A tsunami hit the brokerage industry in 2008. The stock market
experienced its historic nose-dive. So did individual investors'
trust, especially in big financial firms.
Wire houses -- Wall Street's iconic full-service brokerages --
saw their share of individual investors' assets slip to 20% in
2009 from 21% the year before.
Smaller financial shops saw their slices of the pie grow
larger. Registered investment advisers -- many of whom quit wire
houses -- ended up with 3% of retail investors' assets, up from
And discount brokerages, including those run by mutual funds,
ended up with 14%, up from 13%.
"A lot of investors felt they weren't getting their money's
worth from the wire houses, so they left," said Ken Leon, equity
research analyst for S&P Capital IQ.
The Heat Was On
A lot of brokers and advisers jumped ship too, taking clients
"They felt they could serve their clients' needs better on
their own or in smaller advisory firms, where they could have
more say in rules -- make sure the rules would work for their
clients," Leon said.
Many investors felt that their scorching came from riding down
on the wire houses' pet products.
A vicious cycle set in.
As the market fell, investors grew more reluctant to bet good
money after bad. That rocked the market more.
With fees from assets under management falling, big brokerages
laid off brokers and advisers.
Many clients followed them to new positions at smaller firms,
further depleting wire houses' market share.
Many clients switched to online brokerages, a few of which
), for one (and a favorite in the
Best Online Brokers
survey) -- offer advice from consultants. Many online brokerage
clients are happy to make their own investment decisions.
"I don't think professionals manage my money any better than I
can," said Joe Greene, a 42-year-old certified fire-alarm
technician for the Osceola Count school district in Florida, who
invests through Scottrade and has profited on all four covered
call trades he's made this year.
Many individual investors have yet to regain their nerve from
the '08 crash.
"A lot of people feel it's too difficult to make investment
decisions," said Morningstar analyst Gaston Ceron. "So they're
putting their money into
or broad market index mutual funds or bonds -- anything but
Industrywide, assets under management plunged 30% to 40% from
the October 2007 market peak to the March 2009 bottom, says Scott
Smith, director of financial industry research firm Cerulli
Associates. Management fees fell by the same proportion.
Full-service brokerages felt most of the pain, Smith says.
As the financial crisis peaked, 94-year-old Merrill Lynch
found itself drowning in a sea of mortgage-related securities it
owned. The company was hemorrhaging billions of dollars due to
defaults on subprime loans.
And its collateralized debt obligations (CDO) were collapsing
It agreed to a buyout in September 2008 byBank of America (
) amid investor fears that the brokerage was about to fail as
Lehman Bros. had only days before.
CDOs also forced the sale of Smith Barney. In January
) was stuck with shrunken-value CDOs, which it had underwritten
but could not sell.
Desperate for cash as it was bailed out by the government,
Citi sold Smith Barney toMorgan Stanley (
A similar fate awaited Wachovia, which got sold toWells Fargo
And Swiss banking giantUBS (UBS) -- whose army of wealth
management advisers compete with Merrill and Morgan Stanley --
was besieged by the IRS and several U.S. states for allegations
ranging from tax evasion to misrepresenting the value of
The low interest-rate environment since the meltdown has
dampened earnings from banking operations at online brokerages
such as Schwab andTD Ameritrade (AMTD), Ceron says.
Like their own depositors, it's hard for banks to find
low-risk yield, Ceron adds.
The fallout has not stopped.
Among investors who played musical chairs with brokerages in
2012, 52% of self-directed investors dumped a full-service
broker, according to a Cerulli Associates study. And 19% of
self-directed investors switched from another online
Online brokerages have big differences. Schwab, with its
network of independent advisers, can offer contact with advisers
as well as low-cost online trading.
Joining The Trend
Then there are the full-service brokerages. Just as one-time
discount brokerages have expanded their offerings, wire houses
such as Morgan Stanley Smith Barney andJPMorgan Chase (JPM) are
fighting back and rolling out cut-price,
do-it-yourself investing channels
Cerulli's Smith cites $7 trades offered by Merrill Lynch via
"They have access to 30 million Bank of America customers who
aren't wealthy enough for a traditional, full-service brokerage,
but who can be well serviced other ways," he said.
Steps such as those may be why the shift in market share from
full-service brokerages to online brokerages is slowing, says
Leon. "Traditional brokerages excel at servicing the mass
affluent market up to the high new worth and ultrahigh net
worth," he said. "Online brokerages are not designed to do
Neither type of brokerage is likely to disappear.
"Customer segmentation is more distinct than it was five years
ago," Leon said. "There are opportunities for both ends."