Banks, especially smaller ones, may lose the battle for brokerage business because they have been slow to join a revolution in investment broker compensation, brokerage executives say.
Following a move by Merrill Lynch about a year ago, brokerages are steering away from trading fees. Instead they are establishing wrap accounts, in which brokers' fees are tied to the size of their clients' portfolios.
Observers say market conditions are dictating this shift. Trading fees are being driven lower by new competition, including online trading systems. And brokers increasingly need to win business by offering asset management and investment advice in addition to trading.
"The whole industry needs to move more in this direction," said Dwight Moody, president and chief executive officer of First Union Brokerage Services, which has six products that generate such fees and plans more. "To move away from transaction [fees], you've got to have the product," he said.
Wrap accounts help brokers keep clients, and those that have made the switch are finding fee-based revenue more reliable, said Burton Greenwald, a mutual fund consultant based in Philadelphia. "Everyone recognizes that fee-based revenue is more predictable," he said.
Larger banks including First Union have grasped the trend, but smaller regional and community banks appear to be lagging, said a bank-channel head at a large fund company.
Smaller banking companies have been slow to change because bank brokers tend not to have lasting client relationships, said H.G. "Toby" Mumford Jr., senior vice president and director of sales at Franklin Templeton Distributors Inc. in San Mateo, Calif.
Moreover, Mr. Greenwald said, wrap accounts have traditionally been aimed at wealthier customers, and bank brokerage customers are generally less affluent, less savvy investors. Brokers also may be reluctant to have their fee structure changed, he added.
An executive at the fund division of a regional bank put it more bluntly: "You're taking a big leap of faith when you mess with people's compensation."
A brokerage's sales force is generally accustomed to commissions, and it will take time to familiarize them with different forms of income generation, said Tony Fadool, senior vice president for national sales at Federated Investors in Pittsburgh.
At the same time, many bank brokerages have avoided wrap accounts because similar services are performed in other parts of their holding companies, said Marcia Selz, president of Marketing Matrix in Los Angeles. Banks' trust departments generally have similar fee structures for wealthy investors, and most bank executives do not want to push brokers away from traditional transaction fees, Ms. Selz said.
One regional banker said that banks are ahead of the brokerage industry in turning to percentage-of-assets compensation because trust departments have been managing such relationships for years. But they have yet to blend the those departments' asset management style with the accessibility of brokerage accounts, Mr. Mumford said.
Banks unable to keep up with the change will have a talent pool on their hands that is largely obsolete for brokerage business, said John Duncan, an industry lawyer in Chicago. These employees will have to be retrained, he said.
Mr. Fadool said banks will have to overcome some of these big obstacles" to create a consistent revenue stream as well as products that suit their clients.
He said the move toward percentage-of-assets fees is made more difficult for banks because many are relative newcomers to the brokerage industry. Many funds offer class C shares, which charge a percentage of the investor's assets each year over a set period, Mr. Fadool said. More banks are taking to this system, which allows bank brokers attract and manage assets better over the long haul, he said.
One advantage banks have here, Mr. Fadool said, is a ready-made audience. "Banks have all the customers - they just don't have all the assets."