Should Banks Stay in the Brokerage Business (1989)

Should banks stay in the brokerage business? Early in the 1980s, banks started challenging conventional interpretations of the Glass-Steagall Act by asking the Comptroller of the Currency to permit banks to offer their customers securities brokerage services. The Comptroller consented, stating that what the banks could not offer was investment advice in conjunction with these services. Nor could banks imply that funds invested through these services were insured. Although the banks couldn't compete with full-service brokerage firms, they could offer the same services as the brokers that had sprung up when fixed commissions were abolished on May 1, 1975. Banks rushed to offer brokerage services. Security Pacific, Bank of America, and Union Planters purchased existing brokerage firms. Other banks started their own brokerage subsidiaries. Still others contracted for services through wholesalers like Pershing or Fidelity. Banks saw this as a way to compete with Merrill Lynch's newly introduced Cash Management Account (CMA). Brokerage service was seen as an important step in establishing a comprehensive financial services firm. In 1985, an ABA Banking Journal survey of commercial banks revealed that 65% were offering securities brokerage. The desire to diversify their financial services was the largest single motivation, mentioned by 49% of the respondents. Only 13% claimed that profit was a motive. Indeed, at the time of the survey 62% of banks offering brokerage services did not yet consider these services profitable. Now, four years later, is there synergy with other financial services and talk of profitability? Results are difficult to measure, and the reviews are mixed. An uneasy period. Of the 462 banks responding to the ABA's 1988 Retail Deposit Services Survey, almost 65% offered brokerage services through their trust or private banking department. As might be expected, larger banks were more likely to have brokerage services: 89% of the banks with assets over $1 billion offered the services, as did only 35% of the banks with assets of $50 million or less. The sentiment among bankers today toward securities brokerage services is anything but unanimous. Some banks are considering abandoning their brokerage services. Says one executive in the capital markets area of a northeast regional bank, who asked to remain anonymous, I'm not convinced banks should be in the retail equities At the same time, though, other banks are making significant investments to expand brokerage services. To be sure, the current market environment is difficult for anyone on Wall Street. Since the October 1987 market crash, profits have plummeted. Even established securities firms are reevaluating the business. Then there are the newcomers--banks. To get into the business quickly, most banks contracted with wholesalers to provide brokerage services. In so doing, they relinquished control over the quality of the service. And those that simply provided an 800 number that customers could call to place trade orders lost the primary contact with customers. Furthermore, many banks marketed brokerage as a discount service. Low price was the main marketing theme of 77% of the banks in the 1985 ABA BJ survey. Only 7% mentioned customers' confidence in the bank as a marketing approach, and a mere 5% emphasized service quality. Customers were not comfortable making investment decisions in that atmosphere. A credible institution. Some banks believed that marketing a new investment service with the label discount would give both the service and the bank a bargain basement image and would not attract upscale customers. Instead, these banks successfully appealed to consumers' image of the bank as professional, competent, and efficient. We don't refer to our service as 'discount,' even though our commission charges are less than those of full-service brokers, says Mike Overholt, president of InvestNet, Mellon Bank's brokerage subsidiary headquartered in Pittsburgh. …