What is the best aspect of working for a national brokerage firm? For a great many brokers the response is: freedom.
That’s “freedom” as in freedom from pressure to sell proprietary products, freedom from branch managers breathing down your neck, freedom to move from firm to firm as you choose.
Traditionally, freedom for the retail brokers has meant entrepreneurial freedom – working independently and being in control of running their own businesses. But just how free is the average retail broker, given the changing nature of the brokerage industry? Look closely at what the business is like on a day-to-day basis and it would seem that brokers’ freedom is being dramatically redefined.
Different lines
Take product lines. When asked to rate pressure to sell proprietary products, retail brokers from across Canada who took part in this year’s Investment Executive Brokerage Report Card felt they have all the freedom in the world. The grades for freedom from pressure remain high (a high rating indicating considerable freedom), although they have actually gone down slightly in recent years to an average 9.3 this year from an average 9.5 in 1998.
But the comments that follow walk a different line. Listen to what the brokers are saying about their product line:
– An Edward Jones broker in the Toronto area talks about the “12 approved and three preferred” mutual fund companies recommended by the firm’s analysts.
– Another broker says TD Evergreen Investment Services Inc.‘s product line is “limited, compared with the banks. We have a couple of accounts and some products.”
– “I prefer to deal with the preferred funds,” says another Edward Jones broker.
– A Merrill Lynch Canada Inc. broker in Newfoundland reports being told to sell only Dell Computer Corp. shares over a 24-hour period.
And at some companies, there is paperwork if you don’t toe the line. “If I sell something that’s not followed by the company, I am required to get a risk letter from the client,” says an Edward Jones broker in Ontario.
A Merrill Lynch broker in Toronto says an e-mail message sent in January advised brokers of their responsibilities should they choose not to follow the analysts’ advice. “If I sell a product or a penny stock that is not on the recommended list, I have to get a letter from the client and the deal has to be approved by the regional manager,” the broker reports.
Small wonder that one Edward Jones broker we spoke to is asking the company to broaden the product range. “We need more freedom on selling products. They are restrictive on selling the RRSP worldwide exposure products, and we can also only offer products from two or three fund companies,” he says.
It is not only the restricted lists that are causing problems for those who want to be free. When asked if the firm was looking to have more control over his book, a Winnipeg-based broker at BMO Nesbitt Burns Inc. explained the situation: “Yes, they [management] are looking for control, but it is subtle. They’re offering more and more products that you want to buy anyway; they just happen to be proprietary products.”
A broker with RBC Dominion Securities Inc. in Toronto echoes this soft-pedalled approach to controlling what the brokers sell. “The industry is moving to fee-based. There is no pressure as yet, but there are incentives to bigger products or fee-based products.”
At DS, the carrot is followed by a big stick – cutting payout for lower producers. “If we are producing less than $300,000 a year, our payout is cut to 20%,” reports one DS broker in Toronto.
“They’ve cut the grid on transaction-based and upped the ante on fee-based work,” says a DS broker in British Columbia. “That’s not the way the clients want it; it’s the way the management is pressuring it.”
How about freedom to pick and choose clients? Traditionally, entrepreneurial brokers have developed individual relationships with their clients.
“All my clients are accounts that I have built up from scratch,” says a National Bank Financial Inc. broker in Montreal. “It’s much better that way. My book belongs to me, not to the bank.”
Bank’s referral system
But brokers at bank-owned firms do report relying more heavily on the bank’s referral system for clients. “I love the referral system, it’s the best thing about being owned by a bank,” says one DS broker.
A TD Evergreen broker in Thunder Bay, Ont., says that, thanks to the referral system, he doesn’t have to spend a dime on marketing. “I just let the bank do it all,” he says.
The situation often changes when brokers start to rely on the bank’s referral system for the majority of their clientele. A Goepel McDermid Inc. broker in Edmonton explains the trend: “The banks are trying to drive a wedge between the retail broker and the client. If brokers are building individual relationships with clients, that can handicap the banks’ ability to control that wealth.
“The referral system isn’t about promoting warm fuzzy feelings between bankers and brokers,” he continues. “Brokers at bank-owned firms have to pay for referrals without having control over the accounts they receive.”
For a TD broker based in Windsor, Ont., the proof is in the referral system’s performance. “A lot of times we get a referral and then the client has a problem [with the bank] and packs up.”
Perhaps freedom is not quite what brokers think it is all cracked up to be. With restricted product lists, a mentality in the industry that encourages management to direct product lines and control clientele and clients who are increasingly tied to the firm and less to the broker, brokers may have rethink exactly what they mean by freedom on the job. The freedom to take lunch when they want and the freedom that comes from being in control of their businesses are two very different things.