.68, up 68 cents.