Regional brokerage firms and some independent investment advisers have been making hay hiring hundreds of discontented wirehouse brokers.
But Stifel Financial Corp. chief executive Ron Kruszewski, one of the beneficiaries of the movement, acknowledged this week what the big brokerage firms have long contended — that many of the brokers on the market are relatively weak producers.
“To a certain extent, it's true,” he said last week at a conference in New York sponsored by Bank of America Corp. and its Merrill Lynch & Co. Inc. unit.
Mr. Kruszewski, whose firm last month acquired 322 brokers in 56 mostly Midwestern branches from UBS Financial Services, said that the new brokers generally produced below-average revenue relative to all UBS financial advisers. But he added that he's satisfied with the deal, because higher production revenue doesn't always translate into higher profit.
“I don't look at productivity per [financial adviser]; I look at profit,” he said. “An FA doing $350,000 in Missouri with higher client retention and less risk is more profitable” than a broker in a high-cost area such as New York.
Stifel has added 583 net new brokers this year, bringing its total number of financial advisers to 1,900 in 273 offices, including about 185 independent contractors at its Century Securities Associates unit. Five years ago, Stifel had 621 financial advisers.
Mr. Kruszewski also said that Stifel expects to continue to grow from “dislocations” related to the mergers of larger competitors. That contrasts with the views of John Taft, the head of Royal Bank of Canada's RBC Wealth Management unit, one of Stifel's major competitors, who recently said that the boom in breakaway brokers is ending.
In the past year, Merrill Lynch was acquired by Bank of America, Citigroup Inc. sold a majority interest in its Smith Barney affiliate to Morgan Stanley, and Wachovia Securities and its parent bank, Wachovia Corp., were absorbed by Wells Fargo & Co.
Mr. Kruszewski and Mr. Taft also have differing opinions about a key regulatory initiative affecting the retail-brokerage industry.
The possibility that Congress and the Securities and Exchange Commission will impose a fiduciary standard of care on retail brokers who give advice is “what keeps me up at night,” Mr. Kruszewski said at the conference, calling it an example of financial services reform that “goes too far.”
Imposing a hard-and-fast fiduciary standard as interpreted under the Investment Advisers Act of 1940, would “eviscerate” the brokerage model, he said, and could even prevent a broker from selling something as simple as a municipal bond.
He also called it “a solution in search of a problem,” since the major issues of the financial industry that emerged last year weren't caused by misunderstandings be-tween investors and their brokers but by loose credit standards and the creation of instruments such as collateralized mortgage obligations that had little to do with retail brokerage.
Mr. Kruszewski drew criticism from Mr. Taft when he made similar remarks about the fiduciary standard last month at the annual meeting of the Securities Industry and Financial Markets Association. The brokerage industry trade group has endorsed a fiduciary standard for brokers who give advice, provided that the standard is adjusted to allow brokerage clients to opt out of requiring their brokers to make full disclosure of potential conflicts prior to every sale. They also want a standard that permits brokerage firms to conduct proprietary trading and other activities that could create conflicts with clients.
Mr. Taft said that the group is “taking the high road” in endorsing the standard.
Mr. Kruszewski said that he isn't so much against a modified fiduciary standard as concerned that it is drawing attention away from more vital issues. He also told investors at the Merrill Lynch conference that he thinks that key legislators and regulators understand the distinctions between the suitability standard to which brokers are held and the fiduciary standard that applies to investment advisers, and will act accordingly.
Stifel, which is gearing up through Century to offer custody services to registered investment advisers, has booked 42% of its operating profit in this year's first three quarters from its global wealth management businesses, down from 57% last year, as it realized gains from previous buildups in its trading and investment banking activities. Revenue from global wealth management fell to 53%, from 56%, in the first nine months of 2008.
Growing through retail-brokerage acquisitions, meanwhile, has added to Stifel's cost structure. The company booked expenses of $2.5 million, or 4 cents a share, in the third quarter to convert the UBS brokers and branches to its system.
Stifel, which in recent years bought retail-brokerage firms Butler Wick and Ryan Beck, also has reimbursed $7.5 million of automated-customer-account transfer fees to clients who were charged by their previous firms for following their brokers to Stifel. Last year, such ACAT fees totaled $2.4 million.
E-mail Jed Horowitz at jhorowitz@investmentnews.com.
