Brokerage is dead

I know a lot of stock brokers. The good ones are excellent sales people, but their skill sets usually end there. They generally have rudimentary knowledge of fundamental and/or technical analysis, money management principles, and even basic economics. I don’t know if they forgot all that subject matter right after they passed the Series 7 exam, or they are just plain stupid, but that matters little. If you can sell, you can make commission, and that is what brokers are concerned with.

The retail brokerage culling after the market debacle of 2000-01 has not been fully rejuvenated, and the replacements that are in are being called “advisors.” Unfortunately, most of these folks couldn’t advise their clients way out of a wet paper bag, and the firms they work for know it.

In From Traders to Tech Support, BusinessWeek outlines how the traders’ role is changing. Once the executor of the order, the trader now spends a growing portion of their time assisting customers with executing the order themselves. The advent of the internet, high-speed connections, and cinema quality displays have given the customer many of the advantages previously reserved for traders. Instant information and high resolution display of the data, at the customers’ desks, is the order of the day.

So the brokerage firms are providing those customers with front-end interfaces that take advantage of all the horsepower. Now that doesn’t mean that every person who owns or is interested in owning some stock is mentally equipped to deal with the markets, but the opportunity is there.

Where does that leave brokers? Well many brokers are moving to fixed fee business models, whereby they charge their clients based on a percentage of assets under management. The rest? Some have enough of a high-net worth client base to keep them busy for a while, but they will eventually be overcome by the RIAs and the software moves. Others will simply be selling used cars.

By the way, I know a lot of insurance brokers as well, and I think the same goes for them. A significant portion of that business is already being grabbed by CPAs and estate planning attorneys that know products like life insurance are complimentary to their hourly charges – and they likely know the client better than the broker does anyway. Picking up a life insurance policy is no more than a recognition of need, and participating in a data gathering exercise. Underwriters have enormous data crunching capabilities, and personal information on a prospective insured is readily available from a number of information brokers. It needs much less human intervention than it did even ten years ago. With all the goings on with large insurer price fixing, and insurance pricing that has been hyper-competitive (particularly in the life business) for too long, the need to maintain competitiveness will force wholesalers out the door, and only the big retail brokers will survive.