The Financial Supermarket Is Back In Style
by Bill WillisOnWallStreet, March 1, 2010Glass-Steagall was repealed in 1999 overturning core financial regulations and allowing the creation of Citigroup. It became known as a financial supermarket; a place where advisors could offer their customers the products and services needed to manage their financial lives. The firm became synonymous with the concept. Citigroup’s failure is well documented, however, its demise should not be seen as an indictment of the financial supermarket approach. Just because the idea was not well executed in the past does not mean that it can not be successfully applied today.Typically when banks first merged with brokerages, management’s expectations were unrealistic. The synergies were expected to yield spectacular results. Clients would be shared and cross-selling the order of the day. For a number of reasons, the process stalled. There were often cultural differences that led to mistrust and misunderstandings.
A decade ago, most bankers and advisors harbored negative stereotypes of one another. Brokers were seen as self-serving, aggressive risk takers and bankers worried about sharing accounts. The banker’s negative image was one of a passive company man who was more concerned with following the rules than getting the order. When one did share a valued account with a banker, he might refuse the client a loan or attach an unfavorable rate. If the banker referred an account to a broker, he might put him in a losing stock idea and jeopardize the entire relationship.
Compensation was also different. Bankers worked on teams to provide comprehensive solutions and generally were risk averse. Compensation consisted of a salary plus bonus. Advisors only succeeded if they were able to capture new assets and their compensation was commission-based. Most preferred to work alone and often were more willing to expose clients to risk. So there were major philosophical differences.
In recent years banks have entered the investment business and brokerages have emphasized lending. Advisors at Merrill Lynch, Morgan Stanley, and other firms started offering mortgages and other more sophisticated lending solutions. Banks such as Wells Fargo, Citigroup and others began to aggressively hire advisors to team up with their existing professionals. As a result, each group has become much more familiar with the products and services of each other. While working successfully together over time, distrust has been replaced by mutual respect.
The most infamous financial supermarket, Citigroup, did not fail in how it served the retail customer, but rather by missteps it made in the institutional space. Many Smith Barney advisors grew to have productive relationships with their bank colleagues. Their advisors in the branches (Citi Investment Services) continue to work profitably with bank employees.
Three major mergers in the last two years have produced a new era of financial supermarkets. Bank of America has teamed with Merrill Lynch, Wells Fargo with Wachovia and finally, JPMorgan with Bears Stearns. Initially, many at Merrill were concerned that their new parent would impose their corporate culture on the new subsidiary, but so far reports are decidedly positive.
Bank of America is staying the course with their plan to leave the Merrill Lynch unit in charge of brokerage activity. Bank of America Investments (BAI) has been folded into Merrill and all advisors are eligible to receive bank customer referrals. For years Merrill has taught their advisors how lending makes relationships stickier. Once clients have borrowed money from an institution, it becomes unlikely that they will withdraw their assets. Now Merrill advisors are able to offer their clients more lending alternatives. Bank of America bankers have had a good experience working with the BAI advisors before the merger. Now they have a chance to work with some of the top professionals in the industry.
When Wells Fargo purchased Wachovia, there was understandably less concern about dramatic change. The new parent was another bank-fortunately in a much better financial position. Wells brought a significant brokerage history to the marriage. The Wells brokerage and legacy Wachovia bank brokerage channel seem to fit together neatly. The private client group and independent channel are experiencing more than a name change. Their advisors and clients now have access to Wells Fargo’s suite of services. What began as a contentious rescue has developed into a healthy relationship.
Looking back to the events surrounding JPMorgan’s purchase of Bear Stearns, it is hard to believe how successful this merger has become. Talk about a potential culture clash! Amazingly, we had one of the nation’s largest banks buying an aggressive and fiercely independent brokerage firm. Initially, the purchase price was so low that most at Bear were shocked and insulted. Then, the price of the offer was increased by Jamie Dimon and he and his team began mending fences. During the second half of 2008 when Wall Street was enduring its most turbulent period, having JP Morgan as a parent provided extraordinary comfort. The Bear Stearns retail advisors kept the Bear Stearns name, but added JP Morgan’s financial strength, powerful capital markets, and extensive lending capability. Most of the people we know there are enthusiastic about their expanded array of products and services and also pleased with their new corporate image.
It appears that each of the three new financial supermarkets is off to a successful start. With a decade of collective experience, advisors and bankers are collaborating effectively. In an era where we are often competing against low cost, Internet-driven solutions, it is essential that advisors bring added value to their relationships. These new financial supermarkets might prove the best environment for advisors to offer such a proposition.