Brokers’ Boomer Problem and Boomers’ Broker Problem

Old-line Morgan Stanley Group’s plan to marry Middle-America-anchored Dean Witter, Discover & Co., the big securities industry merger deal of last week, tells you that Wall Street wants Main Street in the worst way.

Coincidentally, that’s exactly how many Americans believe their money would be managed if they put it in the hands of a full-service brokerage.

Sometime between the 1950s and the 1980s, the traditional broker’s image in this country went from basically respectable to used-car-lot sleazy in the minds of a lot of people.

That image is, of course, a gross generalization. There are a record 103,000 brokers out there, and they aren’t all sitting around thinking of new ways to cheat widows and orphans. The industry serves millions of savvy investors, and judging by the assets under management at firms like Dean Witter, Merrill Lynch & Co. and Smith Barney Inc., quite a few brokers must be doing something right.

Yet in some major respects, the industry is stuck in a time warp: Despite significant movement by some big firms to stress objective advice and financial counseling by their brokers--which is what many or most investors, especially baby boomers, say they want--the business still is too heavily dependent on making sales and bringing in commissions.

That criticism doesn’t just come from investors or industry consultants. It comes from many of the brokers who work for full-service firms, says Dan Jamieson, editor of Irvine-based Registered Representative, a magazine for brokers.

Indeed, whereas the traditionally institution-oriented Morgan’s embrace of Dean Witter suggests that Morgan sees the small investor as the future, within the full-service brokerage industry the biggest debate going is how to get the distrusting baby boomers in the door at all over the next 20 years.

Full-service brokerage firms “know they need to get the boomers, but they have not figured out how to do that,” says Jamieson.

Meanwhile, the competition--including discount brokerages, registered investment advisors, financial planners and mutual fund firms--already are doing land-office business with aging boomers.

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Consider: While the 103,000 brokers officially counted by the Securities Industry Assn. is up 12% since 1987, discount brokerage industry employment has soared 150% since then. The discounters are taking in more than 15% of total small-investor commissions now, up from 5% in 1985.

The mutual fund industry, of course, has mushroomed in size just since 1990. And no one has an exact count of the people out there calling themselves “financial planners,” but their numbers have skyrocketed in this decade.

What many of these competitors offer small investors is a la carte financial advice for a flat fee, and, generally, a pressure-free relationship: You aren’t going to be hounded to buy a product.

“No matter how it’s delivered, advice is what people want and need,” says Louis Harvey, president of Dalbar Inc., a Boston-based financial services research firm.

Brokers, too, give advice. But Harvey says investors’ overriding concern about full-service brokers is their incentive to sell their company’s own products--regardless of quality--and their need to sell, period, to keep the parent firm’s revenue goals satisfied.

Harvey says investors, particularly baby boomers, see this in terms of the medical analogy: “What would you think of a doctor’s advice,” Harvey says, “if he was getting paid by the drug company for the pills he prescribed for you? This is fundamentally why boomers don’t trust brokers.”

A series of consumer surveys done by Dalbar in 1996 tells the tale: Asked to judge the reliability of investment advice from various sources, including brokers, registered investment advisors, financial planners and accountants, investors over the age of 70 actually named brokers the most reliable.

But baby boomer investors rated brokers fourth--well behind financial planners, investment advisors and accountants, in that order.

Aged investors may control the biggest fortunes today, but they won’t live forever. The boomers, meanwhile, are the fortune holders of the future--and their image of brokers doesn’t bode well.

To be sure, nearly all of the major full-service houses are trying to address this image problem. Merrill Lynch has for years pushed its brokers to stress total financial planning. Many firms now are offering clients a fuller menu of mutual funds, including those of outside, no-load firms long excluded from brokers’ “approved” sales list.

Smaller brokerages, such as Edward Jones and A.G. Edwards, have boomed by giving their brokers extraordinary freedom to serve clients as they choose--without the pressure of having to peddle proprietary products (such as firm-managed mutual funds), because they have none.

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And last year, even Dean Witter--long the leader in pushing in-house products--stopped compensating brokers more for sales of those products than for others that might suit a client better.

But old habits die hard. Jamieson says the complaint of many brokers is that while they see the need for the industry to change, their branch or local manager may not.

The irony of boomers’ mistrust of brokers is that they may in many cases be snubbing the financial pros with the best training, research and products--all the more disturbing considering the many ill-informed, barely trained financial planners and mutual fund reps in the market.

For brokers, though, as long as the sales commission remains the primary mode of compensation, boomers’ suspicions aren’t likely to be easily hurdled.