Money Management and the Country Club

The landscape of the nation’s brokerage industry is changing rapidly. The latest example is Morgan Stanley and UBS exiting the broker protocol, which prevented companies from suing employees that took their client to rival firms. UBS explained their decision was the result of their desire to increase their brokers’ productivity, not poach from rival firms. This means that recruiting is less important than retention, commissions less important than ongoing fees, growth less important than cost cutting….

The emphasis, according to UBS, was to acknowledge that selling has become much less profitable than planning. So where does this leave the broker, the country club, and old school money management? A funny thing that happened with the rise of Google was the layers of fees and the wink-wink society of brokers became exposed overnight.

Country Club

Not too long ago, you hired a broker, your assets went into a portfolio built by the firm, and you owned 14 mutual funds. The broker made commissions by rebalancing your portfolio on a quarterly basis, in addition to the ongoing portfolio management fees. Furthermore, the mutual funds that provided the greatest kickbacks to the brokers often received preferential treatment irrespective of a client’s best interests.

Anyone see a problem with this?

We’ve seen brokerage fees compress over the past five years but not the expense ratios of mutual funds to the same degree. Mutual fund wholesalers still provide entertainment in much of the way medical reps did for physicians a decade ago. One difference is that the brokerage firm, not the broker, makes portfolio allocation decisions.

Clients have now begun to associate country clubs and high-end offices as places their fees go to die. The industry that prided itself on being flashy is now having a difficult time running away from the golf course it seemed to covet. The Internet has clearly changed the way we view buying anything and the brokerage industry is no different.

Why would they change?

Well, the answer is actually an internal force as much as the buying public. These very brokerage firms are now seeking to automate and hire younger, cheaper associates in an attempt to stave off attrition and clients leaving. The planner has replaced the round of golf as money management fees allow clients to play all the golf they want with far fewer fees.