Brokerages Are Making Brokers More Powerful: How Will That Effect The Securities Industry?

As reported in the Wall Street Journal, there has been a recent trend at big brokerages of shifting the power from the headquarters to brokers and branch managers. Apparently big brokerages like Bank Of America, UBS Group, and Merrill Lynch are “unleashing” their brokers and moving power closer to the brokers and their managers, both to keep brokers from leaving their firms and to increase revenues.

These modifications come in the wake of declining revenues and broker exoduses several big brokerages have experienced after the financial crisis. They have also witnessed that brokers who dislike or disagree with their managers and find them unhelpful tend to leave the brokerages more easily. The big brokerages have had to deal with rising regulatory costs and competing with an increasing number of independent advisers. According to research conducted by consulting groups, the registered investment adviser model is more successful as it is a smaller and more tightly integrated groups. Taking a cue from that, the zillion dollar brokerages are making changes aimed at empowering, training and giving their brokers more control over day to day decisions over clients, growth, and resource allocation. Merrill Lynch has plans to restructure the brokerage leadership, emphasize more on productivity and training, and reduce the number of divisions. UBS also made similar changes last year.

There are plans underway to also automate investment advisory and make use of robos to cater to a younger clientele so that the brokers can be freed up to deal with high net worth clients. All in all, this gradual shift is geared towards taking things back to how they were before the financial crisis hit, when the field agents and managers had more autonomy to structure their branches, price and sell services, be less accountable to corporate headquarters, hold more power and sway.

But what do these changes mean for investors and the securities industry? What will it look like if brokerages are more decentralized and brokers are more independently in charge of decision making? One of the changes underway is to give them more power over pricing and marketing their services. Brokerages have often been critiqued for misleading marketing and advertising, and without centralized monitoring there may be more room for that. These changes may also lead to more regulatory and self-regulatory procedures for investment professionals and advisors. Also, the kind of automated investment advice that has been proposed lacks personalization and an understanding of a client’s unique personal circumstances.

Think of the supervisory challenges that will follow a restructuring of this nature. The big brokerages have to take into account how the SEC will view cases of misconduct, individual responsibility, and failure to supervise.  NASD had issued a notice in the past to members regarding an SEC decision about supervision involving the advisory Royal Alliance Associates that operated 1,500 offices with many one-person offices. In this decision it was stated that while firms with many small offices are neither discouraged or incapable of devising an adequate system of supervision, such a setup would mean “greater supervisory challenges and the Commission requires firms organized in such a fashion, and individual supervisors at those firms, to meet the same high standards of supervision.”

The move that will empower and perhaps retain brokers at big brokerages may come at a cost to investors. This lack of supervision may be risky for investors costing them their savings and retirement incomes. At Malecki Law, we regularly fight major institutions and achieve settlements for our clients. We also have a successful record of obtaining expungements, AWCs and No-Action letters for securities industry professionals.